Bank of India vs Assistant Provident Fund Commissioner and Others

Thottathil B. Radhakrishnan, J.—The Petitioner, hereinafter referred to as the "bank", is a banking company governed by the Banking Companies (Acquisition & Transfer of Undertakings) Act, 1970. Respondents 2 to 5 are its debtors, who have executed security documents creating equitable mortgages over immovable properties, in favour of the Bank.

The debt that Respondents 2 to 5 owes to the bank is a. "security debt" as defined u/s 2(ze) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, hereinafter referred to as the "SARFAESI Act". The bank is thus a "secured creditor" as defined in Section 2(zd) having a "security interest", as defined in Section 2(zf), over the mortgaged property, which is a "security asset" in terms of Section 2(zc); of the SARFAESI Act.

The second Respondent, going by its activities, is an establishment covered u/s 1(3)(b) of the Employees Provident Funds and Miscellaneous Provisions Act, 1952, hereinafter referred to as "EPF Act" and Respondents 3 to 5, being its Managing Director/Directors, are "employers" in relation to the said establishment, as defined in Section 2(e) of the EPF Act. The said establishment is a defaulter of various dues, under EPF Act and the schemes thereunder, for several years. Going by the statement filed by the first Respondent, the Assistant Provident Fund Commissioner and Recovery Officer of the Employees Provident Fund Organisation, the defaulted amounts for the period 6/99 to 8/04 is Rs. 18,59,100-55 with incidentals, out of which Rs. 6,33,868 is the amount deducted by the employers from the wages of the workers of the establishment.

The bank proceeded to enforce the security interest u/s 13(1) of the SARFAESI Act by issuing notices, followed by take over of constructive possession of the properties and thereafter, by take over of actual physical possession of the factory of the Respondents 2 to 5 and a residential building and the land on which it stands, all of which are part of the security asset. Such take over of physical possession was also published in terms of Section 13(4) of the SARFAESI Act.

Noticing the aforesaid exercise by the bank, the EPF Organisation issued Ext. P-3 notice on 13-4-2005, restraining the bank from selling the property. The said notice was issued u/s 8(b) of the EPF Act. In issuing Ext. P-3, the EPF Organisation asserted the first charge provided by Section 11(2) of the EPF Act. The bank issued Ext. P-4 to the EPF Organisation, taking the stand that the provisions of the SARFAESI Act shall have effect, notwithstanding anything inconsistent thereto, contained in any other law, for the time being, in force. Accordingly, the bank called upon the EPF Organisation to withdraw Ext. P-3 prohibitory order. Apprehending that the EPF Organisation will proceed further on the basis of Ext. P-3 prohibitory order, the bank has filed this writ petition seeking issuance of a writ in the nature of certiorari quashing Ext. P-3 notice issued by the first Respondent.

The learned Counsel for the bank contended that SARFAESI Act was enacted only in 2002, long after the introduction of Sub-section (2) of Section 11 of the EPF Act, with effect from 1-11-1973 and therefore, being a later enactment, Section 35 of the SARFAESI Act should be held to have an overriding effect on the provisions in Section 11(2) of the EPF Act and the proceedings u/s 13 of the SARFAESI Act, initiated by the bank, is to run to its logical end, notwithstanding anything contained in Section 11(2) of the EPF Act. In support of this proposition, the learned Counsel for the bank referred to the decision of this Court in R.O. & Asst. P.F. Commr. v. K.F.C. 2002 (2) KLT 723, in which it was held that any overriding effect of the State Financial Corporations Act, for short, the "SFC Act", by virtue of Section 46(B) thereof introduced by Act 56 of 1956, has no impact on Section 11(2) of the E.P.F. Act, which, as already noticed, was introduced only later on, by amendment, as per the Act 40 of 1973, with effect from 1-11-1973. This Court, therefore held that while the Parliament amended Section 11 of the E.P.F. Act, by specifically enacting Sub-section (2) thereof to provide a statutory first charge on the assets of the establishment notwithstanding anything contained in any other law for the time being in force, the Parliament were aware of the provisions u/s 46B of the SFC Act and that such later enactment overrides the effect of the former. Relying on this, it was urged on behalf of the bank that the same principle, namely, that the non obstante clause giving an overriding effect, in a later enactment, has a complete overriding effect, notwithstanding any other consequence has to be applied to the situation in hand and as a consequence, it has be held that Section 35 of the SARFAESI Act, which is an enactment, made later in point of time to the introduction of Section 11(2) of the EPF Act, has an overriding effect over the provisions of the E.P.F. Act.

