THE PF DEPARTMENT GETS FIRST CHARGE OVER THE DEFAULTER’S ASSETS

In M/s EDELWEISS ASSET RECONSTRUCTION LIMITED Versus REGIONAL PF COMMISSIONER II AND RECOVERY OFFICER, RO BENGALURU (KORAMANGALA) & ANR. - 2025 (8) TMI 1464 - Supreme Court (LB), Acropetal Technologies Private Limited (‘company’ for short) was covered under the provisions of Employees Provident Fund and Miscellaneous Provisions Act, 1952 (‘Act’ for short). The said company defaulted in remitting the PF amount with the Department, since July 2013. An enquiry was initiated against the company by the Department under Section 7(A) of the Act. The Department conducted and enquiry in this regard. The company was given due opportunity of being heard. The Regional PF Commissioner, vide his order dated 08.06.2015 assessed a liability of Rs.1.29 crores against the company. Further the Authority directed the company to deposit the said amount within 15 days from the date of receipt of its order.

The Authority further held that if the said amount was not deposited within the time given to the company, prosecution under section 14/14(A) of the Act against the company along with the recovery proceedings under sections 8(B) to 8(G) of the Act. It was further clarified that said demand of Rs.1.29 crores do not include interest and the damages under Section 7(Q) and 14B of the Act.

The company, vide their letter dated 29.06.2015 informed the Department that all of its bank accounts have been declared as Non-Performing Assets (‘NPA’ for short).  The banks have initiated recovery proceedings by auctioning the properties of the Company. It was informed by the company that the Axis Bank had initiated recovery proceedings of auction of their property at Attibele Hobli. The auction would be held 29.07.2015. The Company further informed that the Department that the auction amount would cover the entire loan and there would be a balance. The Department may contact the Axis Bank with the request to pay the due amount in the balance auction amount

The Department wrote a letter on 08.07.2015 to the Axis Bank requesting the bank to pay the outstanding PF dues of the company under Section 11(2) of the Act. The Axis claimed first charge under Section 35 of the Securities and Reconstruction Financial Assets and Enforcement of Security Interest Act, 2002. Therefore, the Department again asserted that its dues will stand primarily than other debts. The Department issued an attachment order against the Attibele Hobli property. The Department issued reminders to the Axis Bank. The Axis Bank replied that the auction of the impugned property could not be taken place since there was an order directing to maintain status-quo against the said property. The said writ petition was disposed by the High Court. The Department observed from the facts of the case that the Axis bank made auction of the impugned property during March 2016 and appropriated the major amount of loan from the auction amount. The Axis Bank informed that still there was due by the company to the Axis bank.

The Company informed the Department that the State Bank of India, through its assignee Edelweiss Asset Reconstruction Limited (‘appellant’ for reference) was auctioned the property of the company at Kammanahalli and further the State Bank of India auctioned another property at N.S. Palya. The appellant wrote letters to the appellant as well as State Bank of India on 23.04.2021. The Department claimed an amount of Rs.2.09 crores from the appellant. Therefore, the appellant filed a writ petition before the Karnataka High Court. An interim order was passed by the High Court staying the operation of the order dated 15.06.2016 of the Department claiming Rs.1.31 crores under Section 14(B) of the Act.

In view of the High Court order the Department demanded the appellant to pay a sum of Rs.78.43 lakhs and also issued an attachment order on 24.11.2022. I response to the same the appellant was willing to pay the said amount of Rs.78.43 lakhs subject to the condition that the said amount would be the final payment and the Department would not raise further demand in respect of PF dues from the appellant.

The appellant challenged the order of attachment before the High Court and also the recovery certificate of January 2023. The High Court directed the appellant to deposit Rs.75 lakhs to the Department. On deposit of the said amount, there will be a stay for further recovery by the Department. The High Court dismissed the writ petition filed by the appellant with the directions to transfer Rs.75 lakhs as deposited by the appellant to the accounts of EPFO.

Against the said order the appellant filed the present appeal before the Supreme Court. The appellant has admitted that the dues of EPFO have a first charge. The Axis Bank has sold one property for Rs.12 crores approximately whereas, the appellant has sold 2 properties for total consideration of Rs.7 crores. The balance amount of EPFO may be recovered from the Axis Bank as the appellant has already paid an amount of Rs.75 lakhs which is proportionate to the sale consideration received by it and the balance amount due to the Department which apparently has been stayed by the High Court of Karnataka for the amount quantified under Section 14(B) of the Act amounting to Rs.1.3 crores approximately would fall in proportionate share of the Axis Bank. The recovery for the balance amount if ultimately the Department succeeds before the High Court for its demand under Section 14(B) of the Act should be made from Axis Bank and not from the appellant.

The Department submitted the following before the Supreme Court-

• The High Court has rightly dismissed the petition of the appellant and, therefore, it is entitled to recover the balance amount of Rs.3,43,629/- and the amount of Rs.1.3 crores approximately quantified under Section 14(B) of the Act, when the Department succeeds before the High Court.
• The appellant had not impleaded Axis Bank before the High Court and, therefore, the contention of the appellant that balance recovery may be made from Axis Bank with respect to the amount quantified under Section 14(B) of the Act cannot be sustained.

The Department, therefore, prayed for the dismissal of the appeal by the Supreme Court.

The Axis Bank contended that under Section 35 of the SARFAESI Act, the dues of the Bank being secured would have a priority over the sales taxes and other dues payable to the Government or local authority and, therefore, no recovery can be made from Axis Bank till such time its entire dues are liquidated and satisfied.

The Supreme Court considered the submissions of the parties to the present appeal. The Supreme Court observed that the Axis Bank realized Rs.12 crores from the sales of the property and the appellant realized Rs. 7 crores from the sales of the 2 properties. The appellant deposited Rs.75 lakhs and according to the appellant that it was liable to pay Rs.78.43 lakhs as a final settlement. The balance amount of Rs. 1.31 crores may be recovered by the Department from the Axis Bank.

The Supreme Court observed that 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 Department to satisfy its dues from the secured property in view of Section 35 of the SARFAESI Act. The High Court will examine the priority of first charge amongst the Department and the secured creditors i.e. the Axis Bank and State Bank of India and the State Bank of Travancore (now taken over by SBI) in view of Section 11(2) of the Act.

The Supreme Court set aside the impugned order of the High Court. The Supreme Court directed the High Court to decide the case afresh after impleading the Axis Bank and after affording due opportunity of exchanging pleadings and hearing to all the parties to the said proceedings. 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.