The Supreme Court has held that dues payable under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (EPF & MP Act) hold priority over the debts due to a secured creditor under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act).
The Division Bench, comprising Chief Justice of India B.R. Gavai and Justice K. Vinod Chandran, clarified that the “first charge” created statutorily under Section 11(2) of the EPF & MP Act prevails over the “priority” conferred upon secured creditors under Section 26E of the SARFAESI Act.
Case Summary
The legal issue before the Court was whether the dues of a secured creditor (the Appellant Bank), registered with the Central Registry under the SARFAESI Act, override the claims of workmen and Provident Fund (PF) dues.
The Supreme Court partially allowed the appeals filed by the Jalgaon District Central Cooperative Bank Ltd. The Court directed that from the sale proceeds of the mortgaged assets, the dues under the EPF & MP Act must be satisfied first. The debts due to the secured creditor would be paid thereafter. The Court rejected the contention that Section 26E of the SARFAESI Act gives the Bank priority over statutory PF dues.
Background of the Case
The Appellant, Jalgaon District Central Cooperative Bank Ltd., is a secured creditor that sought to proceed against the properties of a Co-operative Society engaged in sugar manufacturing. The Society had mortgaged its properties and hypothecated stock to the Bank but defaulted on the loan. The factory had been closed since 2000 due to losses.
In 2006, the Bank issued a notice under Section 13(2) of the SARFAESI Act and took possession of the assets. While the Bank attempted to sell the properties, multiple writ petitions were filed by the workmen and their Union seeking recovery of unpaid wages and defaulted Provident Fund amounts.
The High Court, in the impugned judgment, directed that the Provident Fund dues be deposited immediately upon the sale of the property, before applying the proceeds to any other debt, including the Bank’s claim. The Bank approached the Supreme Court challenging these directions.
Arguments of the Parties
The Appellant-Bank contended that Section 26E of the SARFAESI Act, introduced with effect from January 24, 2020, creates an overriding effect regarding the recovery of dues for a secured creditor. Relying on the judgment in Punjab National Bank & Ors. v. Union of India & Ors. (2022), the Bank argued that once the security interest is registered with the Central Registry, it has priority over other claims.
The Respondent-Workmen argued that Provident Fund dues carry a specific “first charge” under the law. They relied on Maharashtra State Cooperative Bank Ltd. v. Assistant Provident Fund Commissioner (2009), asserting that PF dues must be paid before the Bank can set off the defaulted loan amounts.
The Court’s Analysis
Justice K. Vinod Chandran, writing for the Bench, examined the interplay between Section 26E of the SARFAESI Act and Section 11(2) of the EPF & MP Act.
On the Nature of “First Charge” The Court observed that Section 11(2) of the EPF & MP Act contains a non-obstante clause and declares that any amount due from an employer regarding contributions shall be deemed to be the “first charge” on the assets of the establishment.
Referring to the precedent in Maharashtra State Cooperative Bank Ltd., the Court reiterated that the EPF & MP Act is a welfare legislation. The Court noted:
“There being a clear first charge created under the EPF&MP Act, it overrides the priority under Section 35 and Section 13 as also that conferred under Section 26-E since a priority cannot be equated with a first charge and cannot be given prevalence over the first charge statutorily created.”
Distinguishing Previous Judgments The Court distinguished the present case from Punjab National Bank (2022). It noted that Punjab National Bank dealt with “Crown debts” (Central Excise dues) where the specific statute did not provide for a first charge at the relevant time. In contrast, the EPF & MP Act creates a specific statutory first charge.
The Court also relied on Central Bank of India v. State of Kerala (2009), holding that a statutory first charge created by a welfare legislation validly overrides the priority provisions of the SARFAESI Act.
Scope of PF Dues The Court clarified that the priority for EPF dues is not limited to the principal contribution.
“…the first charge would be for the dues under the EPF&MP Act which includes not only the contribution payable but also the interest, penalty and damages if any imposed.”
On Workmen’s Wages Regarding the unpaid wages of the workmen, the Court noted that these dues had not yet been quantified. Consequently, the Court held that unquantified workmen’s dues “cannot have any priority over the claim raised by the secured creditor, the Bank, which is conferred a priority under Section 26-E of the SARFAESI Act.”
The Decision
The Supreme Court set aside the impugned High Court judgment in part and issued the following directions:
- Sale Proceedings: The Appellant-Bank is entitled to proceed with the auction of the property.
- Order of Priority: From the auction proceeds, the dues under the EPF & MP Act must be satisfied first.
- Secured Debt: After the satisfaction of EPF dues, the proceeds shall be applied to the debts due to the Appellant-Bank.
- Workmen’s Dues: The workmen were granted liberty to approach the appropriate authority under the MRTU & PULP Act to determine their dues. The Court directed that such an application should be considered de hors (without regard to) the delay. However, payment to workmen would only be necessitated “if there is any amount remaining after satisfaction of the provident fund dues and that of the secured creditor.”
Case Details:
- Case Title: Jalgaon District Central Coop. Bank Ltd. v. State of Maharashtra and Ors.
- Citation: 2025 INSC 1335
- Bench: CJI B.R. Gavai and Justice K. Vinod Chandran
