Clear First Charge Under EPF Act Overrides Priority Provisions Under SARFAESI Act: Supreme Court
The Appeal before the Supreme Court was filed by a secured creditor, a Co-operative Bank, which sought to proceed against the properties of the mortgagee.
CJI B.R. Gavai, Justice K. Vinod Chandran, Supreme Court
The Supreme Court has held that a clear first charge created under the Employees' Provident Funds and Miscellaneous Provisions Act, 1952, overrides the priority under Section 35 and Section 13 as also that conferred under Section 26-E of the SARFAESI Act, since a priority cannot be equated with a first charge and cannot be given prevalence over the first charge statutorily created.
The Appeal before the Apex Court was filed by a secured creditor, a Co-operative Bank, which sought to proceed against the properties of the mortgagee, a Co-operative Society, engaged in the manufacture of sugar at its factory.
Referring to the provisions of the SARFAESI Act and the EPF&MP, the Division Bench of Chief Justice Of India B. R. Gavai and Justice K. Vinod Chandran held, “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."
“However, from the proceeds of the sale of the assets, 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. Hence, the sale proceeds have to be first applied in satisfaction of the dues under the EPF&MP Act and then in satisfaction of the secured debt of the appellant-bank", it added.
AOR M. Y. Deshmukh represented the Appellant while Advocate Preet S. Phanse represented the Respondent.
Factual Background
The Co-operative Society engaged in the manufacturing of sugar, mortgaged their properties and also hypothecated the stock in trade to the Bank as security for the loan availed. In the year 2000, the factory stood closed because of the huge losses. In 2001, the appellant bank approached the Cooperative Court with a dispute and a Receiver was appointed. The dispute was adjudicated, allowing the appellant-bank to recover an amount of Rs 30,24,32,954. In 2002, the Commissioner of Sugar appointed a liquidator to commence the proceedings for liquidation, and in 2006, the appellant-bank issued a notice under Section 13(2) of the SARFAESI Act and took over possession of the secured assets of the Society.
The workers approached the liquidator for payment of their dues and later in the year 2007 approached the Industrial Court under the Maharashtra Recognition of Trade Unions and Prevention of Unfair Labour Practices Act, 1971. The said application stood dismissed. When the appellant-bank proceeded to sell the properties, there were multiple writ petitions filed challenging the same by the workmen and their Union seeking recovery of the dues of the workmen and the defaulted amounts of provident fund. A Director of the appellant also challenged the auction proceedings and a corrigendum issued. The Society and its members filed separate writ petitions which were decided by the impugned judgment, against which the appeals were filed before the Apex Court. The bank was aggrieved by the direction to proceed with the sale and deposit the sale proceeds in a separate account from which unpaid wages and other legal dues of the workers were to be paid.
Reasoning
Considering that Section 26E gives a priority to the secured creditor’s dues even if the claim of the workmen was accepted and their dues determined, the Bench held that it could not have been recovered from the sale proceeds of the auction conducted by the secured creditor; if the proceeds could only satisfy the debt due to the secured creditor. “The provision under Section 26E, in addition to Section 35, gives a debt of the secured creditor priority over the workmen’s dues if it is registered with the Central Authority as provided under the Act of 2002”, it added.
The Bench explained that SARFAESI Act is the latter act and if the question was solely of the non-obstante clause giving it overriding effect from any law for the time being in force, the SARFAESI Act would prevail. However, in the EPF&MP Act, Section 11(2) creates a statutory first charge on the assets of the establishment for any amount due from an employer, be it the employers’ or employees’ contribution, which would include any interest or damages.
“On the above reasoning, we find that the workmen’s dues which also has not been quantified as of now 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. However, from the proceeds of the sale of the assets, 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”, it noted.
Allowing the appeals, the Bench held that the appellant-bank would be entitled to proceed with the auction, if not already proceeded with and from the proceeds received in auction, first the dues under the EPF&MP Act would have to be satisfied and then the debts due to the appellant Bank.
Cause Title: Jalgaon District Central Coop. Bank Ltd. v. State of Maharashtra (Neutral Citation: 2025 INSC 1335)
Appearance
Appellant: AOR M. Y. Deshmukh, Advocates Manjeet Kirpal, Sanyukta N. Suryawanshi, D. Aswathaman, Atharva D. Kale, Dhumal Viraj Prataprao
Respondent: Advocates Preet S. Phanse, Siddharth Dharmadhikari, AOR Aaditya Aniruddha Pande, Advocate Shrirang B. Varma, AOR Shivaji M. Jadhav, AOR M/S. S.M. Jadhav And Company