First Charge Under EPF Act Prevails Over SARFAESI Priority: Supreme Court Upholds Provident Fund Dues Over Bank’s Secured Debt

“A statutory first charge under a welfare statute like the EPF Act prevails over mere priority under SARFAESI Act” –  In a landmark ruling addressing the enduring conflict between secured creditors under the SARFAESI Act and statutory dues under welfare legislation, the Supreme Court of India on 20 November 2025 held that provident fund dues under Section 11(2) of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (EPF&MP Act) enjoy statutory first charge over the assets of an employer and override the secured creditor’s priority under Section 26E of the SARFAESI Act, 2002.

The Court clarified that while SARFAESI gives priority to secured creditors, such priority cannot override a legislated first charge created for welfare purposes, especially when it seeks to protect the social security entitlements of employees.

Bench comprising Chief Justice B.R. Gavai and Justice K. Vinod Chandran partially allowed the appeals filed by the appellant-bank, modifying the Bombay High Court’s directions and firmly upholding the precedence of EPF dues over all other claims, including those of secured creditors.

“Priority under SARFAESI is not equivalent to a first charge; a welfare legislation’s first charge will prevail”

The controversy arose when the Jalgaon District Central Cooperative Bank, a secured creditor, sought to enforce its registered security interest over the assets of a defunct sugar cooperative through proceedings under the SARFAESI Act. The cooperative, which defaulted on large loans, had mortgaged and hypothecated its assets in favour of the bank. After taking over possession in 2006, the bank attempted to sell the assets.

However, claims were raised by workers and the Provident Fund Department, asserting that their unpaid wages and PF contributions should take precedence. The High Court had directed the bank to deposit the sale proceeds in a “no lien account” and settle workmen’s dues and provident fund dues before satisfying its own claim.

The bank contested the ruling, arguing that Section 26E of the SARFAESI Act, introduced in 2020, gave it statutory priority over all other debts once its security interest was duly registered under Section 23. The workers, meanwhile, asserted that Section 11(2) of the EPF Act, which creates a first charge over an employer’s assets for unpaid dues, must override SARFAESI provisions.

“First charge under Section 11(2) of EPF Act includes interest, damages and penalties — not just contributions”

Referring to the authoritative judgment in Maharashtra State Cooperative Bank Ltd. v. Assistant Provident Fund Commissioner, the Supreme Court reiterated that Section 11(2) of the EPF Act creates a first charge on the assets of the employer not just for principal PF dues, but also for any interest under Section 7-Q and damages under Section 14-B.

“It is not merely a declaration of priority but a legislative creation of first charge,” the Court noted, while also emphasising that welfare legislations enacted to fulfil constitutional directives under Articles 38 and 43 must receive a purposive and liberal construction.

The Court further held:

“A priority cannot be equated with a first charge and cannot be given precedence over a first charge statutorily created.”

SARFAESI’s Priority vs EPF’s First Charge: The Legal Hierarchy

Although SARFAESI Act is a later statute and contains a non-obstante clause under Section 26E giving priority to secured creditors, the Court held that such priority must yield to an existing statutory first charge, particularly where public interest and social welfare are at stake.

“SARFAESI being a latter statute does not override a first charge unless expressly stated… In the EPF&MP Act, Section 11(2) creates a statutory first charge... This overrides the priority under Section 26E.”

The Court decisively clarified that:

“Where two laws contain non-obstante clauses but one creates a first charge and the other grants a priority, the statutory first charge will prevail.”

This interpretation was also aligned with earlier rulings in Central Bank of India v. State of Kerala, Employees Provident Fund Commissioner v. Official Liquidator, and State Bank of Bikaner v. National Iron and Steel Rolling Corp., which had consistently upheld the superior position of statutory charges over general or even secured debts, especially where no express exclusion was made.

“Unquantified Workmen’s Wages Cannot Override Registered Security Interests”

The Court, however, drew a clear distinction between statutorily secured EPF dues and unquantified claims of workers’ unpaid wages. While EPF dues had a first charge, unquantified workmen’s dues could not be treated as having any enforceable priority over the bank’s registered security interest.

“Since the workmen’s dues have not been quantified and do not enjoy a statutory first charge, they cannot take precedence over the registered security interest of the appellant bank under Section 26E.”

Nevertheless, in a worker-friendly gesture, the Court allowed the workmen liberty to approach the appropriate authority under the MRTU & PULP Act, and held that such determination should not be defeated merely on grounds of delay. However, such dues will only be entertained after satisfaction of EPF dues and the bank’s secured claim.

Directions and Outcome: EPF Dues First, Then Secured Debt, Then Workmen’s Dues (If Any Surplus)

The Supreme Court allowed the bank to proceed with the auction of the mortgaged properties but laid down the following clear order of application of sale proceeds:

“The first charge would be for the dues under the EPF&MP Act, including interest, penalty and damages, followed by the secured debt of the appellant-bank. The claims of workmen may be considered thereafter, if any surplus remains.”

With this, the impugned High Court judgment was partly set aside, and the appeals were allowed in part, with liberty to the workmen to file applications for quantification of dues.

Judgment Reaffirms Constitutional Welfare Mandate

This judgment carries profound implications for secured creditors, financial institutions, employers, and workers alike. It reinforces the principle that economic recovery mechanisms like SARFAESI cannot be used to circumvent statutory welfare obligations, especially those enacted to protect vulnerable workers.

“Welfare statutes such as the EPF Act must be interpreted with the constitutional vision of social justice. Financial expediency cannot override basic protections enshrined in law,” the Court remarked.

Date of Decision: 20 November 2025