Provident Fund Dues Override SARFAESI Priority Even After Section 26E Registration
- REEDLAW
- 5 hours ago
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REEDLAW Legal News Network reports: In a landmark ruling, the Supreme Court clarified that although a registered security interest under the SARFAESI Act ordinarily provides a secured creditor statutory priority under Section 26E, provident fund dues continue to retain a superior first-charge status by virtue of overriding statutory provisions. The Court held that sale proceeds must first be directed towards the discharge of provident fund dues before being appropriated towards the recovery of secured debt, even where workmen's claims remain unquantified or pending determination.
The Supreme Court Bench comprising the Chief Justice and a companion Judge, while adjudicating a batch of miscellaneous matters concerning competing entitlements over sale proceeds, held that statutory provident fund dues cannot be subordinated to a Section 26E priority. It was observed that although a secured creditor lawfully registered under Section 23 of the SARFAESI Act obtains a statutory first charge under Section 26E, provident fund dues, being statutory first-charge obligations, must be cleared in priority before appropriation of sale proceeds towards secured debt.
The appeals concerned the claim of a secured creditor, a Co-operative Bank, to enforce a mortgage created by a Co-operative Society engaged in sugar manufacturing, whose factory had become defunct and whose loans had defaulted. The appellant had proceeded under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and claimed that registration of the security interest with the Central Registry conferred priority over all dues, including unpaid wages and provident fund contributions. It was asserted that the provisions introduced in 2020, particularly Sections 26D and 26E, created an overriding statutory right that prevailed over any competing liability.
The workmen resisted the sale and claimed unpaid wages and statutory dues, especially provident fund amounts. It was pointed out that their attempt before the Industrial Court had been dismissed only for want of a delay condonation affidavit and without examining the merits. A Single Judge of the High Court had subsequently permitted them to raise their claims before the liquidator, but by the time the bank took possession of the assets and commenced sale under the SARFAESI Act, the liquidator’s role had become redundant. In earlier writ proceedings, directions were issued that sale proceeds should be deposited in a no-lien account, provident fund dues be paid first, and workmen’s dues be settled after quantification.
On facts, the factory had ceased operations in 2000 due to heavy losses. The appellant had initiated dispute proceedings in 2001 and obtained a decree permitting recovery exceeding Rs. 30 crores. A liquidator was appointed, and subsequently possession of mortgaged assets was taken under Section 13(2) of the SARFAESI Act. Attempts to run the factory on lease failed, and assets reverted to the appellant. Parallel litigation arose from the workmen, their union, shareholders, and a director, ultimately leading to the impugned judgment.
The appellant relied heavily on the later statutory regime, including registration under Section 23 and priority under Section 26E. It was argued that once a security interest was duly registered, proceeds of sale could not be diverted to any other claim until full satisfaction of the secured debt. In support, reliance was placed on the judgment affirming that secured debts have statutory primacy even against governmental dues, where competing statutes did not expressly override SARFAESI.
Insofar as wages were concerned, the Court found that workmen’s dues had not yet been quantified by any competent forum, and in any event, Section 26E envisaged priority to the secured creditor where sale proceeds were insufficient. However, provident fund dues stood on a different footing. The Court revisited earlier precedent that had treated provident fund contributions—both employers’ and employees’ components—as a statutory first charge having precedence over all debts. The nature of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, as a welfare legislation was emphasised, and prior judgments affirming that a statutory first charge overrides mortgage rights were recalled.
Balancing both statutes, the Court examined whether later insertion of Section 26E, containing an overriding clause, displaced the earlier first charge under Section 11(2) of the EPF Act. The Court observed that the first charge under a welfare statute creates a statutory priority and that such a charge attaches to the establishment’s assets irrespective of subsequent enforcement under SARFAESI. While dues of workmen could not be paid ahead of the bank in the absence of quantification and in light of Section 26E, provident fund dues constituted a crystallised statutory charge that could not be postponed until after discharge of secured debt.
The Court therefore affirmed that statutory provident fund dues retain priority at the stage of distribution of sale proceeds, whereas unsecured and unquantified wage claims could not dilute the enforcement rights of the secured creditor under Section 26E. The enforcement process under SARFAESI was allowed to proceed, but subject to the payment of provident fund dues from the sale proceeds before adjustment against outstanding loan amounts.
Mr. M.Y. Deshmukh, Advocate, represented the Appellant.
Mr. Shivaji M. Jadhav, Advocate, appeared for the respondent.
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