Supreme Court Asks HC To Decide If Bank Or EPFO Gets First Charge Over Defaulter's Assets

The Supreme Court has directed the Karnataka High Court to adjudicate the critical question of who holds priority over the proceeds from the sale of a defaulter's assets, the Employees' Provident Fund Organisation (EPFO), claiming provident fund dues under the Employees' Provident Funds and Miscellaneous Provisions Act, 1952 (PF Act), or secured financial creditors enforcing recovery under the SARFAESI Act, 2002.

The bench of Justices Vikram Nath, Sanjay Karol, and Sandeep Mehta was hearing a case involving M/s Acropetal Technologies Pvt. Ltd., which had defaulted on provident fund contributions amounting to ₹1.29 crore. Invoking Section 11(2) of the PF Act, the EPFO asserted a statutory first charge over the company's assets. While so, Axis Bank and Edelweiss ARC auctioned the company's secured properties under the SARFAESI framework, realising approximately ₹12 crores and ₹7 crores, respectively.

EPFO insisted that its statutory dues be paid in priority from these proceeds, while Axis Bank resisted, relying on Section 35 of SARFAESI, which gives overriding effect to the Act.

Edelweiss offered partial payment but argued that Axis Bank, having recovered more, should bear the bulk of the liability. However, the Karnataka High Court held in EPFO's favour, directing Edelweiss to deposit ₹75 lakh, which led Edelweiss to appeal to the Supreme Court.

The judgment authored by Justice Vikram Nath refrained from deciding the issue after noting that the Axis Bank, being a necessary party to the proceedings, was not impleaded before the High Court. It accordingly set aside the impugned decision and directed the High Court to decide afresh after impleading the Axis Bank as a respondent and after affording due opportunity of exchanging pleadings and hearing to all the parties to the said proceedings.

“In our considered opinion, 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. 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, namely, State Bank of India and the State Bank of Travancore (now taken over by SBI) in view of Section 11(2) of the PF Act.”, the court said.

“The High Court will take into consideration, the relevant fact relating to the charge having been created by the EPFO over the properties to be auctioned by the 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. All the parties to the writ petition as it would stand now after remand would be at liberty to raise all contentions before the High Court.”, the court ordered.

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

Citation : 2025 LiveLaw (SC) 848

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Appearance:

For Petitioner(s) : Mr. Krishnan Venugopal, Sr. Adv. Mr. Kaushik Mishra, Adv. Mr. Shivendra Singh, AOR Ms. Prakriti Rastogi, Adv. Mr. Shailesh K. Rajora, Adv. Ms. Deepanshi Ishar, Adv. Mr. Avinash Mathews, Adv.

For Respondent(s) : Mr. Gopal Jain, Sr. Adv. M/S. Dua Associates, AOR Mr. Munawwar Naseem, Adv. Mr. Jaskaran Singh Bhatia, Adv. Mr. Dushyant Parashar, AOR Mr. Manu Parashar, Adv. Mr. Praduman Kumar Aggarwal, Adv. Mr. Dinesh Pandey, Adv. Mr. Sanjay Kumar Aggarwal, Adv. Mrs. Neha Shanker, Adv.