SARFAESI - Employees Provident Fund dues overrides priority under SARFAESI Act.

Supreme Court Prioritizes Provident Fund Dues Over Secured Creditors' Claims. Apex Court Rules Employees' Provident Funds and Miscellaneous Provisions Act's Statutory First Charge Supersedes SARFAESI Act's Priority

In a landmark judgment, the Supreme Court of India has ruled that the statutory first charge under the Employees Provident Funds and Miscellaneous Provisions Act, 1952 (EPF&MP Act) takes precedence over the priority of secured creditors under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). This decision was delivered in the case of Jalgaon District Central Coop. Bank Ltd. vs. State of Maharashtra, marking a significant precedent in the hierarchy of debt recovery laws in India.

The case revolved around a dispute between Jalgaon District Central Cooperative Bank Ltd., a secured creditor, and the State of Maharashtra regarding the recovery of dues from a defunct sugar manufacturing cooperative society. The society had defaulted on its loan, and the bank sought to recover its dues by selling the mortgaged assets under the SARFAESI Act. However, the provident fund dues owed by the society to its employees, as stipulated by the EPF&MP Act, were claimed to have a first charge on the assets.

The Supreme Court, led by Chief Justice B.R. Gavai and Justice K. Vinod Chandran, examined the interplay between Section 26E of the SARFAESI Act and Section 11(2) of the EPF&MP Act. Section 26E provides priority to secured creditors for debt recovery, while Section 11(2) of the EPF&MP Act establishes a statutory first charge on an employer's assets for due contributions, interest, penalties, and damages related to employee provident funds.

The Court affirmed that the statutory first charge created under the EPF&MP Act supersedes the priority accorded to secured creditors under the SARFAESI Act, despite the latter's non-obstante clause. This ruling emphasized the welfare objective of the EPF&MP Act, which aims to protect the provident fund dues of employees, aligning with the Directive Principles of State Policy in the Indian Constitution.

The judgment has significant implications for financial institutions and employees, as it prioritizes employees' provident fund dues over secured debts in asset liquidation scenarios. The Court directed that sale proceeds from the auction of the society's assets should first satisfy the EPF&MP Act dues before addressing the bank's secured debt.

Furthermore, the Court allowed the workmen to approach appropriate authorities to quantify their dues, which would be considered if any sale proceeds remain after settling the provident fund and secured debts.

The decision underscores the judiciary's commitment to uphold social welfare legislations and ensure the protection of workers' rights in financial recovery processes.

Bottom Line:

SARFAESI Act, 2002 - Priority of secured creditors over other debts - Statutory first charge under Employees' Provident Funds and Miscellaneous Provisions Act, 1952 overrides priority under SARFAESI Act.

Statutory provision(s): Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 Section 26E, Employees Provident Funds and Miscellaneous Provisions Act, 1952 Section 11(2), Maharashtra Recognition of Trade Unions and Prevention of Unfair Labour Practices Act, 1971

Jalgaon District Central Coop. Bank Ltd. v. State of Maharashtra, (SC) : Law Finder Doc id # 2811235