Provident Fund Dues Supersede Secured Creditor’s Claims Under SARFAESI Act: Supreme Court
Kiran Raj
The Supreme Court of India Division Bench of Chief Justice B.R. Gavai and Justice K. Vinod Chandran held on Thursday (November 20) that provident fund dues of employees must be satisfied before any claim asserted by a secured creditor under the SARFAESI Act. The Court concluded that liabilities arising under the Employees’ Provident Funds and Miscellaneous Provisions Act constitute a statutory first charge that supersedes the priority otherwise available to banks after registration of security interest. The dispute concerned a secured creditor seeking to recover its dues through the sale of a defunct cooperative society’s mortgaged assets, while workmen sought payment of outstanding provident fund contributions. The Court directed that EPF dues be paid first from the sale proceeds, followed by the secured creditor’s entitlement.
The dispute arose when a cooperative bank, acting as a secured creditor, sought to recover its outstanding dues from the mortgaged assets of a cooperative society engaged in sugar manufacturing. The society had availed loans from the bank by mortgaging its properties and hypothecating stock. The factory later became defunct, and the society defaulted on repayment. The bank invoked remedies under the SARFAESI Act after registering its security interest with the Central Registry. Prior to this, a receiver had been appointed in proceedings before the Cooperative Court, and a liquidator had also been appointed by the Sugar Commissioner.
Workmen of the society claimed unpaid wages and provident fund contributions. They initially approached the liquidator and later filed applications before the Industrial Court under the MRTU & PULP Act, which were dismissed as delayed. A Single Judge of the High Court subsequently permitted them to raise their claims before the liquidator. When the bank initiated steps to sell the mortgaged assets, multiple writ petitions were filed by workmen, their union, members of the society, and a director challenging the sale and seeking recovery of dues.
The parties relied on statutory provisions including Sections 13, 23, 26D, and 26E of the SARFAESI Act; Section 11(1) and (2) of the EPF & MP Act; and relevant provisions of the MRTU & PULP Act. The bank contended that its registered security interest conferred priority, while the workmen asserted that provident fund arrears constituted a statutory first charge.
The Court recorded that the bank had registered its security interest under the SARFAESI Act, noting that “The ‘Asset ID Search Report’ (A-40) speaks of the appellant-bank having complied with Section 23… thus making applicable Section 26E.” It addressed the bank’s submission that the statutory priority created under Section 26E should prevail over all other claims.
The Court examined the workmen’s position regarding unpaid wages and provident fund dues, stating that “the provident fund dues definitely have a first charge.” It observed that the Industrial Court had dismissed the workmen’s applications solely on the ground of delay, and recorded that “The Liquidator’s role is no more relevant since the secured creditor has taken over the property and had proceeded for sale as per the Act of 2002.”
The Bench discussed the statutory framework governing priority of debts and referred to Section 11(2) of the EPF & MP Act, quoting that “the amount so due shall be deemed to be the first charge on the assets of the establishment, and shall… be paid in priority to all other debts.” It stated that “if there is a first charge statutorily created, validly, dehors the non obstante clause… the statutory charge would prevail.”
The Court then reproduced the substantive effect of Section 11(2) in relation to the SARFAESI Act, stating: “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. In that circumstance, the effect of the non obstante clause giving precedence over any other law for the time being in force pales into insignificance…”
The Court also addressed the status of the workmen’s unquantified wage claims, recording 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.” It added that even if determined later, “it could not have been recovered from the sale proceeds… if the proceeds could only satisfy the debt due to the secured creditor.”
The Court stated that the statutory first charge under the EPF & MP Act must be satisfied before the secured creditor’s dues: “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 further noted that determination of workmen’s claims may proceed “if there is any amount remaining after satisfaction of the provident fund dues and that of the secured creditor.”
The Court directed: “On the above reasoning, we cannot but partly set aside the impugned judgment and the directions therein. 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 will have to be satisfied and then the debts due to the appellant Bank.”
“We would only leave liberty to the workmen to approach the appropriate authority under the MRTU & PULP Act by an application to determine the dues, which shall be considered de hors the order rejecting the same on the ground of delay and de hors the delay caused as such.”
“The appeals are allowed, setting aside the impugned judgment with the aforesaid directions.”
Advocates Representing the Parties:
For the Petitioners: Mr. M. Y. Deshmukh, AOR Ms. Manjeet Kirpal, Adv. Ms. Sanyukta N. Suryawanshi, Adv. Mr. Atharva D. Kale, Adv. Mr. Aswathaman D., Adv.
For the Respondents: Ms. Preet S. Phanse, Adv. Mr. Siddharth Dharmadhikari, Adv. Mr. Aaditya Aniruddha Pande, AOR Mr. Shrirang B. Varma, Adv. Mr. Shivaji M. Jadhav, AOR Mr. Brij Kishor Sah, Adv. Mr. Adarsh Kumar Pandey, Adv. Mr. Vignesh Singh, Adv. Mr. Aditya S. Jadhav, Adv. Mr. Shivaji M. Jadhav, Adv. Mr. Brij Kishor Sah, Adv. Ms. Apurva, Adv. Mr. Adarsh Kumar Pandey, Adv. Mr. Vignesh Singh, Adv. Mr. Aditya S. Jadhav, Adv. M/S. S.M. Jadhav And Company, AOR
Case Title: Jalgaon District Central Coop. Bank Ltd. v. State of Maharashtra and Ors.
Neutral Citation: 2025 INSC 1335
Case Number: Civil Appeal (arising out of Special Leave Petition (C) No.27740 of 2011 etc.)
Bench: Justice B.R. Gavai, Justice K. Vinod Chandran
