Mar 31, 2023

SC Holds That Recoveries under SARFAESI Act Will Prevail Over Recoveries Under MSMED Act

SC in the matter of Kotak Mahindra Bank Limited (‘Appellant’) v. Girnar Corrugators Private Limited (‘Respondent’), CA No. 6662 of 2022 settled certain lacunae with respect to the priority of payments due under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (‘SARFAESI Act’) vis a vis payment due under the Micro, Small and Medium Enterprises Development Act, 2006 (‘MSMED Act’).

The Respondent had created a charge over its properties (‘Security’) in favour of the Appellant pursuant to the Appellant granting certain credit facilities to One Mission Vivacare (‘Borrower’). Upon payment default by the Borrower the Appellant filed an application under the SARFAESI Act for recovery of the debt due by way of selling the Security. The Division Bench of the High Court of Madhya Pradesh rejected the application observing that the Appellant must recover the debt as per the procedure of the MSMED Act, given that it is sector specific legislation applicable only Micro, Small and Medium Enterprises. Upon appeal, the SC was presented with inter alia the following issues:

a.     Whether the MSMED Act would prevail over the SARFAESI Act?

b.     Whether recovery proceedings / recoveries under the MSMED Act would prevail over the recoveries made / recovery proceedings under provisions of the SARFAESI Act?

The SC inter alia opined the following:

a.    While Sections 15 to 23 of the MSMED Act provide the procedure for the enforcement of contractual terms between parties, there is no express provision giving ‘priority’ for payments under the MSMED Act over the dues of the secured creditors under other legislations; and

b.    The SC noted that the MSMED Act under Section 24 and the SARFAESI Act under Section 26E had non-obstante clauses for the precedence of the MSMED Act and the SARFAESI Act over any other law in case of any repugnance. However, the SC opined that Section 26E of the SARFAESI Act would prevail given that the provision was inserted by way of an amendment to the SARFAESI Act in 2016. The SC 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 26E of the SARFAESI Act would prevail over the recovery mechanism of the MSMED Act.

The SC also emphasised the objective of the SARFAESI Act, stating that the SAREFAESI Act was enacted primarily for the enforcement of security interest by creditors upon a payment default, thereby making it a special legislation in itself.




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