Justice Anant Ramanath Hegde passed the ruling while dismissing a writ petition filed by the Regional Provident Fund Commissioner-I, EPFO, seeking a direction to Axis Bank to pay ₹60,75,347 towards provident fund dues from the sale proceeds of a property mortgaged by one of the partners of M/s Devki Designs.

The EPFO contended that the partnership firm had defaulted in remitting provident fund contributions for the period between September 2013 and March 2015. The dues were quantified through orders dated January 9, 2014 and July 10, 2017. After the firm ceased operations in March 2015, EPFO initiated recovery proceedings and attached a property belonging to one of the firm's partners. It subsequently learnt that the property had already been auctioned by Axis Bank for recovery of its loan. Claiming a statutory first charge over the auction proceeds under Section 11(2) of the EPF Act, the EPFO sought payment of its dues from the Bank.

Axis Bank opposed the petition, contending that the property was the separate property of the partner and had been mortgaged in its favour in September 2012, much before the recovery proceedings. It argued that Section 11(2) creates a first charge only over the assets of the establishment and not over the separate assets of a partner.

The Court framed two issues for consideration: whether the statutory first charge under Section 11(2) of the EPF Act overrides the Bank's security interest under the SARFAESI Act, and whether such first charge extends to the separate property of a partner of the defaulting partnership firm.

On the first issue, the Court relied on the Supreme Court's decision in Jalgaon District Central Cooperative Bank Ltd. v. State of Maharashtra and held that Section 11(2) of the EPF Act prevails over Section 26E of the SARFAESI Act. It observed that the statutory first charge created under the EPF Act overrides the priority available to secured creditors under the SARFAESI Act in respect of the assets of the establishment.

However, while answering the second issue, the Court held that Section 11(2) expressly creates a first charge only over the assets of the establishment. It does not provide for a first charge over the separate assets of the employer or a partner. The Court observed that Parliament consciously restricted the statutory first charge to the establishment's assets and did not extend it to distinct personal assets of the employer. It further noted that any statutory first charge affecting property rights must be expressly provided by law and cannot be inferred through purposive interpretation, particularly in view of Article 300A of the Constitution.

The Court further explained that although Section 8B of the EPF Act permits recovery proceedings against the employer's assets after exhausting remedies against the establishment, this recovery mechanism does not elevate EPFO's claim into a statutory first charge over the employer's separate property.

Examining the facts, the Court found no material to establish that the partner's property had been brought into the stock of the partnership firm. The property continued to stand in the partner's individual name and merely offering it as security for the firm's loan did not convert it into an asset of the establishment. Consequently, Axis Bank's prior mortgage over the property prevailed, and the EPFO could not claim a statutory first charge over it.

Accordingly, the Court dismissed the writ petition.

Case Title: Regional Provident Fund Commissioner-I, EPFO v. M/s Devki Designs & Axis Bank Ltd.
Case No.: W.P. No. 47483 of 2018
Appearance: Axis Bank Ltd. was represented by Dua Associates through Tejas S.R., Partner.