Supreme Court | Karnataka HC Directed To Decide If Secured Creditors Or EPFO Hold First Charge Over Defaulter’s Assets | Priority Dispute Between SARFAESI and PF Act Remitted
Kiran Raj
The Supreme Court of India Division Bench of Justice Vikram Nath, Justice Sanjay Karol, and Justice Sandeep Mehta set aside the Karnataka High Court’s order in a dispute concerning recovery of provident fund dues under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952. The Court directed that the writ petition filed by the appellant be restored to the High Court for fresh adjudication after impleading Axis Bank as a necessary party. The Supreme Court clarified that the High Court must first examine the competing claims of priority between provident fund dues under Section 11(2) of the Act and secured creditors under Section 35 of the SARFAESI Act, 2002.
The matter originated with M/s Acropetal Technologies Pvt. Ltd. (the Establishment), which was covered under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952. The Establishment defaulted in payment of provident fund dues from July 2013. An inquiry under Section 7A of the Act determined a liability of Rs.1,28,90,486/- by order dated 8 June 2015. The order also warned that any default might entail prosecution under Section 14/14(A) and recovery under Sections 8(B) to 8(G). Importantly, the liability did not include interest and damages under Sections 7(Q) and 14(B).
Subsequently, by communication dated 29 June 2015, the Establishment informed authorities that its bank accounts had been declared Non-Performing Assets, and recovery processes were underway. Axis Bank initiated auction of the Attibele property, with an auction date fixed for 29 July 2015. The Establishment assured that statutory dues would be addressed from the sale proceeds. The Employees’ Provident Fund Organisation (EPFO), through its letter dated 8 July 2015, demanded remittance of Rs.2,96,76,656/- under Section 11(2) of the Act, referring to precedent in Maharashtra State Co-operative Bank v. Assistant PF Commissioner.
Axis Bank, however, asserted priority under Section 35 of the SARFAESI Act by communication dated 20 July 2015. The EPFO responded by issuing an attachment order against the Attibele property on 23 July 2015.
The auction scheduled by Axis Bank was stayed temporarily by the Karnataka High Court. After disposal of the writ petition in late 2015, Axis Bank proceeded to sell the property in March 2016, appropriating the proceeds against its dues and informing the EPFO that no balance remained for provident fund liabilities.
Later, EPFO was informed that other properties of the Establishment, namely the Kammanahalli property and the Palya property, were being auctioned by State Bank of India and State Bank of Travancore respectively, through their assignee, Edelweiss Asset Reconstruction Company (EARC). On 23 April 2021, EPFO demanded Rs.2,08,94,800/- from EARC under Section 11(2).
EARC challenged a demand raised under Section 14(B) of the Act for Rs.1,30,52,221/- by filing a writ petition. An interim order stayed the operation of this demand. EPFO then demanded Rs.78,42,579/- and issued an attachment order dated 24 November 2022. EARC expressed willingness to remit Rs.78,43,629/- subject to full and final settlement.
The Karnataka High Court on 2 February 2023 directed EARC to deposit Rs.75 lakhs, stayed further recovery, and later dismissed the writ petition, ordering transmission of the deposited amount to EPFO. Aggrieved, EARC filed the present appeal before the Supreme Court.
The appellant admitted that EPFO dues had first charge but contended that since Axis Bank had realised Rs.12 crores while EARC realised only Rs.7 crores from sales, recovery should be proportionate. The liability under Section 14(B) amounting to Rs.1.3 crores should be recoverable from Axis Bank, it argued.
EPFO maintained that dismissal of the writ petition was correct, asserting entitlement to recover both Rs.3,43,629/- and Rs.1.3 crores subject to High Court outcome. It argued that since EARC had not impleaded Axis Bank in High Court proceedings, the proportional recovery argument was unsustainable.
Axis Bank maintained that Section 35 of the SARFAESI Act gave secured creditors priority over statutory dues. Hence, EPFO could not recover anything from Axis Bank until its dues were fully satisfied.
