Recoveries under SARFAESI for secured assets prevail over recoveries under MSMED Act: Supreme Court

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The Supreme Court on Thursday held that recoveries under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act towards secured assets would prevail over recoveries under the Micro, Small and Medium Enterprises Development (MSMED) Act mandated by awards decreed by the Facilitation Council. (Kotak Mahindra Bank Limited v. Girnar Corrugators Private Limited)

A Bench of Justices MR Shah and Krishna Murari reiterated that the MSMED Act does not provide for any priority over debt dues of the secured creditor unlike Section 26E of the SARFAESI Act. The judges explained,

“…in absence of any specific provision for priority of the dues under MSMED Act, if the submission on behalf of respondent No.1 for the dues under MSMED Act would prevail over the SARFAESI Act, then in that case, not only the object and purpose of special enactment/SARFAESI Act would be frustrated, even the later enactment by way of insertion of 19 Section 26E of the SARFAESI Act would be frustrated…Section 26E of the SARFAESI Act would become nugatory and would become otiose and/or redundant.”

The Court was hearing a challenge to a Madhya Pradesh High Court ruling that had held that the MSMED Act will prevail over the SARFAESI Act in view of Section 24 of the former, which provides that the provisions of Sections 15 to 23 would have an overriding effect over any other law in force.

A division bench of the High Court had in August 2017 set aside a single-judge’s order holding the contrary view.

The appellant before the Supreme Court had moved the High Court after a Naib Tehsildar had refused to take possession of secured assets pursuant to a district magistrate’s order under Section 14 of the SARFAESI Act.

The Tehsildar had reasoned that recovery certificates towards orders passed by the Facilitation Council were still pending.

Counsel for the appellant submitted that there is no repugnancy between the provisions of the two Acts in question.

It was pointed out that there is no express ‘priority’ given for payments under the MSMED Act for dues of secured creditors, or over any taxes or cesses payable to authorities.

Counsel for the respondents argued that small businesses completely rely on the MSMED Act for recovery of dues, and a decree from the Facilitation Council was their only avenue for the same.

Further, if the SARFAESI Act is given an overriding effect, it would render awards of the Facilitation Council non-executable in all cases where there are secured creditors, and thus impede the growth of small businesses.

The top court noted that is a settled position of law that among two statutes, if one has a non-obstante clause, it means that the legislature wanted the same to prevail over the other.

Section 26E of the SARFAESI Act, which is a non-obstante clause (a proviso added to uphold its enforceability over one contradictory to it), states,

“…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 authorities.”

It underscored that the SARFAESI Act was a a special legislation for enforcement of security interest created in favour of secured creditors/financial institutions.

Further, no magistrate would have jurisdiction to adjudicate disputes between secured creditors and debtors.

“If any person is aggrieved by the steps under Section 13(4) / order passed under Section 14, then the aggrieved person has to approach the Debts Recovery Tribunal by way of appeal / application under Section 17 of the SARFAESI Act.”

The judges thus held that the Tehsildar’s actions were incorrect, and accordingly allowed the appeals.

Advocate Amar Dave appeared for the appellant-bank. Senior Advocate Niranjan Reddy appeared for the respondents.

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