Jalgaon District Central Coop. Bank Ltd. vs State of Maharashtra and Ors.
Special Leave Petition (C) No.27740 of 2011
CJI.B. R. GAVAI and K. VINOD CHANDRAN, J
Overview
The present judgment of the Supreme Court concerns itself with the principal question of the priority of claims when a secured creditor takes action against assets of a defaulting borrower under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, hereinafter referred to as the SARFAESI Act. The central issue is thus whether the claim of the secured creditor, by mere registration with the Central Registry under Sections 23 and 26D-26E (which was inserted in 2020), would have priority over the statutory dues of workmen and provident fund authorities. This case emanates from a sick cooperative sugar factory mortgaging its assets with the appellant bank, and the claims of the secured creditor and the workmen started running riot.
Background Facts
The facts are that the sugar cooperative mortgaged its immovable properties and hypothecated its stock to the appellant Bank as security for loans. Because of severe losses, the factory closed down in the year 2000. In the year 2001, the Bank filed proceedings before the Cooperative Court. It obtained an order for recovery of over Rs. 30 crores. Thereafter, parallel liquidation proceedings were started under different provisions by a liquidator appointed by the Sugar Commissioner. In the year 2006, the Bank initiated SARFAESI proceedings, took possession of the assets, began running the factory and tried to lease it. However, once again, the operations failed to take off. Workmen approached the Liquidator and later the Industrial Court for their dues. However, their claim was rejected on the grounds of delay. When the Bank moved to sell the secured assets, workmen, union members, and even a director from the Society filed several writ petitions before the Bombay High Court challenging the sale of the assets.
Legal issues before the court
The bank, in appeal before the Supreme Court, contended that the amendments introduced in the year 2020 under Sections 26D and 26E provide overriding priority to secured creditors whose security interests have been registered with the Central Registry. The bank produced its registration record, called the Asset ID Search Report, to prove its compliance. Counsel argued that secured creditors, upon registration, acquire statutory priority over all other dues, including government dues.
Workmen contended that wages and provident fund contributions could not be displaced by a subsequent statute and underlined their entitlements due and unpaid. They further pointed out the procedural irregularities in the dismissal of their belated claim by the Industrial Court.
The Supreme Court addressed whether Section 26E indeed overrides the priority for provident fund dues affirmed in earlier judgments. The Court observed that Section 26E, read with Section 35 – the non obstante clause, gives clear priority to secured creditors when security interests are registered. The Court held that once Chapter IVA was inserted, a secured creditor’s claim, when properly registered, would be accorded paramountcy over all other debts, including workmen’s dues, except in cases where any statute has created a first charge which outlives the SARFAESI override. However, the judgment emphasises that provident fund dues still retain special statutory protection.
Decision by the court
The Court upheld the bank’s right to proceed with the sale of the secured assets, recognised the applicability of Section 26E due to proper registration and clarified the manner in which different claims, including workmen’s dues and PF contributions, must be prioritised under the revised statutory framework.