Per contra, it was urged on behalf of the EPF Organisation that unlike in the EPF Act, no charge is created by the SARFAESI Act and the unique nature of the provisions contained in Section 11(2) of the EPF Act, cannot be held to be affected by Section 35 of the SARFAESI Act. Section 37 of the SARFAESI Act was also referred to by the learned Counsel to urge that the said statute is only in addition to and not in derogation of any other law, for the time being, in force. It was also pointed out that even going by SARFAESI Act, Section 39 thereof provides for distribution, of amounts realised by the sale of secured assets, in accordance with the provisions of Section 529(A) of the Companies Act, 1956 and, so much so, the Legislature must be deemed to have intended only to uphold the priority for the workers dues. It is also urged that it is not the intention of the SARFAESI Act to disturb the social welfare policy embedded in Section 11(2) of the EPF Act.

On behalf of the workmen, a trade union, on its application, was impleaded and its counsel heard. Relying on the decisions of this Court in KFC''s case (Supra) and Sherry Jacob Vs. Canara Bank, , it was urged that this writ petition is only dismissed.

The issues that arise for decision in this case are: (i) whether the provisions in the SARFAESI Act, have an overriding effect on the provisions of the EPF Act, and (ii) whether the first charge and priority provided by Section 11(2) of the EPF Act is hit by Section 35 of the SARFAESI Act.

Section 35 of the SARFAESI Act reads as follows:

Section 35 : The provisions of this Act to override other laws. - The provisions of this Act shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.

The EPF Act is an Act to provide for the institution of provident fund, pension fund, deposit insurance fund, etc. in factories and other establishments, to carry forward the constitutional mandate for providing social justice to the working class. It is intended to give social security to the industrial workers at the end of their careers. EPF Act provides for a deduction of prescribed amounts from the wages payable to the employees and deposit of such amounts and contributions by the employer in the provident fund. The said fund is administered by the Central and Regional Provident Fund Commissioners, who have statutory authorities. EPF Act provides substantive rights and corresponding obligations as well as statutory duties, non-performance of which invites statutory damages, other liabilities by way of interest etc., as well as penalties. It is a unique substantive law with a social welfare goal and provides, within itself, the means and procedures for its enforcement and to penalise those who violate its provisions.

Section 11 of the EPF Act declares the priority of payment of contributions under the Act over other debts. Sub-section (1) of Section 11 of EPF Act deals with the question of priority where an employer is adjudicated insolvent or being a company subjected to an order of winding up. Sub-section (2) of Section 11 deals with other types of priorities and reads as under:

11(2): Without prejudice to the provisions of Sub-section (1), if any amount is due from an employer, whether in respect of the employee''s contribution deducted from the wages of the employee or the employer''s contribution, the amount so due shall be deemed to be the first charge on the assets of the establishment, and shall, notwithstanding anything contained in any other law, for the time being in force, be paid in priority to all other debts.

As noticed by the Division Bench of this Court in K.F.C.''s case (Supra) Sub-section (2) of Section 11 of the EPF Act has two facets. First, it declares that the amount due from the employer towards contribution under the EPF Act shall be deemed to be a first charge on the assets of the establishment. Second, it also declares that notwithstanding anything contained in any other law for the time being in force, such debt shall be paid in priority to all other debts. Both these provisions bring out the intention of the Parliament to ensure the social benefit as contained in the legislation.

There are other provisions in the Act rendering the amounts of Provident Fund payable, immune from attachment of Civil Court''s decree, which also indicate such intention of the Parliament.

The application of the Act to an establishment is by operation of law, in the sense that, the coverage commences from the falling of such an establishment within the parameters provided under Sub-section (3) of Section 1 of the E.P.F. Act. On the existence of such facts, the coverage is compulsory and liability for payment of contribution is automatic. The only exception to the coverage under Sub-section (3) of Section 1 of the E.P.F. Act is the exclusion of the application of the Act to certain establishments enumerated in Section 16(1) of the said Act or by an exemption granted as per a notification as provided in Section 16(2) of that Act. Even those not covered under the Act can come under the cover of the Act by recourse to the procedure provided in Sub-section (4) of Section 1. The coverage under the E.P.F. Act is not dependent on any order by any authority. Adjudication u/s 7A is called for only when there is a dispute.

