2025 (8) TMI 1464 - SC - Indian Laws

Petition restored for fresh hearing to decide if Bank A has first charge under Section 35 and Section 11(2)

M/s EDELWEISS ASSET RECONSTRUCTION LIMITED Versus REGIONAL PF COMMISSIONER II AND RECOVERY OFFICER, RO BENGALURU (KORAMANGALA) & ANR.

M/s EDELWEISS ASSET RECONSTRUCTION LIMITED Versus REGIONAL PF COMMISSIONER II AND RECOVERY OFFICER, RO BENGALURU (KORAMANGALA) & ANR. - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether a statutory charge in favour of the provident-fund authority under the relevant statutory scheme (Section 11(2) of the Provident Fund statute) has priority over charges and realisations effected by a secured creditor under the securitisation and reconstruction statute (Section 35 of the SARFAESI regime) in respect of immovable property sold in auction. 2. Whether, in proceedings challenging the transmission or appropriation of sale proceeds, the secured creditor whose charge and auction-sale are in issue must be impleaded so that the question of competing priority can be adjudicated. 3. Whether an interim deposit made by an assignee/realisation agent pending adjudication extinguishes or alters the rights of the statutory authority to claim the balance from other secured creditors that realised higher sale proceeds. 4. Procedural question: whether a writ petition dismissed without considering the competing claims of an unimpleaded secured creditor should be set aside and remitted for fresh adjudication after impleading that creditor and permitting pleadings and hearing. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Priority of Statutory Provident-Fund Charge (Section 11(2)) vis-à-vis Secured Creditor under SARFAESI (Section 35) Legal framework: The provident-fund statute confers upon the statutory authority a charge over the proceeds of any property sold by the employer/debtor and grants priority for recovery (Section 11(2) and related provisions). The SARFAESI regime (Section 35) provides protection to secured creditors that their security realisations enjoy certain priorities over specified public dues. Precedent treatment: The statutory authority relied upon an earlier apex-court decision addressing competing claims to sale proceeds, which the authority invoked to assert its priority. The Court in the present matter directed that the High Court should examine competing priorities in light of the statutory provisions and precedents identified by the parties; no precedent was overruled. Interpretation and reasoning: The Court recognised that the question of priority between the statutory-charge holder and secured creditors under SARFAESI raises a pure legal issue governed by the interplay of Section 11(2) of the provident-fund statute and Section 35 of the SARFAESI Act. Given that different secured creditors realised different amounts from different properties and that the statutory authority asserted attachment/orders prior to some auctions, the Court held that the High Court must determine (on complete pleadings and evidence) whether the statutory charge, as asserted and attached prior to auction, takes precedence or whether the SARFAESI-secured creditor's rights and statutory priority under Section 35 prevail. Ratio vs. Obiter: Ratio - the proper approach is to adjudicate priority by construing and applying Section 11(2) vis-à-vis Section 35 on the facts and documentary record (e.g., timing of charge/attachment and auction). Obiter - detailed conclusions on which claimant ultimately prevails were not expressed; the Court refrained from deciding the merits. Conclusions: The Court mandated a fresh adjudication of competing priorities. It held that the High Court must examine and decide whether the statutory charge under Section 11(2) has priority over the SARFAESI-secured creditors in respect of the relevant properties and sale proceeds. Issue 2 - Necessity of Impleading the Secured Creditor Whose Auction and Realisation Are in Dispute Legal framework: Principles of adjudicatory fairness and necessary-party doctrine require that parties whose rights are directly affected by a decree be impleaded so they have opportunity to present their case; this is particularly important where rights to sale proceeds and priorities are directly in issue. Precedent treatment: The Court relied on established practice that a party whose legal rights are put in issue should be heard; no novel precedent was laid down or overruled. Interpretation and reasoning: The Court observed that the secured creditor who conducted an auction and appropriated proceeds was not made a party before the High Court even though its rights and priorities were directly in question. The Court held that absence of impleadment deprived the secured creditor of an opportunity to address arguments concerning Section 35 and its priority vis-à-vis the statutory authority. On that basis, the Court concluded that remand and impleadment were necessary to enable a fairly conducted adjudication. Ratio vs. Obiter: Ratio - where a litigant's rights are directly affected by a decision on priority of realised sale proceeds, that litigant must be impleaded and afforded opportunity to be heard; failure to do so renders the earlier adjudication vulnerable to setting aside. Obiter - the Court did not specify limits on impleadment in other contexts. Conclusions: The impugned order was set aside and the matter remitted for fresh adjudication after impleading the secured creditor(s) who conducted the auctions and appropriated sale proceeds. Issue 3 - Effect of Interim Deposit by One Realisation Agent on Liability of Other Secured Creditors Legal framework: Payment into court or interim deposits do not ipso facto determine ultimate rights of competing creditors; substantive rights depend on statutory priority, timing of attachments, and the factual record establishing creation and notice of charges. Precedent treatment: The Court did not alter precedent on the legal effect of interim deposits; it emphasised that payment by one realisation agent does not automatically absolve other parties from their competing liabilities if equitable or statutory priorities dictate otherwise. Interpretation and reasoning: The Court recognised that one realisation agent/assignee had deposited a significant sum as an interim measure and had expressed willingness to make further payment subject to being discharged. However, the Court declined to treat that deposit as dispositive of entitlement between competing creditors. Instead, it directed the High Court to consider whether any remaining balance could legitimately be claimed from other secured creditors who realised larger sale proceeds, dependant on findings as to priority and timing. Ratio vs. Obiter: Ratio - interim deposit by a disputing realisation agent does not preclude adjudication of ultimate liability between competing creditors; adjudication must determine who bears the balance based on statutory priority and evidence. Obiter - specific apportionment methodology was not prescribed. Conclusions: The High Court must determine whether the statutory authority's claim for balance sums can be recovered from other secured creditors depending on the resolution of priority; the interim deposit does not conclusively settle that question. Issue 4 - Appropriateness of Setting Aside Impugned Order and Remanding for Fresh Decision with Pleadings and Hearing Legal framework: Principles of fair adjudication require that all parties whose rights are affected be before the court, and that contested statutory questions be decided after full pleadings, evidence and hearing. Where a lower court decides without impleading a necessary or directly affected party, appellate courts may set aside and remit for fresh consideration. Precedent treatment: The Court followed this settled procedural principle; no countervailing precedent was invoked to justify denial of a remand. Interpretation and reasoning: Given that the secured creditor was not before the High Court and that the competing legal questions (statutory priority under Section 11(2) vs. SARFAESI Section 35) required adjudication with inputs from all interested parties, the Court held that the proper course was to set aside the order and restore the writ petition for fresh disposition after impleadment, exchange of pleadings and hearing. Ratio vs. Obiter: Ratio - a writ disposed without impleading a materially affected secured creditor must be set aside and remanded for full adjudication. Obiter - none on alternative remedies. Conclusions: The impugned order was set aside; the case remitted to the High Court to be heard afresh with the secured creditor impleaded, pleadings exchanged, and all contentions on priority adjudicated in accordance with law.