Provident Fund Dues Take Precedence Over Bank's Claim Under SARFAESI Act : Supreme Court

The Supreme Court on Thursday (November 20) held that employees' provident fund dues take precedence over the 'priority' rights claimed by banks in the sale of a company's assets under the SARFAESI Act.

The Court held that dues under the Employees' Provident Funds and Miscellaneous Provisions Act enjoy priority over the claims of secured creditors proceeding under the SARFAESI Act, reaffirming that the statutory first charge created under the EPF law overrides the “priority” granted to secured creditors in Section 26E of the SARFAESI Act.

Holding that a statutory first charge is superior, the bench ruled that EPF dues must be discharged first from the auction proceeds of the secured assets. Only the remaining amount, if any, can be applied towards clearing the bank's debt. The Court permitted the bank to proceed with auction but directed that the provident fund authorities' claims be satisfied before the bank receives any share.

“from the proceeds of the sale of the assets, the first charge would be for the dues under the EPF&MP Act which includes not only the contribution payable but also the interest, penalty and damages if any imposed. Hence, the sale proceeds have to be first applied in satisfaction of the dues under the EPF&MP Act and then in satisfaction of the secured debt of the appellant-bank.”, observed a bench of Chief Justice BR Gavai and Justice K Vinod Chandran.

The case concerned the Jalgaon District Central Cooperative Bank's attempt to recover dues by auctioning the assets of a defunct sugar cooperative. The bank claimed priority as a secured creditor under Section 26E of the SARFAESI Act. However, the Provident Fund authorities asserted a competing 'first charge' under Section 11(2) of the Employee Provident Fund & Miscellaneous Provisions Act, which mandates that PF dues be paid in priority over all other debts.

Clarifying the distinction between the 'first charge' created under the EPF & MP Act and the priority of claims under the SARFAESI Act, the judgment authored by Justice Chandran noted that although SARFAESI is a later statute and could ordinarily override the EPF & MP Act, the explicit use of the term 'first charge' in the EPF law gives provident fund dues a higher statutory status. As a result, PF dues take precedence over the claims of secured creditors.

“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.... In that circumstance, the effect of the non obstante clause (in SARFAESI Act) giving precedence over any other law for the time being in force pales into insignificance…”, the court said.

Accordingly, the appeal was allowed.

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

Citation : 2025 LiveLaw (SC) 1125

Click here to download judgment

Appearance:

For Petitioner(s) : Mr. M. Y. Deshmukh, AOR Ms. Manjeet Kirpal, Adv. Ms. Sanyukta N. Suryawanshi, Adv. Mr. Atharva D. Kale, Adv. Mr. Aswathaman D., Adv.

For Respondent(s) : Ms. Preet S. Phanse, Adv. Mr. Siddharth Dharmadhikari, Adv. Mr. Aaditya Aniruddha Pande, AOR Mr. Shrirang B. Varma, Adv. Mr. Shivaji M. Jadhav, AOR Mr. Brij Kishor Sah, Adv. Mr. Adarsh Kumar Pandey, Adv. Mr. Vignesh Singh, Adv. Mr. Aditya S. Jadhav, Adv. Mr. Shivaji M. Jadhav, Adv. Mr. Brij Kishor Sah, Adv. Ms. Apurva, Adv. Mr. Adarsh Kumar Pandey, Adv. Mr. Vignesh Singh, Adv. Mr. Aditya S. Jadhav, Adv. M/S. S.M. Jadhav And Company, AOR