Supreme Court Asks High Court to Decide If Bank or EPFO Gets First Charge over Defaulter's Assets

The Supreme Court recently dealt with a crucial conflict between the Employees’ Provident Fund Organization (EPFO) and secured financial creditors over the recovery of dues from a defaulter’s assets. The dispute arose in the case of M/s Acropetal Technologies Pvt. Ltd., which had defaulted on provident fund contributions amounting to Rs- 1.29 crore.

EPFO claimed that under Section 11(2) of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (PF Act), it held a statutory first charge over the company’s assets. On the other hand, Axis Bank and Edelweiss Asset Reconstruction Company (ARC) auctioned the company’s secured properties under the SARFAESI Act, 2002, and recovered nearly Rs- 19 crores in total. This triggered a legal battle over whether EPFO Gets First Charge over Defaulter’s Assets or the banks enjoy priority under Section 35 of SARFAESI, which grants overriding effect to that Act.

High Court’s Decision and Appeal

The Karnataka High Court had ruled in EPFO’s favour, holding that provident fund dues enjoy priority. It directed Edelweiss to deposit Rs- 75 lakh toward the outstanding amount. Edelweiss challenged this decision before the Supreme Court, arguing that Axis Bank had recovered a larger sum and should bear the primary burden. Axis Bank also claimed priority as a secured creditor under SARFAESI.

The Supreme Court noted that Axis Bank, being a necessary party, was not impleaded before the High Court proceedings. Since the question of whether EPFO Gets First Charge over Defaulter’s Assets had not been properly adjudicated with all stakeholders present, the top court decided not to resolve the issue directly.

Supreme Court’s Observations

A three-judge bench of Justices Vikram Nath, Sanjay Karol, and Sandeep Mehta set aside the Karnataka High Court’s order and remanded the case for fresh consideration. Justice Vikram Nath, writing the judgment, stressed that the High Court must carefully examine whether Axis Bank and other secured creditors have priority over EPFO dues or whether EPFO Gets First Charge over Defaulter’s Assets.

The Court specifically directed the High Court to consider:

• The effect of Section 35 of SARFAESI, which grants overriding effect to the Act.
• The statutory charge created under Section 11(2) of the PF Act.
• The fact that EPFO had already created a charge on the properties before the auction by Axis Bank.

The bench clarified that it was not entering into the merits of the priority issue and left all contentions open for the parties to argue afresh.

Next Steps before the High Court

The Supreme Court ordered that Axis Bank, along with other secured lenders such as the State Bank of India and the erstwhile State Bank of Travancore, must be impleaded as respondents in the proceedings. The High Court will then re-examine the matter after hearing all parties.

This ruling highlights the unresolved but critical question of whether EPFO Gets First Charge over Defaulter’s Assets or if secured creditors enjoy priority under SARFAESI. The final answer now rests with the Karnataka High Court, which will need to balance employee welfare obligations under the PF Act against the rights of banks enforcing secured loans.

Cause Title: [M/S EDELWEISS ASSET RECONSTRUCTION LIMITED VERSUS REGIONAL PF COMMISSIONER II AND RECOVERY OFFICER, RO BENGALURU (KORAMANGALA) & ANR.]