2025 (11) TMI 1331 - SC - Indian Laws

Provident fund first charge under Section 11(2) EPF Act overrides secured creditor priority under SARFAESI Sections 35, 13, 26E

Jalgaon District Central Coop. Bank Ltd. Versus State of Maharashtra and Ors.

SC held that statutory 'first charge' for provident fund dues under Section 11(2) of the EPF&MP Act prevails over the priority granted to secured ... Recovery of dues related to Employees e.g. EPF - Overriding claim over the assets of the factory - Sections 26D and 26E of the SARFAESI Act introduced w.e.f. 24.01.2020, has an overriding effect insofar as the recovery of dues of the secured creditor or not - provident fund dues, declared a 'first charge' under Section 11(2) of the Employees' Provident Funds & Miscellaneous Provisions Act (EPF&MP Act), prevail over the priority conferred by Section 26-E of the SARFAESI Act or not - HELD THAT:- When there are two enactments conferring priority in satisfaction of a debt coming under the respective enactments, by virtue of a non-obstante clause overriding the provisions of any law in force at that time, the time in which the statute was enacted or the provision was incorporated, assumes significance and the provision latter in time would prevail. However, if there is a first charge statutorily created, validly, dehors the non obstante clause conferring priority over other debts, the statutory charge would prevail. With these principles in mind, on looking at the provisions under the SARFAESI Act and the EPF&MP Act, the former with the incorporation of Section 26-E, it is opined that there has to be found a first charge to the EPF&MP Act dues, under Section 11(2) of that Act. Undisputedly, SARFAESI Act is the latter act and if the question was solely of the non-obstante clause giving it overriding effect from any law for the time being in force, the SARFAESI Act would prevail. However, 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 also as has been held in Maharashtra State Co-operative Bank Limited3. 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, as held in Central Bank of India - There being a clear first charge created under the EPF&MP Act, it overrides the priority under Section 35 and Section 13 as also that conferred under Section 26-E since a priority cannot be equated with a first charge and cannot be given prevalence over the first charge statutorily created. 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 - liberty given 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. Such determination would be necessitated if there is any amount remaining after satisfaction of the provident fund dues and that of the secured creditor. The impugned judgement set aside - appeal allowed. 1. ISSUES PRESENTED AND CONSIDERED 1. Whether a secured creditor whose security interest is registered with the Central Registry under the SARFAESI Act (post-introduction of Chapter IVA and Section 26-E) has priority over unpaid wages and other dues of workmen recovered from sale proceeds of the secured assets. 2. Whether provident fund dues, which are declared a 'first charge' under Section 11(2) of the Employees' Provident Funds & Miscellaneous Provisions Act (EPF&MP Act), prevail over the priority conferred by Section 26-E of the SARFAESI Act. 3. Whether an unquantified claim of workmen (rejected earlier for delay) can be enforced against the sale proceeds of secured assets subject to the priority regime under the SARFAESI Act and EPF&MP Act. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1: Priority of a registered secured creditor (Section 26-E SARFAESI Act) vis-à-vis workmen's dues (wages and other employment claims) Legal framework: Chapter IVA of the SARFAESI Act (Central Registry) and Section 26-E (priority to secured creditors) introduced w.e.f. 24.01.2020; Sections 13 and 35 (overriding effect of SARFAESI Act provisions) govern enforcement of security interest. Precedent Treatment: The Court relied on prior decisions addressing the overriding effect of SARFAESI provisions and the role of Section 13/35 in creating statutory precedence for secured creditors; it noted jurisprudence expressing concern at High Courts entertaining writs that undermine statutory remedies. Interpretation and reasoning: Registration of the security interest with the Central Registry triggers Section 26-E which, by its non obstante language, confers priority to debts due to the secured creditor 'over all other debts.' Where workmen's claims remain unquantified, Section 26-E operates to prevent recovery of those claims from sale proceeds that are otherwise liable to satisfy the secured creditor's debt. The Court observed that the workmen's pending claims, not yet adjudicated to a monetary amount, cannot have priority over a registered secured creditor's statutory priority. Ratio vs. Obiter: Ratio - A secured creditor with a registered security interest under Section 26-E has priority over unquantified workmen's dues for the purpose of distribution of sale proceeds. Obiter - Comments on procedural impropriety of invoking writ jurisdiction where statutory remedies exist. Conclusions: The Court held that the secured creditor is entitled to proceed with enforcement and sale; workmen's unquantified dues do not take