1. Court’s decision
The Bombay High Court has partly allowed a writ petition filed by a construction company that had leased a sugar factory from a secured creditor. The Court quashed a prohibitory order issued by the EPFO Recovery Officer under Sections 8-B and 17-B of the Employees’ Provident Fund Act, 1952, after finding that the order was procedurally illegal as it was issued without following the mandatory steps under Section 8-F, which governs recovery from debtors or garnishees of defaulting employers.
While the Court upheld the priority of provident fund dues and reaffirmed that a lessee of an establishment is a transferee for purposes of Section 17-B—even when the transfer occurs through a secured creditor under SARFAESI—the Court ruled that EPFO must first serve a notice, then allow the lessee to file a statement on oath, and conduct a quasi-judicial inquiry before fastening any liability.
The impugned order was therefore set aside qua the petitioner, but allowed to operate as a notice under Section 8-F(3)(i). The petitioner has been granted three weeks to submit a statement on oath.
2. Facts
A cooperative sugar mill defaulted on provident fund contributions amounting to approximately ₹2.52 crore. EPFO issued recovery certificates and proceeded to recover the dues. At the same time, a cooperative bank (secured creditor) invoked SARFAESI, took possession of the factory, and leased it to the petitioner for 25 years to revive operations and recover its loan.
Under the lease terms, the bank undertook to apply part of the lease rent towards statutory dues. The petitioner was not a party to any employment relationship with the defaulting cooperative mill.
In September 2023, EPFO issued a demand notice to the petitioner under Section 17-B, alleging transferee liability for pre-transfer dues. On 22 August 2025, EPFO issued a prohibitory order forbidding the petitioner from paying amounts due to the mill and directing that such monies be paid only to the Recovery Officer.
The petitioner challenged the order under Article 227.
3. Issues
- Whether the EPFO was justified in issuing a prohibitory order under Sections 8-B and 17-B without following the procedure in Section 8-F.
- Whether a lessee of an establishment—when the lease is executed by a secured creditor under SARFAESI—can be treated as a “transferee” under Section 17-B.
- Whether the priority of provident fund dues under Section 11(2) overrides claims of secured creditors.
- Whether absence of enquiry under Section 7-A invalidated the action.
4. Petitioner’s arguments
The petitioner argued that the prohibitory order was unlawful because no enquiry under Section 7-A was conducted, no determination of dues was made, and no notice under Section 8-F(3)(i) was issued. Without giving an opportunity to file a statement on oath, EPFO could not proceed against a debtor of the employer.
On merits, the petitioner contended that it was not a transferee of the employer since the lease was executed by the bank (a secured creditor), not the defaulting sugar mill. The lease deed also contained a clause that the bank would bear statutory dues, thereby insulating the petitioner from liability. Reliance was placed on earlier Division Bench authority to argue that transferee liability was non-existent in involuntary transfers.
5. Respondents’ arguments
EPFO argued that the prohibitory order was valid and that PF dues enjoy absolute priority under Section 11(2). The petitioner, according to EPFO, was jointly and severally liable under Section 17-B as the transferee of the establishment, regardless of whether the transfer was voluntary or through a secured creditor. EPFO relied heavily on Esskay Pharmaceuticals and the Maharashtra State Cooperative Bank decision to highlight the inviolable priority of PF dues.
EPFO also relied on a previous Bombay High Court ruling (Nandkishore Agarwal) which had upheld similar action.
The secured creditor supported the petitioner’s stance.
6. Analysis of the law
The Court framed the legal landscape by stressing the social welfare character of the EPF Act, which must be interpreted purposively. It affirmed that:
• PF dues rank first on the assets of an establishment, overriding all secured and unsecured debts (Section 11(2));
• Section 17-B imposes transferee liability to prevent employers from defeating PF recovery by transferring establishments;
• Transferee liability applies to both voluntary and involuntary transfers, as held by the Calcutta Full Bench in Dalgaon Agro Industries.
