The Supreme Court stepped in to settle a long-running dispute about who gets paid first when a mortgaged asset of a failed co-operative society is sold. In the clash between provident fund dues, a bank’s secured debt under the SARFAESI Act, and unquantified workmen’s claims, the Court drew a clear line. PF dues, backed by a statutory first charge, come before everything else. The Bank can auction the property, but it must satisfy PF dues first, then recover its secured debt, leaving workmen to seek quantification only if funds remain. The ruling gives much-needed clarity on how competing statutory claims must be ranked.

Key Issue

The central issue was the priority of claims on the sale proceeds of a defunct Co-operative Society's mortgaged assets, specifically addressing which debt takes precedence: the secured debt of the Co-operative Bank (Appellant) under the SARFAESI Act, 2002 , the Provident Fund (PF) dues under the EPF&MP Act, 1952 , or the unpaid workmen's dues.

Brief Facts

The Appellant, the Jalgaon District Central Coop. Bank Ltd., is a secured creditor. The mortgagor was a Co-operative Society engaged in sugar manufacture, which became defunct in 2000 due to huge losses and defaulted on its loan. The Bank initiated recovery proceedings under the SARFAESI Act in 2006 and took possession of the secured assets. The workmen approached the Industrial Court for their dues in 2007, but their application was dismissed on the grounds of being grossly delayed and for not filing an application for condonation of delay. When the Bank proceeded to sell the properties, the workmen and others challenged the proceedings in writ petitions. The High Court, in its impugned judgment, directed the sale proceeds to be deposited in a "No Lien Account" and directed that the provident fund dues shall be deposited immediately on sale, before applying proceeds to the Bank's claim, as PF dues were found to have priority. The Bank challenged this priority direction.

Court's Analysis and Findings

The Supreme Court's analysis centered on reconciling the conflicting statutory provisions that grant priority to different debts, specifically the 'priority' under the SARFAESI Act versus the 'first charge' under the EPF&MP Act. The Court first addressed the position of the general workmen's dues, noting that these dues had not been quantified as of the judgment date. The Court found that under Section 26E of the SARFAESI Act, which was introduced in 2020, the debt of the secured creditor (the Bank) is conferred a priority over all other debts, including all revenues, taxes, and cesses, provided the security interest is registered. Since the Bank had complied with the registration requirements, the unquantified workmen's dues could not have any priority over the secured creditor's claim.

The more complex issue involved the Provident Fund (PF) dues under Section 11(2) of the EPF&MP Act. While the SARFAESI Act, with the incorporation of Section 26E, is the later enactment and its non-obstante clause generally overrides previous laws , the EPF&MP Act's Section 11(2) creates a statutory first charge on the assets of the establishment for all amounts due from an employer (including both employer's and employee's contribution, interest, and damages). Drawing upon precedent, the Court reasoned that a clear statutory first charge is fundamentally different from and cannot be equated with a general priority. Therefore, the first charge created under Section 11(2) of the EPF&MP Act overrides the priority conferred under Sections 13, 35, and 26E of the SARFAESI Act, even though the SARFAESI provision was introduced later. The Court emphasized that the amount due under the EPF&MP Act includes not only the contribution but also any interest, penalty, and damages imposed.

Judgment and Directions

Based on its analysis, the Supreme Court partly set aside the impugned High Court judgment and issued a set of specific directions to govern the sale and application of the proceeds. The Court held that the appellant-Bank is entitled to proceed with the auction of the secured assets. However, the sale proceeds must be applied in a specific order of precedence. The first charge must be satisfied first: the dues under the EPF&MP Act, which includes all contribution payable, interest, penalty, and damages. After the PF dues are satisfied, the remaining proceeds are to be applied in satisfaction of the secured debt of the appellant-Bank, which enjoys the statutory priority under the SARFAESI Act. Finally, regarding the workmen's general dues, the Court left liberty to the workmen to approach the appropriate authority under the MRTU & PULP Act to determine these dues. This application for determination must be considered de hors the earlier rejection on the ground of delay and de hors the delay caused as such. Such determination and subsequent satisfaction of the workmen's dues would only be necessary if there is any amount remaining from the sale proceeds after the satisfaction of both the provident fund dues and the secured creditor's debt. The appeals were allowed with these specified directions.

To Read the Full Judgment, Click Here

Case Title: Jalgaon District Central Coop. Bank Ltd. v. State of Maharashtra and Ors

Coram: Justice K. Vinod Chandran,  (with Hon'ble CJI B. R. Gavai).

Case no. : SLP(C) 27740 of 2011