priority over the secured creditor's claim under Section 26-E, and hence cannot be paid from sale proceeds ahead of the secured creditor. Issue 2: Whether provident fund dues (first charge under Section 11(2) EPF&MP Act) override the priority under Section 26-E SARFAESI Act Legal framework: Section 11(2) EPF&MP Act creates a statutory 'first charge' on the assets of the establishment and contains an express non obstante clause declaring such dues to be paid 'in priority to all other debts.' Section 26-E SARFAESI Act confers priority to secured creditors after registration of security interest. Precedent Treatment: The Court examined prior rulings that (a) treat the EPF&MP Act as a welfare enactment intended to secure employees' dues and interpret 'any amount due from an employer' broadly to include contributions, interest and damages; (b) recognise that where a statutory first charge is created by one enactment, a later non-obstante priority provision may not displace a valid first charge; and (c) apply the temporal and substantive analyses when two non-obstante clauses and priorities collide. Interpretation and reasoning: The Court distinguished between (i) statutory 'priority' conferred by a non-obstante clause (as in Section 26-E) and (ii) a statutory 'first charge' (as in Section 11(2) EPF&MP Act). It reasoned that a first charge operates as a real right on the assets and is not simply a procedural preference; therefore, a first charge validly created under welfare legislation (EPF&MP Act) cannot be subordinated by a later enacted statutory priority which does not itself create a first charge. The Court analysed legislative timing but concluded that the existence of a statutory first charge in EPF&MP Act mandates that provident fund dues be satisfied first from sale proceeds, including contributions, interest, penalty and damages. Ratio vs. Obiter: Ratio - Statutorily created first charge under Section 11(2) EPF&MP Act prevails over priority conferred under Section 26-E SARFAESI Act; sale proceeds must first satisfy EPF&MP dues (contributions, interest, damages) and thereafter the secured creditor's claim. Obiter - Observations on the interplay of other revenue/statutory charges where those enactments may be subject to SARFAESI by express limitation in their own statutory language. Conclusions: The Court concluded that provident fund dues having a statutory first charge will be paid first from the proceeds of sale of secured assets; only thereafter will the proceeds be applied to the secured creditor's registered debt under Section 26-E. Issue 3: Remedies available to workmen whose claims were rejected for delay and the effect on distribution of sale proceeds Legal framework: MRTU & PULP Act (remedies before Industrial Court), powers of Liquidator under state sugar legislation, and the statutory remedy structure under SARFAESI Act (possession/sale and appeal mechanisms). Precedent Treatment: The Court referred to prior admonitions against High Courts exercising writ jurisdiction to circumvent statutory remedies; it also considered authorities on remittance and quantification of workmen's dues by competent fora (Industrial Court, Liquidator) and the necessity of quantification before distribution. Interpretation and reasoning: The Court noted factual multiplicity: prior dismissal of workmen's claims by Industrial Court for delay, direction by a Single Judge to permit verification by the Liquidator, and later takeover and sale under SARFAESI by the secured creditor. The Court held that the Liquidator's role became academically redundant once the secured creditor had taken possession and proceeded under SARFAESI. Consequently, quantification of workmen's dues is necessary for any distribution from sale proceeds that remain after satisfying EPF&MP dues and the secured creditor's claim. The Court granted liberty to the workmen to approach the appropriate authority under the MRTU & PULP Act to have their dues determined de hors the earlier order rejecting them on grounds of delay. Ratio vs. Obiter: Ratio - Workmen must have their dues quantified by competent authority; subject to such quantification, they may claim amounts remaining after satisfaction of EPF&MP first charge and the secured creditor's claim. Obiter - Directions regarding remand to Liquidator or procedural condonation are contextual and do not override the statutory priority regime. Conclusions: The Court directed that workmen be permitted to apply to the competent authority for quantification, with such determination to be considered fresh (de hors previous dismissal for delay). Distribution order: first EPF&MP dues; next secured creditor's dues; any remaining balance to be applied to quantified workmen's dues. Cross-references and Practical Directions The Court reconciled Sections 11(2) EPF&MP Act and Section 26-E SARFAESI Act by distinguishing 'first charge' from statutory 'priority,' directing application of sale proceeds accordingly. The Court permitted the secured creditor to continue enforcement and auction; ordered provident fund dues to be paid immediately from sale proceeds before applying proceeds to the secured creditor; and preserved a route for workmen to seek quantification of their dues for any residual funds.