Auction Purchasers Cannot Remove EPFO Attachment As CERSAI Registration Came After EPF Dues Accrued: Kerala High Court

The Kerala High Court has recently dismissed a writ petition filed by auction purchasers seeking removal of attachments over a property purchased in SARFAESI proceedings conducted by Federal Bank.

Justice Viju Abraham held that since the bank itself could not claim statutory priority under Section 26-E of the SARFAESI Act, the auction purchasers were not entitled to seek effacement of the EPFO attachment.

The court noted that priority under Section 26-E arises only upon registration of the security interest with the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI), which in this case was effected only on November 5, 2016, after the provident fund dues had accrued from July 2014 and the EPFO attachment order had been issued on November 4, 2015.

The petitioners were the successful auction purchasers of 43.99 cents of land and a building in Kalpetta Village, Wayanad, brought to sale by Federal Bank under the SARFAESI Act. A sale certificate was issued and registered in their favour.

The property had been mortgaged by Sushil Kumar, Director of Kalpetta Janakshema Maruthi Chits Pvt. Ltd., in favour of the bank. The equitable mortgage was created on 05.09.2014 and confirmed by letter dated 06.09.2014.

However, the encumbrance certificate reflected two attachments: one effected by the Employees' Provident Fund Organisation (EPFO) on 04.11.2015, and another obtained by the another respondent pursuant to orders of the Munsiff Court, Taliparamba dated July 16, 2018, for recovery of Rs.4,34,625/-.

Contending that these attachments were subsequent to the mortgage and liable to be effaced, the auction purchasers submitted a representation before the sub-registrar. Upon being informed that no action could be taken without a court direction, they approached the High Court.

The EPFO contended that the bank acted illegally in selling the attached property without informing the Provident Fund authorities. It further asserted that provident fund dues enjoy priority over other debts under Section 11 of the Employees' Provident Funds and Miscellaneous Provisions Act, 1952.

The fourth respondent argued that the attachment obtained through the civil court could not be removed in writ proceedings and that the bank or the purchasers must approach the competent forum.

Federal Bank supported the petitioners, contending that the first charge under Section 11(2) of the EPF Act applies only to the assets of the establishment. Since the subject property belonged to the director in his individual capacity, the bank argued that Section 26-E of the SARFAESI Act granted priority to secured creditors.

Referring to Section 11(2) of the EPF Act and Section 26-E of the SARFAESI Act, the court observed that “both statutes provide for a priority for recovery of the amount due under the respective statutes.”

The court noted that although the equitable mortgage was created on September 5, 2014, the security interest was registered with the Central Registry (CERSAI) only on November 5, 2016. In contrast, the EPF dues had accrued from July 2014, and the EPFO's attachment order was issued on November 4, 2015, that is, prior to the registration of the security interest with CERSAI. The court also noted that the provident fund contribution had become due even prior to the creation of the equitable mortgage.

“the bank could get priority as mandated in Section 26-E of the SARFAESI Act only after the registration with the CERSAI, which happened only on 05.11.2016, and the provident fund became due much prior to that, and the attachment by the EPFO was also before such registration,” the court observed.

Holding that statutory priority under Section 26-E arises only upon registration with CERSAI, the court concluded that the bank could not claim priority over the EPF dues.

“I am of the view that the claim of the bank on the ground of priority over the debts relying on Section 26-E of the SARFAESI Act cannot be accepted,” it held.

Since the auction purchasers derived title through the bank, and the bank itself had no statutory priority over the EPFO dues, the court declined to issue any direction to delete or efface the attachments.

Accordingly, the writ petition was dismissed.

For Petitioners: Advocates Gayathri Narendranath, B.G Bhaskar and Lalitha A

For Respondents: Advocates Dr. Abraham P Meachinkara, V.V Suresh, Mohan Jacob George, P.V Parvathy, Reena Thomas and Nigi George