Supreme Court rules that provident fund dues under EPF&MP Act have statutory first charge that prevails over secured creditor's priority under SARFAESI Act - PF dues must be paid first from auction proceeds.
When a company defaults on loans and the bank proceeds to auction its properties under SARFAESI Act, who gets paid first - the bank (secured creditor) or the Provident Fund authorities for unpaid PF dues of employees?
Provident Fund dues must be paid FIRST from the auction proceeds, before any payment to the secured creditor bank.
The Supreme Court has ruled that Section 11(2) of the Employees' Provident Funds and Miscellaneous Provisions Act, 1952 creates a statutory first charge on the assets of the establishment for any amount due from an employer. This first charge prevails over the priority given to secured creditors under Section 26E of the SARFAESI Act, 2002.
Sugar Factory Closure: Co-operative Society's sugar factory closed due to huge losses, leading to employee layoffs and unpaid PF dues
Bank Recovery Proceedings: Appellant bank approached Cooperative Court, Receiver appointed, allowed to recover ₹30.24 crores
SARFAESI Action: Bank issued notice under Section 13(2) and took over possession of secured assets
Workers' Claims: Workers approached Industrial Court for unpaid wages and PF dues, but claims dismissed due to delay
SARFAESI Amendment: Section 26E introduced giving secured creditors priority over all other debts
Supreme Court Ruling: "PF dues have first charge over secured creditor" - established clear payment hierarchy from auction proceeds
| Priority | Claimant | Legal Basis | Amount Covered |
|---|---|---|---|
| 1st | Provident Fund Dues | Section 11(2) EPF&MP Act - Statutory First Charge | Contributions + Interest + Damages |
| 2nd | Secured Creditor (Bank) | Section 26E SARFAESI Act - Priority | Principal + Interest + Costs |
| 3rd | Workmen's Dues (if quantified) | Various labor laws | Unpaid wages, gratuity, etc. |
| 4th | Other Unsecured Creditors | Contractual rights | As per agreement |
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act - allows banks to recover non-performing assets without court intervention.
Introduced in 2020, gives secured creditors priority over all other debts and government dues after registration of security interest.
The Employees' Provident Funds and Miscellaneous Provisions Act - social welfare legislation for employee provident funds.
Creates statutory first charge on employer's assets for PF dues, overriding all other debts and charges.
A charge created by statute that has precedence over all other claims, including prior mortgages and secured debts.
"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. 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."
This judgment reinforces the protective nature of labor welfare legislation and establishes that employee provident funds, being essential social security measures, enjoy the highest priority in debt recovery scenarios. It balances the interests of secured creditors with the fundamental rights of employees to social security.
This content is for informational purposes only and does not constitute legal advice. Consult a qualified legal professional for specific legal guidance. The information provided is based on judicial interpretation and may be subject to changes in law.
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This analysis decodes a complex debt recovery priority dispute to help employees, employers, and financial institutions understand their rights and obligations when dealing with competing claims on business assets.