Supreme Court: Employee Provident Fund Charge Prevails Over SARFAESI Section 26E Priority; Bank Gets Second Priority

Supreme Court: Employee Provident Fund Charge Prevails Over SARFAESI Section 26E Priority; Bank Gets Second Priority

A Co-operative Sugar Factory mortgaged its immovable assets and hypothecated stock-in-trade to Jalgaon District Central Co-operative Bank. The factory suffered heavy losses and shut down in 2000. The bank obtained a decree before the Co-operative Court and later initiated SARFAESI proceedings in 2006, taking possession of the secured assets. Attempts to revive the factory through a lease failed.

Meanwhile, workers claimed unpaid wages and provident fund dues. Their application before the Industrial Court was dismissed as time-barred without condonation. Several writ petitions were thereafter filed challenging the bank’s sale proceedings and seeking priority for workmen’s dues and PF contributions.

The High Court permitted the sale but directed that PF dues be paid first, followed by wages and then bank dues. Aggrieved, the bank approached the Supreme Court, arguing that after registration of the security interest under Chapter IV-A of the SARFAESI Act, Section 26E granted it absolute priority over all dues.

Issue before Court: Whether Section 26E of the SARFAESI Act overrides the statutory first charge created under Section 11(2) of the EPF Act for unpaid provident fund contributions.

SC’s Ruling: The Supreme Court partly allowed the bank’s appeals and held that EPF dues have a statutory first charge overriding Section 26E SARFAESI priority. Section 11(2) of the EPF Act creates a first charge on the assets of the establishment for all PF dues, including contributions, interest, damages, and penalties.

As per Maharashtra State Co-operative Bank and precedents, a statutory first charge prevails even over later non-obstante provisions. Therefore, PF dues must be paid before bank dues.

The Court said that the workmen’s wage claims were never quantified. The Court allowed workers to re-file claims under the MRTU & PULP Act without being rejected for delay. The High Court directions were modified thus.

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