Insight Details

ESI Contributions in Insolvency: NCLAT Clarifies Their Exclusion from the Liquidation Estate

The Chennai Bench of the National Company Law Appellate Tribunal (NCLAT), in Employees State Insurance Corporation v. Sri Lakshmi Srinivasa Jute Mills Pvt. Ltd. & Ors (2026) ibclaw.in 1101 NCLAT, has reaffirmed the distinct statutory character of Employees’ State Insurance (ESI) contributions in insolvency proceedings. The Tribunal held that ESI contributions lying with a corporate debtor are amounts held in trust for the statutory beneficiaries and, to the extent covered by Section 40(4) of the Employees’ State Insurance Act, 1948 (ESI Act), are excluded from the liquidation estate under Section 36(4)(a)(i) of the Insolvency and Bankruptcy Code, 2016 (IBC).

Factual Background

Sri Lakshmi Srinivasa Jute Mills Pvt. Ltd. (Corporate Debtor) had outstanding statutory ESI liabilities amounting to approximately ₹13.38 crore for the period 2012–2018. Upon commencement of the Corporate Insolvency Resolution Process (CIRP) on 16 March 2022, the Employees State Insurance Corporation submitted its claim for the entire amount as an Operational Creditor.

The Resolution Plan submitted by Agrigo Trading Pvt. Ltd. was subsequently approved by the Committee of Creditors with 100% voting share and sanctioned by the NCLT. However, under the approved Resolution Plan, ESIC was provided only 1% of its admitted claim, amounting to approximately ₹13.38 lakh, on the basis that its claim constituted ordinary Government/Operational Creditor dues. Aggrieved by such treatment, ESIC approached the NCLAT.

Contentions before the NCLAT

1. ESIC principally contended that ESI contributions are statutory amounts intended for employee welfare and cannot be regarded as assets beneficially belonging to the Corporate Debtor. Relying upon Section 36(4)(a)(i) of the IBC, ESIC argued that amounts held in trust for third parties are excluded from the liquidation estate and consequently cannot be subjected to the distribution mechanism under Section 53 of the IBC.
2. In the alternative, ESIC contended that its dues ought to receive treatment akin to workmen/employee dues. ESIC also argued that its having submitted the claim in Form B could not alter the substantive legal character of the statutory contributions.
3. The Respondents, on the other hand, contended that ESIC had itself submitted its claim as an Operational Creditor and could not subsequently seek a different classification. They further argued that Section 36(4)(a)(iii) expressly refers to provident fund, pension fund and gratuity fund, but not ESI contributions. It was also contended that the IBC, by virtue of Section 238, would prevail over inconsistent provisions of other statutes.

Doctrinal and Practical Implications

• The ruling establishes that qualifying ESI contributions are not to be treated as ordinary operational debt. Where such amounts are retained by the Corporate Debtor, they are held in trust for statutory beneficiaries and do not form part of the corporate debtor’s beneficial estate.
• Section 36(4)(a)(i) operates independently of the specific exclusion in Section 36(4)(a)(iii). The absence of an express reference to ESI contributions in the latter provision does not prevent their exclusion where the statutory trust requirement under Section 40(4) of the ESI Act is satisfied.
• The decision also confirms that Form B is procedural in nature. Filing a claim as an Operational Creditor does not convert trust amounts into assets beneficially owned by the Corporate Debtor, nor does it deprive ESIC of its substantive statutory rights.
• As a consequence, the Section 53 waterfall does not apply to qualifying ESI contributions. Since such funds are excluded from the liquidation estate, they cannot be distributed among creditors under the ordinary priority framework applicable to liquidation.
• For resolution professionals, successful resolution applicants, and CoCs, the judgment underscores the need to identify the statutory character of ESI dues at the claim-verification stage. A resolution plan cannot treat qualifying ESI contributions as ordinary Government or operational-creditor claims and provide only a fractional recovery. The precise amount excluded will, however, remain dependent on the statutory records, the relevant contribution period, and the application of Section 40(4) of the ESI Act.

Conclusion

The decision in Employees State Insurance Corporation v. Sri Lakshmi Srinivasa Jute Mills Pvt. Ltd. & Ors. strengthens the jurisprudence recognising employee-related statutory contributions as funds bearing a character distinct from the ordinary assets of an insolvent corporate debtor. By reaffirming Nurani Subramanian Suryanarayanan and Manish Kumar Bhagat, the NCLAT has emphasised that the substantive statutory character of ESI contributions prevails over their procedural classification in insolvency proceedings.

Consequently, the Tribunal set aside the NCLT’s approval of the Resolution Plan to the extent that it treated the relevant ESI contributions as ordinary Government/Operational Creditor dues and restricted ESIC’s recovery to 1%. The Resolution Professional/Successful Resolution Applicant was directed to give effect to the judgment in respect of ESI contributions falling within Section 40(4) of the ESI Act read with Section 36(4)(a)(i) of the IBC, with the precise qualifying amount to be determined from the statutory records.