High Court Must First Determine Priority of Charge Between EPFO and Secured Creditors Before Enforcing Recovery – Supreme Court

“Whether Section 11(2) of PF Act Overrides Section 35 of SARFAESI Is a Matter for High Court to Decide After Hearing All Parties”, Supreme Court of India rendered a significant ruling clarifying that disputes concerning the priority of statutory dues vis-à-vis secured creditors under the PF Act and SARFAESI Act must first be resolved by the High Court after granting full hearing to all affected parties.

The Court set aside a Karnataka High Court decision that had dismissed the writ petition of Edelweiss Asset Reconstruction Ltd. (EARC), while directing the transmission of ₹75 lakhs to the Employees’ Provident Fund Organisation (EPFO). The Supreme Court emphasized that the High Court must first adjudicate the critical issue of whether EPFO or banks hold the "first charge" over auctioned properties.

EPFO’s Dues vs. Secured Creditors' Recovery Under SARFAESI

The case stemmed from the provident fund dues owed by M/s Acropetal Technologies Pvt. Ltd., which defaulted in payments since July 2013. Following an inquiry under Section 7A of the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952, a liability of ₹1.28 crore was determined against the Establishment, excluding interest and damages under Sections 7(Q) and 14(B).

The Establishment’s properties were auctioned by multiple banks — Axis Bank, State Bank of India (SBI) and State Bank of Travancore (now merged into SBI). EPFO claimed priority over sale proceeds under Section 11(2) of the PF Act, while Axis Bank claimed first charge under Section 35 of the SARFAESI Act.

EARC, the assignee of SBI, was directed to deposit ₹75 lakhs by the High Court and had offered to pay ₹78.43 lakhs as full and final settlement, on condition that EPFO would not pursue further recovery. However, the High Court dismissed EARC’s petition and ordered transmission of the deposited sum to EPFO without adjudicating on the issue of priority.

Priority of Statutory Dues Under PF Act vs. Secured Creditor Rights Under SARFAESI

The primary legal issue before the Court was whether EPFO’s statutory charge under Section 11(2) of the PF Act overrides the secured creditors’ rights under Section 35 of the SARFAESI Act. This raises a direct conflict between a social welfare legislation and a financial recovery statute.

The EPFO argued that its charge was statutory and binding, relying on its prior communication and attachment orders before the auction of the concerned properties. Axis Bank and EARC, however, maintained that the SARFAESI-created security interest gives banks and financial institutions priority, as reinforced by Section 35, which gives the SARFAESI Act an overriding effect over other laws.

The bench comprising Justices Vikram Nath, Sanjay Karol, and Sandeep Mehta acknowledged the complexity of the overlapping statutes and conflicting claims.

The Court observed:

“It would be appropriate that the High Court first deals with the issues raised by Axis Bank that it has first charge and priority over and above the EPFO to satisfy its dues from the secured property in view of Section 35 of the SARFAESI Act.”

Further, the Court held:

“The High Court will examine the priority of first charge amongst the EPFO and the secured creditors i.e., the Axis Bank and other two Banks… in view of Section 11(2) of the PF Act.”

Critically, the Court also noted that:

“The EPFO had created a charge over the properties to be auctioned by Axis Bank prior to the auction. Material in this regard has been placed before us. Since we are not entering into the merits of that issue relating to first charge and priority, we are not dealing with the same in detail.”

As such, the Supreme Court set aside the High Court’s order, restored the writ petition, and directed that Axis Bank be impleaded as a necessary party, since it had not been originally heard.

Supreme Court Defers to High Court on Conflict Between EPF Act and SARFAESI

In essence, the Supreme Court refrained from deciding the contentious issue of whether EPFO’s dues under Section 11(2) trump a secured creditor’s rights under SARFAESI, instead remanding the case for the High Court to decide this important question of law after a full and fair hearing to all stakeholders, including EPFO, EARC, Axis Bank, and other relevant financial institutions.

This judgment underscores the judicial preference for procedural fairness and the necessity of a comprehensive factual and legal adjudication before ruling on such crucial matters impacting financial institutions, workers’ rights, and statutory priorities.

Date of Decision: August 26, 2025