The Supreme Court partly set aside the impugned judgment, ordering that provident fund dues must be paid out first from auction proceeds of the defunct factory, ahead of the claims of the secured creditor (the Bank), with remaining amounts to satisfy other debts.

The case revolves around the appellant seeking to recover defaulted loans by auctioning the assets of a defunct sugar manufacturing cooperative society, where the bank held a registered mortgage. Following the society’s closure and appointment of a liquidator, disputes arose over the priority of payments from the auction proceeds- whether the secured creditor’s claims or the provident fund dues owed to the workers should be settled first.

The workmen challenged the auction to secure unpaid wages and provident fund rights, relying on the Employees’ Provident Funds and Miscellaneous Provisions Act (EPF&MP Act), a social welfare law prioritizing employee benefits. The appellant-bank invoked Section 26E of the SARFAESI Act, 2002, arguing that its registered security interest gave it priority over all other claims, including wages and provident fund dues owed to workers. The matter proceeded through various courts, with differing priority decisions.

The Bench comprising Chief Justice B.R. Gavai and Justice K. Vinod Chandran observed that the statutory “first charge” for provident fund dues under Section 11(2) of the EPF&MP Act overrides priority rights given to registered secured creditors under Section 26E of SARFAESI Act, as per purposive interpretation and welfare legislation objectives.

In result, the Supreme Court allowed the bank to proceed with asset auction but directed that proceeds be first applied in satisfaction of provident fund dues, which includes employer and employee contributions, interest, and damages under EPF&MP Act. Only after these amounts are paid can remaining funds be used to satisfy the secured creditor’s claims. Workmen’s other wage-related claims may be pursued separately for quantification and payment if any amount remains.

Cases referred to:

1. Punjab National Bank & Ors. v. Union of India & Ors., (2022) 7 SCC 260
2. Maharashtra State Cooperative Bank Ltd. v. Assistant Provident Fund Commissioner, (2009) 10 SCC 123
3. Builders Supply Corporation v. Union of India & Ors., (1965) 2 SCR 289
4. State Bank of Bikaner and Jaipur v. National Iron Steel Rolling Corporation, (1995) 2 SCC 19
5. State of M.P. v. State Bank of Indore, (2002) 10 SCC 441
6. P. State Financial Corporation v. Official Liquidator, (2000) 7 SCC 291
7. Union of India v. SICOM Ltd., (2009) 2 SCC 121
8. Central Bank of India v. State of Kerala, (2009) 4 SCC 94
9. Employees Provident Fund Commissioner v. Official Liquidator, (2011) 10 SCC 727

Appearances: 

For Petitioner(s): Mr. M. Y. Deshmukh, AOR Ms. Manjeet Kirpal, Adv. Ms. Sanyukta N. Suryawanshi, Adv. Mr. D. Aswathaman, Adv. Mr. Atharva D. Kale, Adv. Mr. Dhumal Viraj Prataprao, 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 M/S. S.M. Jadhav And Company, AOR