Who Gets First Charge on Auction Money? SC Asks Karnataka HC to Decide Between EPFO and Banks

A bench of Justices Vikram Nath, Sanjay Karol, and Sandeep Mehta was dealing an appeal filed by M/s Edelweiss Asset Reconstruction Limited (Appellant) against the Karnataka High Court’s order of February 1, 2024, which had directed the appellant to deposit the auction proceeds from the properties to the EPFO.

The appellant admitted before the apex court that the dues of the EPFO generally have a first charge. However, it objected to the recovery process, highlighting that Axis Bank had sold one property for approximately Rs. 12 crores, while the appellant had sold two properties for a total consideration of approximately Rs. 7 crores. The appellant submitted that the balance amount due to the EPFO should be recovered from Axis Bank.

The appellant also detailed that it had already paid an amount of Rs. 75 lakhs, which was proportionate to the sale consideration it received. It argued that the balance amount due to the EPFO, which includes approximatelyRs. 1.3 crores quantified under Section 14(B) of the PF Act (the recovery of which has been stayed by the high court), would fall under the proportionate share of Axis Bank. The appellant further contended that if the EPFO ultimately succeeds before the high court in its demand under Section 14(B) of the PF Act, the recovery for the balance amount should be made from Axis Bank and not from the appellant.

The EPFO, on the other hand, submitted that the high court had rightly dismissed the appellant's petition, making it entitled to recover the balance amount of Rs. 3,43,629, in addition to the amount of approximately Rs. 1.3 crores quantified under Section 14(B) of the PF Act, once the high court lifted the stay. The EPFO also pointed out that the appellant had not impleaded Axis Bank before the high court, thus rendering the appellant's contention that the balance recovery should be made from Axis Bank unsustainable, especially regarding the Section 14(B) amount.

Axis Bank countered, contending that in view of Section 35 of the SARFAESI Act, the bank’s secured dues would have priority over sales taxes and other dues payable to the Government or local authority. Therefore, the bank argued, no recovery could be made from it until its entire dues were liquidated and satisfied. The bench acknowledged that the appellant had not impleaded Axis Bank as a party-respondent before the high court. However, Axis Bank was impleaded, represented, and duly heard before the Supreme Court.

The bench observed, "According to the appellant, the EPFO had first charge over the property auctioned, whether by the appellant or by the Axis Bank. Whereas the contention of the Axis Bank is that it has the first charge and priority over the sales tax and other dues payable to the Government and local authority. Therefore, EPFO would be entitled to recover anything from the Axis Bank only after its dues are fully satisfied".

Court noted the admitted position that Axis Bank had realised approximately Rs. 12 crores from the sale of the Attibele property, while the appellant had realised only approximately Rs. 7 crores from the sale of the other two properties, namely Kammanahalli property and Palya property. It was also an admitted fact that the appellant had already paid Rs. 75 lakhs and had undertaken to pay Rs. 78,42,579 in full and final discharge of its liability. The appellant maintained that the balance payment of approximately Rs. 1,30,52,221 should be recovered from Axis Bank.

"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 bench held.

The Supreme Court said that the high court should examine the priority of first charge among the EPFO and the secured creditors, including Axis Bank, State Bank of India, and the State Bank of Travancore (now taken over by SBI), in light of Section 11(2) of the PF Act.

Consequently, the apex court set aside the impugned order and restored the writ petition to be decided afresh. The high court was directed to implead Axis Bank as a respondent, afford due opportunity for exchanging pleadings, and grant a hearing to all parties to the proceedings.

The bench said that 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". It pointed out that the material in this regard had been placed before it, and since it was not entering into the merits of that issue relating to first charge and priority, it did not deal with the same in detail.

Court clarified that all parties to the writ petition would be at liberty to raise all contentions before the high court.

Senior advocate Krishnan Venugopal appeared for the appellant, M/s Edelweiss Asset Reconstruction Limited, senior advocate Gopal Jain represented Axis Bank, and advocate Dushyant Parashar appeared for the EPFO