The Supreme Court recorded: “It is true that the appellant did not implead Axis Bank as a party-respondent before the High Court. However, before this Court, Axis Bank was impleaded and is now represented and duly heard.”
The Bench noted the competing claims: “According to the appellant, the EPFO had first charge over the property auctioned, whether by the appellant or by the Axis Bank. Whereas the contention of the Axis Bank is that it has the first charge and priority over the sales tax and other dues payable to the Government and local authority.”
On facts, the Court recorded: “It is an admitted position that Axis Bank by sale of Attibele property has realised an amount of Rs.12 crores approximately whereas, appellant by sale of the other two properties namely Kammanahalli property and Palya property has realised only Rs.7 crores approximately.”
Further: “It is an admitted position that the appellant had already paid Rs.75 lakhs and had in fact given an undertaking that it will pay Rs.78,42,579/- in full and final discharge of its liability.”
The Court observed the central issue: “In our considered opinion, it would be appropriate that the High Court first deals with the issues raised by Axis Bank that it has first charge and priority over and above the EPFO to satisfy its dues from the secured property in view of Section 35 of the SARFAESI Act.”
It continued: “The High Court will examine the priority of first charge amongst the EPFO and the secured creditors i.e. the Axis Bank and other two Banks, namely, State Bank of India and the State Bank of Travancore (now taken over by SBI) in view of Section 11(2) of the PF Act.”
The Bench clarified its own limits: “Since we are not entering into the merits of that issue relating to first charge and priority, we are not dealing with the same in detail. All the parties to the writ petition as it would stand now after remand would be at liberty to raise all contentions before the High Court.”
The Supreme Court allowed the appeal, set aside the impugned order of the Karnataka High Court, and restored Writ Petition No.2543 of 2023. It directed that Axis Bank be impleaded as a party-respondent. The Court stated that the High Court must decide the matter afresh after affording opportunity of pleadings and hearing to all parties.
It ordered: “In view of the above, we set aside the impugned order and restore the Writ Petition No.2543 of 2023 (L-PF) to be decided afresh after impleading the Axis Bank as a respondent and after affording due opportunity of exchanging pleadings and hearing to all the parties to the said proceedings.”
The Court further directed: “The High Court will take into consideration, the relevant fact relating to the charge having been created by the EPFO over the properties to be auctioned by the Axis Bank prior to the auction. Material in this regard has been placed before us.”
Finally: “The appeal stands accordingly allowed. The impugned order is set aside, and the writ petition is restored to its original number before the High Court. Further, the High Court to proceed and decide the writ petition in accordance with law in the light of the observations made above after impleading the Axis Bank as a party-respondent.”
Advocates Representing the Parties
For the Petitioners: Mr. Krishnan Venugopal, Sr. Adv.; Mr. Kaushik Mishra, Adv.; Mr. Shivendra Singh, AOR; Ms. Prakriti Rastogi, Adv.; Mr. Shailesh K. Rajora, Adv.; Ms. Deepanshi Ishar, Adv.; Mr. Avinash Mathews, Adv.
For the Respondents: Mr. Gopal Jain, Sr. Adv.; M/s Dua Associates, AOR; Mr. Munawwar Naseem, Adv.; Mr. Jaskaran Singh Bhatia, Adv.; Mr. Dushyant Parashar, AOR; Mr. Manu Parashar, Adv.; Mr. Praduman Kumar Aggarwal, Adv.; Mr. Dinesh Pandey, Adv.; Mr. Sanjay Kumar Aggarwal, Adv.; Mrs. Neha Shanker, Adv.
Case Title: M/s Edelweiss Asset Reconstruction Limited v. Regional PF Commissioner II and Recovery Officer, RO Bengaluru (Koramangala) & Anr.
Neutral Citation: 2025 INSC 1045
Case Number: C.A. No…./2025 @ SLP(C) No.11069/2024
Bench: Justice Vikram Nath, Justice Sanjay Karol, Justice Sandeep Mehta