A reference to the Section 7Q would show that the liability to pay interest arises from the debt on which the amount becomes due under the Act. The provision in Section 7A and the provisions that follow the said Section do not provide the incidents of levy of contribution. Contributions are to be paid in terms of Section 6 and such liability is a statutory liability. What is provided u/s 11(2) of the E.P.F. Act is a first charge on the assets of the establishment. Such statutory first charge is provided notwithstanding anything contained in any other law. Such charge is as regards any amount due from the employer, whether in respect of the employer''s contribution, or the employee''s contribution, deducted from the wages of the employee. The aforesaid discussions would show that the statutory first charge created by Sub-section (2) of Section 11 of the E.P.F. Act is a charge on the assets of the establishment (employer) eo instanti the occurance of liability in terms of the Act. Such charge, being a statutory first charge notwithstanding anything contained in any other law, is one that is preferential even to a charge falling u/s 100 of the Transfer of Property Act.

However, a survey of the provisions of the S ARFAESI Act would show that it does not provide for any statutory charge. In the absence of any statutory charge being provided by the SARFAESI Act, the statutory first charge created by Section 11(2) of the E.P.F. Act gives a clear priority to such charge under the E.P.F. Act over other charges including any right or mode of enforcement available to the bank under the S ARFAESI Act. So much so the first charge created by the E.P.F. Act has precedence over any right of the bank under the SARFAESI Act.

To consider the issue further, it is appropriate to survey a few provisions of the SARFAESI Act. What is provided u/s 13(1) of the SARFAESI Act is that notwithstanding anything contained in Section 69 or Section 69A of the Transfer of Property Act, any security interest created in favour of any secured creditor may be enforced, in accordance with the provisions of the said Act, by the creditor. Section 2(zf) defines the "security interest" to mean right, title and interest of any kind, whatsoever, upon property created in favour of any secured creditor and includes any mortgage, charge, hypothecation, assignment other than those specified in Section 31. The security interest does not thus amount anything better than what could be a charge or a mortgage, in the context of this case, for the purpose of Transfer of Property Act. The creation of a statutory first charge by a provision like Section 11(2) of the E.P.F. Act gives a clear priority even against those charges created by the act of parties and even statutorily created charges, without any statutorily declared priority or preference. The assets may also be part of a security interest, as defined in Section 2(zf) of the S ARFAESI Act. So much so, the provisions of Section 11(2) of the E.P.F. Act impinges on the right of any secured creditor, as defined in Section 2(zd) of the S ARFAESI Act to act u/s 13(1) of that Act, in relation to any property of defaulter under the E.P.F. Act without acceding to the first charge for the dues under the E.P.F. Act.

In this context, it is worthwhile to refer to the decision of the Apex Court in State Bank of Bikaner and Jaipur Vs. National Iron and Steel Rolling Corporation and Others, , wherein a near similar provision under the Rajastan Sales Tax Act was considered. That provision also provided for a first charge, coupled with a non-obstante clause. The Apex Court held that the statutory charge provided u/s 11AAAA of the Rajastan Sales Tax Act, 1954, will prevail over, even an early mortgage of the same property. In holding so, the decision of the Apex Court in Dattatreya Shanker Mote and Others Vs. Anand Chintaman Datar and Others, , was relied on. It was held as imperative, that when a first charge is created by operation of law over any property, that charge will have precedence over any existing mortgage. Following the said decision, the conclusion is irresistible that the first charge created by Section 11(2) of the E.P.F. Act has priority over any right of the bank referable to SARFAESI Act.

It has to be remembered that, as noticed by the Division Bench of this Court in K.F.C.''s case (Supra), Section 11(2) of the E.P.F. Act declares that the amount due as contribution to the Employees Provident Fund is first charge on the assets of the establishment and that, notwithstanding anything contained in any other law for the time being in force, it shall be paid in priority against all other debts. This is a facet of the E.P.F. Act that goes a step further than what is provided in Section 36 of the SARFAESI Act. The reason for this is obvious. While the secured creditors would have to be held entitled to recover the dues from a secured debtor, the provident fund payable to workers is of greater moment, since it is a matter of terminal social security benefit made available by statute to the working class. Taking into consideration that E.P.F. Act is a social benefit legislation and the evil of the consequence of provident fund dues being defeated by prior claims of secured or unsecured creditors, the Legislature took care to declare that irrespective of when a debt is created, the dues under the E.P.F. Act would always remain the first charge and shall be paid first out of the assets of the establishment.

In the result, this writ petition fails and the same is accordingly dismissed.

No costs.