Case Name – Jalgaon District Central Coop. Bank Ltd. v. State of Maharashtra and Ors.
Case Number – @Special Leave Petition (C) No.27740 of 2011
Day – Thursday, Twentieth of November, Two Thousand and Twenty – Five
Quorum – Hon’ble Chief Justice of India Justice B. R. Gavai and Justice K. Vinod Chandran
FACTS
This matter arises from a long – running dispute between the Jalgaon District Central Co – operative bank Ltd., a secure creditor and a co – operative sugar factory that had mortgaged its immovable properties and hypothecated stock to secure loans from the bank. The sugar factory became defunct around 2000 due to mounting losses and the bank initiated proceedings before the Co – operative Court, eventually securing an award permitting recovery of over Rs. 30 crores. In parallel the Sugar Commissioner appointed a liquidator in 2002. In 2006, the bank invoked its powers under the SARFAESI Act, 2002 and took possession of the assets.
The workers of the factory claimed their unpaid wages and provident fund (PF) dues. Their complaint before the Industrial Court under MRTU & PULP Act was dismissed solely on the ground of delay. Although a single judge later allowed them to approach the liquidator for compensation of dues, the bank proceeded with the auction of the mortgaged properties. Various writ petitions were filed challenging the proposed auction and claiming priority for workmen’s dues, including PF amounts. The High Court permitted the sale but directed that sale proceeds be kept in a “No – Lien Account” and that unpaid wages and PF dues be paid before the Bank’s claim. The Bank appealed these directions before the Supreme Court.
LEGAL ISSUES
- Whether Section 26 – E of the SARFAESI Act grants absolute priority to a secured creditor over all the dues, including workmen’s dues and statutory PF dues.
- Whether PF dues under Section 11(2) of the EPF and MP Act constitute a statutory first charge overriding the SARFAESI Act.
- Whether unqualified workmen’s wage claims can be given priority over secured debts arising from a registered security interest.
- Whether the High Court was justified in directing that sale proceeds be used first for workmen’s dues before repayment of the Bank’s secured debt.
LEGAL PROVISIONS
- Section 26 – E of the SARFAESI Act, 2002: This Section gives priority to debts dues to secured creditors after registration of the security interest.
- Section 35 of the SARFAESI Act, 2002: It’s a non obstante clause giving the Act overriding effect.
- Section 11(2) of the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952: It creates a statutory first charge on the assets of the established for PF dues, overriding all the other debts.
- Maharashtra Recognition of Trade Unions and Prevention of Unfair Labour Practices Act, 1971 (MRTU & PULP Act, 1971): It states the mechanism through which workmen can make an attempt to claim unpaid wages.
ARGUMENTS
APPELLANT: BANK
The Bank raised their contentions with the 2020 insertion of Chapter IV-A and Section 26-E into the SARFAESI Act 2002, a registered secured creditor enjoys statutory priority over all other dues, including those of workmen. The Bank relied on the case of Punjab National Bank v. Union of India [(2022) 7 SCC 260] to contend that SARFAESI supersedes other laws. It argued that the Bank’s claim took precedence over all other because it had properly recorded its security interest with the Central Registry (CERSAI).
The Bank argued that the workers’ wage claims were invalid because they had already been dismissed by the Industrial Court. Since the workers’ claims were no longer valid, they could not be used to prevent the bank from enforcing its secured debt.
RESPONDENT: WORKMEN
The workmen argued that their PF dues carried a statutory first charge under Section 11(2) of the EPF Act, 1952, a position already upheld by the Supreme Court in Maharashtra State Cooperative Bank Ltd. v. APFC [(2009) 10 SCC 123]. They maintained that once a statute creates such a first charge, it continues to prevail unless a later law explicitly displaces it. They further stressed that unpaid wages which are pending for several years should take precedence over all other liabilities given the workers’ prolonged financial hardship.
They submitted that the High Court’s directions protected workers from being left remedial after the Bank’s auction.
ANALYSIS
The Supreme Court based its decision on the difference between a statutory first charge and a statutory priority. While Section 26-E of the SARFAESI Act, 2002 gives secured creditors priority in repayment, it stops short of creating a first charge on the borrower’s assets. On the other hand, Section 11(2) of the EPF & MP Act, 1952, imposes a statutory first charge for PF dues, including contributions, interest, damages and penalties. Relying on previous decisions such as Maharashtra State Cooperative Bank Ltd. v. APFC [(2009) 10 SCC 123], Central Bank of India v. State of Kerala [(2009) 4 SCC 94], and A.P. State Financial Corporation v. Official Liquidator [(2000) 7 SCC 291], the Court reaffirmed that when a statute creates a first charge, it prevails even over later laws which contain clauses that overrides. The Court on this basis concluded that proceeds from the sale of the company’s assets must first be used to clear PF dues before addressing any other debt. The Court even stated regarding unpaid wages, that unquantified wage claims cannot overshadow a secured creditor under Section 26-E of SARFAESI Act, 2002. Since the workers’ wage dues had not been determined, they could not take precedence over the Bank’s statutory priority.
JUDGEMENT
The Supreme Court partly set aside the High Court’s directions. It held that although the Bank may proceed with the auction, the sale proceeds must first satisfy provident fund dues, which enjoy a statutory first charge. Only thereafter may the Bank recover its secured debt. Any leftover amount may be utilised for workmen’s wage claims, once quantified by the appropriate authority. The Court also permitted the workmen to seek determination of their wage dues afresh before the MRTU & PULP authority, ignoring earlier dismissal on grounds of delay.
CONCLUSION
This judgment reaffirms an the crucial legal principle that a statutory first charge such as the priority granted to PF dues under Section 11(2) of the EPF Act, 1952, takes precedence even over the later and more commercially driven priority regime established by Section 26-E of the SARFAESI Act, 2002. While the Court safeguarded provident fund rights as a matter of social security, it also reinforced that unquantified workmen’s dues cannot override registered secured interests. The decision strikes a balanced approach between financial recoveries and workers’ welfare, clarifying the hierarchy of claims when distressed assets are sold under SARFAESI.
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WRITTEN BY- SUSMITA ROYCHOWDHURY
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