Secured Creditor Gets Statutory Priority Under SARFAESI but EPF First Charge Prevails Over Sale Proceeds

A bench of Chief Justice B. R. Gavai and Justice K. Vinod Chandran heard appeals by Jalgaon District Central Cooperative Bank Ltd. challenging a common High Court order which regulated auction proceedings and directed treatment of sale proceeds in relation to workmen’s claims and provident fund dues arising from a defunct sugar factory mortgaged to the bank. The core question concerned the interplay between Section 26‑E of the SARFAESI Act (added w.e.f. 24.01.2020), which conferred priority on registered secured creditors, and the statutory first charge created by Section 11(2) of the Employees’ Provident Funds & Miscellaneous Provisions Act, 1952 (EPF&MP Act), as well as the status of unquantified workmen’s wage claims.

The Court allowed the appeals partly and clarified the order for distribution of sale proceeds. It held that registration of security with the Central Registry under the SARFAESI Act conferred priority to the secured creditor over other debts, but that a prima facie statutory first charge created by Section 11(2) of the EPF&MP Act nevertheless prevailed in the order of satisfaction from sale proceeds. The Court, in its reasoning, observed: The Court directed that, from the auction proceeds, dues under the EPF&MP Act must be satisfied first and thereafter the secured creditor’s claim. The Court left liberty to the workmen to have their wage claims quantified de hors the earlier rejection for delay.

Background

The dispute arose after a cooperative sugar‑manufacturing society defaulted on loans secured by mortgage and hypothecation in favour of the appellant bank. The bank registered its security with the Central Registry under the SARFAESI Act and took possession in 2006, later initiating auction proceedings. The factory had earlier been closed and a receiver and a liquidator had been appointed in separate proceedings; the liquidator and Industrial Court had been approached by workmen for wages and provident fund dues. The Industrial Court dismissed delayed wage claims for want of condonation; a Single Judge of the Bombay High Court directed the liquidator to verify workmen’s claims but did not finally adjudicate entitlement. On writ petitions, the Division Bench directed that the bank proceed with sale but ordered deposits and payment arrangements: for example, “The sale proceeds shall be deposited in a separate account i.e. ‘No Lien Account’ in the bank. Unpaid wages and other legal dues of the workers shall be paid from this account once the dues are quantified by a competent court,” and that “The provident fund dues shall be deposited with the Provident Fund authorities, immediately on the sale of the property and before applying the proceeds to any other debt, including the banks claim.” The bank challenged these directions before the Supreme Court.

The Supreme Court analysed precedents including Maharashtra State Cooperative Bank Ltd. v. Assistant Provident Fund Commissioner and Punjab National Bank v. Union of India, considered the effect of non‑obstante clauses and statutory first charges, and held that while Section 26‑E conferred priority to registered secured creditors, a legislatively created first charge under Section 11(2) of the EPF&MP Act was distinct and must be satisfied first. The Court set aside the impugned judgment partly, permitted the appellant to proceed with auction if not completed, directed application of sale proceeds first to EPF dues (including interest, penalties and damages if determined) and thereafter to the bank’s debt, and granted workmen liberty to have their dues determined by the appropriate authority de hors the prior rejection for delay. The appeals were allowed and pending applications were disposed of.

Case Details: Case No.: 2025 INSC 1335 Case Title: Jalgaon District Central Coop. Bank Ltd. v. State of Maharashtra and Ors. Appearances: For the Petitioner(s): Mr. M.Y. Deshmukh, Advocate (for appellant‑bank) For the Respondent(s): Mr. Shivaji M. Jadhav, Advocate (for respondent‑workmen and their union)