Supreme Court: The division bench of *M.R. Shah and Krishna Murari, J.J., held that recoveries under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (‘SARFAESI Act') with respect to the secured assets would prevail over the recoveries under the Micro, Small and Medium Enterprises Development Act, 2006 (‘MSMED Act') to recover the amount under the award / decree passed by the Facilitation Council.
In the case at hand, Kotak Mahindra Bank Ltd. (‘petitioner') by way of a civil appeal, challenged the judgment of the Division Bench of Madhya Pradesh High Court, wherein it was held that MSMED Act will prevail over the SARFAESI Act.
Issue
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Whether the MSMED Act would prevail over the SARFAESI Act?
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Whether recovery proceedings / recoveries under the MSMED Act would prevail over the recoveries made / recovery proceedings under provisions of the SARFAESI Act?
Court Analysis
The Court stated that Sections 15 to 23 of the MSMED Act only provide for special mechanism for adjudication of the dispute along with enforcing certain other contractual and business terms. There is no specific express provision giving ‘priority’ for payments under the MSMED Act over the dues of the secured creditors or over any taxes or cesses payable to Central Government or State Government or Local Authority.
Whereof, Section 26-E of the SARFAESI Act provides that, notwithstanding anything inconsistent therewith contained in any other law for the time being in force, after the registration of security interest, the debts due to any secured creditor shall be paid in ‘priority' over all other debts and all revenue taxes and cesses and other rates payable to the Central Government or State Government or Local Authority subject to provisions of the Insolvency and Bankruptcy Code, 2016.
The Court, however, noted that the MSMED Act as well as the SARFAESI Act had a non-obstante clause, and nothing repugnant. Therefore, stated that that non-obstante clause of the subsequent statute would prevail over the earlier enactments.
The Court was of the view that if the legislature confers the later enactment with a non-obstante clause, it means that it wanted the subsequent enactment to prevail. Thus, a ‘priority' conferred under Section 26-E of the SARFAESI Act would prevail over the recovery mechanism of the MSMED Act.
The Court considered the provisions of Section 15 to 23 read with Section 24 of the MSMED Act and the provisions of SARFAESI Act and stated that there is no repugnancy between the two enactments and no conflict between the specific subject of ‘priority'.
The Court listed down the objective of the SARFAESI Act while stating that it has been enacted to regulate securitization and reconstruction of financial assets and enforcement of security interest and to provide for central debts of security interest created on property rights. It is a special legislation for enforcement of security interest which was created in favour of the secured creditor. Therefore, in absence of any specific provision for ‘priority' of the dues under MSMED Act, then not only the object and purpose of special enactment would be frustrated, even the later enactment by way of insertion of Section 26E of the SARFAESI Act would be frustrated.
Thus, the Court set aside the judgment passed by the Division Bench of Madhya Pradesh High Court and consequently restored the order passed by the Single Judge bench. The Court held that recoveries under SARFAESI Act with respect to the secured assets would prevail over the recoveries under the MSMED Act to recover the amount under the award / decree passed by the Facilitation Council.
While agreeing with the single Judge bench, the Court further stated that if respondent no.1 was aggrieved by the order passed by the District Magistrate under Section 14 of the SARFAESI Act, it will be open for him to initiate proceedings under Section 17 of the SARFAESI Act
[Kotak Mahindra Bank Limited v. Girnar Corrugators Pvt. Ltd, 2023 SCC OnLine SC 15, decided on 05-01-2023]
*Judgment by Justice M.R. Shah
Advocates who appeared in this case :
For the petitioner- Advocate Krishnayan Sen;
For the respondent- Advocate Pulkit Tare and Advocate Arjun Garg.
