Provident fund dues have first charge over claim of bank under SARFAESI Act – SC

Provident fund dues definitely have a first charge over claim of bank under SARFAESI Act – Supreme Court

In a recent judgment, Hon’ble Supreme Court has held that provident fund dues definitely have a first charge over claim of bank under SARFAESI Act

ABCAUS Case Law Citation:
4874 (2025) (11) abcaus.in SC

In the instant case a Co-operative Society (the mortgagee) was engaged in the manufacturing of sugar, mortgaged their properties and also hypothecated the stock in trade to the Bank (secured creditor) as security for loan availed.

Due to default in repayment of loan, the bank, was proceeding against the properties (factory) of the mortgagee who had defaulted the loan and the factory had become defunct.

When the appellant-bank proceeded to sell the properties, there were multiple writ petitions filed challenging the same by the workmen and their Union seeking recovery of the dues of the workmen and the defaulted amounts of provident fund. 

The Hon’ble High Court held that the provident fund dues have priority which was directed to be paid immediately on the sale of the factory before applying the proceeds to the debt due to the bank.

The contention of the bank was that 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. 

On the other hand, the State submitted the provident fund dues definitely have a first charge, which are to be first paid before the bank proceeds to set off the defaulted loan amounts. 

The Hon’ble Supreme Court observed that it had held that the priority under Sections 11(1) and (2) of the Employees’ Provident Funds and Miscellaneous  Provisions Act, 1952 would operate against the statutory as well as non-statutory and secured as well as un-secured debts, including mortgage or pledge.

The Hon’ble Supreme Court further observed that a non obstante clause, giving priority to the secured creditors was brought under the SARFAESI Act in the year 2020 which overrides any other law in force at the time of its incorporation, pitted against a specific first charge provided in a welfare legislation, enacted earlier.

The Hon’ble Supreme Court noted that it had considered the background which led to the enactment of EPF&MP Act intended to give social security to the workers employed in the factories and other establishments; essentially a welfare legislation. Sub-section (2) of Section 11 was held to be not only a declaration “that the amount due from the employer towards contribution under the Act shall be treated as the first charge of the assets of the establishment, but also lays down that notwithstanding anything contained in other law, such dues shall be paid in priority to all other dues (sic. paragraph 28)”. Asserting that the Act is a social welfare legislation intended to protect the interest of weaker sections of the society it was found imperative that the Court give a purposive interpretation to the provisions, keeping in mind the Directive Principles of State Policy embodied in the Constitution.

The Hon’ble Supreme Court opined 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.

The Hon’ble Supreme Court opined that 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. In the light of the above principles when the provisions under the SARFAESI Act and the EPF&MP Act are looked into the former with the incorporation of Section 26-E, there has to be found a first charge to the EPF&MP Act dues, under Section 11(2) of that Act.

The Hon’ble Supreme Court observed that 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.

The Hon’ble Supreme Court observed that 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.

However, the Hon’ble Supreme Court clarified that in the instant case, the workmen’s dues which also had not been quantified as of now cannot have any priority over the claim raised by the secured creditor, the Bank, which is conferred a priority under Section 26-E of the SARFAESI Act. However, 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. 

Accordingly, the Hon’ble Supreme Court partly set aside the impugned judgment and the directions therein. It was directed that 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.

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