Can the assets of an establishment, already pledged to a bank against loans, be sold to clear Provident Fund dues?

In Maharashtra State Co-operative Bank Ltd. V/s The Assistant Provident Fund Commissioner, 2009 the Hon’ble Supreme Court, was faced with the question of whether the sugar bags pledged by two sugar mills in favour of the appellant-bank as security for repayment of the loan together with interest could be attached and sold for realization of the dues of provident funds etc. payable by the employer i.e., the management of the Sugar Mills under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 (for short `the Provident Fund Act’);

The Supreme Court, relying on some of its previous decisions and those of various other High Courts, as well as, Sections 11 of the Provident Fund Act observed that as per Sub-section (2) of Section 11, the amount due from the employer towards contribution under the Act shall be treated as the first charge on the assets of the establishment, also, notwithstanding anything contained in any other law, such dues were to be paid in priority to all other debts.

Section 11 of the Provident Fund Act states that;

“(1) Where any employer is adjudicated insolvent or being a company an order for winding up is made the amount due-

(a) from the employer in relation to an establishment to which any Scheme or the Insurance Scheme applies in respect of any contribution payable to the Fund or as the case may be the Insurance Fund damages recoverable under section 14B accumulations required to be transferred under sub-section (2) of section 15 or any charges payable by him under any other provision of this Act or of any provision of the Scheme or the Insurance Scheme; or

(b) from the employer in relation to an exempted establishment in respect of any contribution to the provident fund or any insurance fund (in so far as it relates to exempted employees) under the rules of the provident fund or any insurance fund any contribution payable by him towards the Pension Fund under sub-section (6) of section 17 damages recoverable under section 14B or any charges payable by him to the appropriate Government under any provision of this Act under any of the conditions specified under section 17 shall where the liability therefor has accrued before the order of adjudication or winding up is made be deemed to be included among the debts which under section 49 of the Presidency Towns Insolvency Act 1909 or under section 61 of the Provincial Insolvency Act 1920 or under section 530 of the Companies Act 1956 are to be paid in priority to all other debts in the distribution of the property of the insolvent or the assets of the company being wound up as the case may be.

Explanation : In this sub-section and in section 17 insurance fund means any fund established by an employer under any Scheme for providing benefits in the nature of life insurance to employees whether linked to their deposits in provident fund or not without payment by the employees of any separate contribution or premium in that behalf.

(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.”

The Apex Court held that a bare reading of the section would make it clear that the amount due is required to be paid in priority to all other debts (`all other debts’ as mentioned in both the Sub-sections). This would mean that Section 11 will operate against statutory as well as non-statutory and secured as well as unsecured debts including a mortgage or pledge. The Court further opined that, sub-section (2) was designedly inserted in the Act for ensuring that the provident fund dues of the workers are not defeated by prior claims of secured or unsecured creditors.

Hence, the Supreme Court concluded that interest payable against loans and damages payable under Section 14B of the Provident Fund Act form part of the amount due from an employer for the purpose of Section 11(2) of the Provident Fund Act.

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