Provident fund dues take precedence over secured creditors under SARFAESI: Supreme Court

The Supreme Court recently held that provident fund dues have priority over all other debts including those owed to banks under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) [Jalgaon District Central Coop. Bank Ltd. State of Maharashtra & Ors.]. .A Bench of Chief Justice of India BR Gavai and Justice K Vinod Chandran ruled that the Employees’ Provident Funds and Miscellaneous Provisions Act (EPF Act) creates a statutory first charge on an establishment’s assets, which overrides the priority given to secured creditors under Section 26E of SARFAESI..The Court was hearing appeals filed by the Jalgaon District Central Cooperative Bank after the Bombay High Court directed that provident fund dues of workers at a defunct sugar factory must be paid before the bank could recover its loan.The dispute originated when a cooperative sugar factory in Maharashtra defaulted on its loans and shut down in 2000. The bank, which had mortgaged the factory’s assets, moved the Cooperative Court in 2001 and obtained an order allowing it to recover over ₹30 crore. The Sugar Commissioner later appointed a liquidator, while the bank invoked SARFAESI in 2006 to take possession of the factory and sell its assets.When the bank initiated the sale, workmen and their union filed writ petitions before the High Court seeking payment of unpaid wages and provident fund dues. The High Court allowed the auction but directed that provident fund dues be paid first and the remaining proceeds deposited in a “no-lien account” for disbursal of workers’ wages once quantified. The bank challenged these directions before the Supreme Court, claiming that Section 26E of SARFAESI gave secured creditors an overriding right over all other claims..The Court examined the legislative intent behind both enactments. It noted that the EPF Act, a welfare legislation enacted to secure social protection for workers, explicitly creates a “first charge” on the employer’s assets for any amount due towards provident fund contributions, interest, penalties or damages. Explaining this principle, the bench said that the EPF Act’s first charge cannot be diluted by the priority given to secured creditors under SARFAESI.“The effect of the non-obstante clause giving precedence over any other law for the time being in force pales into insignificance, as held in Central Bank of India v. State of Kerala. There being a clear first charge created under the EPF Act, it overrides the priority under Section 35 and Section 13 as also that conferred under Section 26E since a priority cannot be equated with a first charge and cannot be given prevalence over the first charge statutorily created,” the Court said.The bench distinguished between two forms of precedence - “priority” (under SARFAESI) and “first charge” (under the EPF Act), holding that the latter had greater legal force. It reasoned that when two statutes each confer overriding power, the one creating a first charge prevails over one that merely creates priority, even if enacted later in time.The Court also noted that the EPF Act’s protective scope extended to all amounts due from the employer, including interest and damages. This interpretation, it said, was consistent with the Court’s earlier decision in Maharashtra State Cooperative Bank Ltd. v. Assistant Provident Fund Commissioner (2009), which affirmed that provident fund dues override all secured and unsecured debts..On the bank’s argument that the 2020 amendment to SARFAESI granted lenders absolute priority, the Court said that the welfare intent behind the EPF Act could not be defeated by later financial legislation..While allowing the bank to proceed with the auction of the factory’s assets, the Court directed that the sale proceeds must first be used to clear provident fund dues in full. Only the remaining amount could be applied towards repayment of the bank’s secured loans.It also permitted the workmen to approach the competent authority under the Maharashtra Recognition of Trade Unions and Prevention of Unfair Labour Practices Act to determine their unpaid wages, if any amount remained after satisfying provident fund and loan dues..The bank was represented by advocates MY Deshmukh, Manjeet Kirpal, Sanyukta N Suryawanshi, D Aswathaman, Atharva D Kale and Dhumal Viraj Prataprao.The respondents were represented by advocates Preet S Phanse, Siddharth Dharmadhikari, Aaditya Aniruddha Pande, Shrirang B Varma and Shivaji M Jadhav..[Read Judgment].Follow Bar and Bench channel on WhatsAppDownload the Bar and Bench Mobile app for instant access to the latest legal news.