However, when EPFO proceeds against a debtor of the employer, the statute mandates strict compliance with Section 8-F, which mirrors Section 226(3) of the Income-Tax Act. The Court relied on the Supreme Court’s ruling in Beharilal Ramcharan to hold that any action under Section 8-F(3)(i) must be preceded by:
- A notice;
- An opportunity to file a statement on oath;
- An enquiry based on natural justice;
- A reasoned conclusion if the Commissioner finds the denial false.
The Recovery Officer had bypassed all these steps.
7. Precedent analysis
Esskay Pharmaceuticals (SC)
Held that PF dues are a first charge and override even secured creditors. Applied here to reject the bank’s priority claim.
Maharashtra State Cooperative Bank (SC)
Clarified that PF dues must be paid before any other debt, statutory or contractual. Applied fully.
Dalgaon Agro Industries (Calcutta FB)
Held that Section 17-B applies equally to involuntary transfers, including court-approved transfers and transfers through secured creditors. Applied to reject petitioner’s argument that lease via SARFAESI prevents transferee liability.
Beharilal Ramcharan (SC)
Held that recovery from a garnishee requires notice, opportunity, enquiry—a core basis for quashing the EPFO’s order.
8. Court’s reasoning
The Court held:
• EPFO’s action was essentially a garnishee order under Section 8-F, not a direct transferee recovery under Section 17-B;
• Section 8-F mandates a notice-based procedure, but EPFO issued a straight prohibitory order without giving the petitioner a chance to dispute liability;
• The petitioner must be allowed to file a statement on oath under Section 8-F(3)(vi);
• Although transferee liability under Section 17-B exists, EPFO cannot ignore the procedural regime that Section 8-F requires;
• Lease terms between bank and petitioner cannot override statutory provisions—parties cannot contract out of a social welfare statute.
Thus, procedural illegality undermined the prohibitory order, even though the underlying PF dues and the statutory priority remain unquestionable.
9. Conclusion
The Court:
- Quashed the prohibitory order dated 22 August 2025 qua the petitioner;
- Directed that the same order be treated as a notice under Section 8-F(3)(i);
- Granted the petitioner three weeks from uploading to file a statement on oath;
- Directed EPFO to conduct an enquiry and pass a fresh reasoned order thereafter;
- Reaffirmed transferee liability and PF priority but insisted on strict statutory procedure.
No costs were imposed.
10. Implications
This ruling clarifies a crucial procedural safeguard: EPFO cannot directly issue garnishee-style prohibitory orders without following Section 8-F’s notice-and-hearing requirements.
It also significantly strengthens the judiciary’s trend of treating SARFAESI-based leases as “transfers” under Section 17-B, making lessees potentially liable for predecessor PF dues. The judgment underscores that contractual allocation of statutory liabilities is irrelevant when PF dues are involved.
For banks, assignees, and lessees of distressed assets, this ruling is a reminder that PF liabilities attach to the establishment, not merely its owner. For employers, it reiterates that workers’ PF dues remain inviolable.
Case Law References
Esskay Pharmaceuticals (2011) — PF dues override all debts including secured creditors; applied.
Maharashtra State Cooperative Bank (2009) — PF dues have absolute priority; applied.
Dalgaon Agro Industries (Calcutta FB) — Section 17-B covers involuntary transfers; relied upon.
Nandkishore Agarwal (Bom HC) — Upheld transferee liability; considered.
Beharilal Ramcharan (SC) — Garnishee orders require notice & enquiry; foundational to outcome.
FAQs
1. Can EPFO issue a prohibitory recovery order without notice?
No. The High Court held that EPFO must follow Section 8-F procedures, including notice and the opportunity to file a statement on oath.
2. Is a lessee under SARFAESI considered a “transferee” liable for PF dues?
Yes. Section 17-B applies even to involuntary transfers, including transfers by secured creditors.
3. Does PF have priority over secured creditors’ dues?
Yes. Under Section 11(2), PF dues constitute a first charge and override all other debts.