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INTRODUCTION
Running a business is an onerous task beset with myriad responsibilities. Not only the businessmen, who can be Director or Employer or Promoter, has to worry about keeping the business profitable, but he has to also the task of taking care of the various legal obligations which the company have to fulfil. One such obligation comes under the Employees’ Provident Funds & Miscellaneous Provisions Act, 1952 (in short EPFMP Act), whereby the Employer, is liable to pay the provident fund dues in respect to its employees to Employees’ Provident Funds Organisation (in short EPFO).
Drastic powers of arrest of Directors are given under the EPFMP Act to the EPFO officers, in case some arrears are due from the Employer and he fails to pay them. But there are also many safeguards against illegal demands made against the Directors, some of which I have explained in this Article.
In the present article we will see such a case where EPFO asked a Director to either pay the provident fund arrears within 15 days or get arrested. We will further see as to how the Director protected himself from such a demand or arrest.
Brief Facts
Ali (the Petitioner) who was the Director/Employer of a company was asked by the EPFO to pay Rs.4,59,885/- upfront or he will be arrested by the Police. Reason was this: EPFO believed that Ali’s company has not paid its past EPFO dues (also called Arrears) and hence EPFO can arrest and detain him in prison. When the Director approached the Single Judge of the Kerala High Court his problem only compounded as the Single Judge believed that there is a prima facie case against the Director and hence he should deposit at least Rs.2,00,000/- during the pendency of the Writ Petition. Against this order of the Single Judge the Petitioner preferred Letters Patent Appeal in the same High Court.
So let’s understand first of all what is EPFO’s claim? Actually any establishment which is notified by Central Government and has 20 or more employees have to pay the provident fund dues in regard to all of its employees. If it fails to do so, the Authorised Officer of the EPFO (who is generally a Central Provident Fund Commissioner or Regional Provident Fund Commissioner) issues are Recovery Certificate which mentions the amount of arrears which are due from the Company, sometimes called Establishment and sends it to the Recovery Officer (another government servant who is employed by EPFO).
Now the Recovery Officer issues a Show Cause Notice to the Director to show as to why he should not be arrested and detained as he have failed to pay the amount which the EPFO asked him to pay.
What is a Show Cause Notice( or SCN)
A Show Cause Notice is an intimation where a party asks the other party, to show cause as to why a particular action is not taken against it. So, presumption is reversed in the case of Show Cause Notice as EPFO does not have to show anything, though it is the one which is demanding money from the Director. Instead it is the Director, who have been asked to shell out the money, is required to show as to why he is not liable to pay the money. It is the onus reversed, as in the Courts if a party claims some amount from another, it has to prove its case first. So, the presumption in the beginning is that EPFO is right and Director is wrong. It is very similar to High Court procedure when a Second Appeal is admitted and “Rule Nisi” is issued. When Rule Nisi is issued the party who won the case in the RFA (Regular First Appeal) have to show as to why a RSA (Regular Second Appeal) should not be allowed in favour of the losing party. But there is a big difference between EPFO’s Show Cause Notice and Rule Nisi in the sense that Rule Nisi is issued by High Court after hearing the arguments of the losing side in the Regular First Appeal and getting satisfied that the losing party has some case. This does not happen in the case of SCN.
Now, when the Director files the reply to the Show Cause Notice showing that he doesn’t owe anything to the EPFO and EPFO is satisfied with the reply, then the demand is obliterated. But, if EPFO is not satisfied with the reply then it asks the Director to pay the money within 15 days, as otherwise recovery proceedings will be initiated against him by the Recovery Officer under Section 8B of EPFMP Act. Though it is generally my experience that when Show Cause Notice is issued against the Director, he is almost always asked to pay despite how reasonable his reply to the Show Cause Notice is.
Ways to Recover Arrears
Now when the Recovery Officer is not satisfied with the Reply of the Director he initiates Recovery Proceedings against the Director. There are 3 ways in which the Recovery Officer can force you to pay the arrears. They are defined under Section 8B of EPFMP Act.
Firstly the personal property of the Director/Employer, including his house, car, bank account, shares etc. can be attached by EPFO and he cannot use or sell them. So, for example if the Director has a personal bank account, he cannot withdraw or transfer money to someone else from the said bank account. This is collquially called “Freezing of Directors’s Assets“.
Secondly the Director can be arrested for his default in paying arrears.
And thirdly Director’s whole company can be taken from his hand and given to a third party (called Receiver). The Director is completely thrown out from his Company’s management and he cannot run the Company anymore, as the Receiver is the new boss. These provisions are very similar to the Insolvency and Bankruptcy Code, 2016, Civil Procedure Code, 1908 and Arbitration & Conciliation Act, 1996. As per Insolvency and Bankruptcy Code, when a company is in default and Coroporate Insolvency Resolution Process( in short CIRP) is initiated against it, an Interim Resolution Professional is appointed to run the company and the prior management including Directors, Promoters are not allowed to intervene and Interim Resolution Profession(who is later replaced by Resolution Professional by the Committee of Creditors) takes full control of the company by throwing away the previous Director, Employer and Promoter. Similarly in Order XL of CPC, 1908 allows the Court to appoint a Receiver who can throw out even the true owner of the house. The true owner is not even entitled to receive rent from his own property and the same goes to the Receiver. In Arbitration & Conciliation Act, 1996 under Section 9 the Court and under Section 17 the Arbitrator, has such power to take the property like shares, machinery of a factory away from the Owner/Promoter/Director, if he defaults in its obligations like non-payment of loan or breach of the terms of an agreement. Though I must say that these are only interim measures depending upon the prima facie proof and does not decide the case fully.
( Continued)
Parveen Semwal
Advocate, High Court of Delhi and Supreme Court of India