Supreme Court Directs Karnataka High Court to Determine Priority of Claims Between EPFO and Secured Creditors

New Delhi: In a significant ruling, the Supreme Court has directed the Karnataka High Court to resolve the priority of first charge among the Employees' Provident Fund Organisation (EPFO) and secured creditors, including Axis Bank and two other banks, concerning funds obtained from the sale of properties belonging to a defaulting establishment.

A bench comprising Justices Vikram Nath, Sanjay Karol, and Sandeep Mehta nullified a previous order from the High Court dated February 1, 2024, which had dismissed the plea by Edelweiss Asset Reconstruction Limited (EARC). Senior advocate Krishnan Venugopal, representing EARC, conceded that EPFO holds the first charge on the dues. However, EARC argued that while Axis Bank sold one property for approximately ₹12 crores, they had disposed of two properties for a total of ₹7 crores. EARC stated that the remaining amount owed to EPFO could be recovered from Axis Bank, as they have already remitted ₹75 lakhs, corresponding to the sale proceeds received.

The appellant further claimed that the outstanding dues owed to EPFO, which had been stayed by the High Court under Section 14(B) of the PF Act, amounting to around ₹1.3 crores, should come from the proportionate share of Axis Bank. If EPFO is successful in its claims before the High Court regarding the Section 14(B) demand, recovery should be pursued from Axis Bank, not EARC.

Representing EPFO, advocate Dushyant Parashar argued that the High Court's dismissal of the appellant's petition was justified, allowing EPFO to collect the remaining amount of ₹3,43,629 along with the approximate ₹1.3 crores quantified under Section 14(B) of the PF Act, contingent upon its success in the High Court.

Parashar emphasized that EARC did not include Axis Bank in the proceedings before the High Court. Hence, their claim regarding recovery from Axis Bank for the Section 14(B) quantified amount lacked foundation. Axis Bank's senior advocate Gopal Jain contended that according to Section 35 of the SARFAESI Act, the bank's secured dues take precedence over any sales taxes and other dues owed to governmental authorities, preventing recovery until their full dues are settled.

After hearing the arguments, the bench remarked, "In our considered opinion, it would be appropriate that the High Court first deals with the issues raised by Axis Bank concerning its first charge and priority over EPFO for recovering dues from the secured property as per Section 35 of the SARFAESI Act."

The Court instructed the High Court to examine the priority of claims between EPFO and the secured creditors, which include Axis Bank, the State Bank of India, and the State Bank of Travancore (now part of SBI), under Section 11(2) of the PF Act. The bench noted the necessity for the High Court to consider any relevant facts related to the charge created by EPFO over the properties that Axis Bank intends to auction.

While the Supreme Court acknowledged that pertinent material was presented, it refrained from addressing the merits of the first charge and priority issue in detail. All parties involved in the writ petition, post-remand, will be at liberty to present their contentions before the High Court," the bench concluded.

This dispute arose following M/s Acropetal Technologies Pvt Ltd, which falls under the Employees Provident Fund and Miscellaneous Provisions Act, 1952, defaulting on provident fund payments since July 2013.