The Top Court observed that Sections 15 to 23 of the Micro, Small and Medium Enterprises Development Act, 2006 (hereinafter referred to as “MSMED Act”) only provide for a special procedure for adjudication of the dispute and that there is no specific express provision for ‘priority’ of payments. Whereas Section 26E of Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter referred to as “SARFESI”) provides priority to secured creditors, subject to the provisions of the Insolvency and Bankruptcy Code, 2016. The said provision is a later enactment that the MSMED Act and has a non-obstante clause. Even as per the contentions of the Respondent, the later enactment overrides the previous one, and therefore the Bench opined that Section 26E of SARFAESI would prevail over the recovery mechanism of the MSMED Act.
Moreover, the Apex Court noted that the MSMED Act does not talk about priority unlike SARFAESI, and therefore as such, there is no repugnancy between the two enactments as far as the matter of ‘priority’ is concerned.
Noting the object of SARFAESI which is to provide special provisions for the financial assets and security interest, the Top Court expounded that if MSMED Act is given precedence over SARFAESI then the object of SARFAESI would be frustrated.
It was hence, propounded that as far as the issue of recoveries concerning the secured assets is concerned, the provisions of SARFAESI would prevail over the MSMED Act.
Brief Facts:
The present appeal has been preferred by the Appellant Bank (Secured Creditor) against the order passed by the Madhya Pradesh High Court vide which the appeal of Respondent No.1 was allowed, and it was held that the MSMED Act prevails over the SARFESI.
Background of the Case:
One Mission Vivacare (hereinafter referred to as “Debtor”) obtained several credit facilities from the Appellant Bank and in exchange mortgaged certain movable fixed assets. The Debtor defaulted on loans and so recovery proceedings under Section 13(2) of SARFAESI were initiated by the Appellant to take possession of the secured Assets.
The District Magistrate allowed the application of the Appellant and directions were given to the Naib Tehsildar to take possession and comply with the orders of the Court. However, the Tehsildar refused to take possession on the ground that a recovery proceeding is already pending for recovering money from the secured assets. It was also submitted that an award was passed by the Facilitation Council in favour of Respondent No.1 under MSMED Act for recovery of a certain amount from the secured assets. It was further observed by the Naib Tehsildar that since MSMED Act is a special enactment, it would override SARFAESI.
The Learned Single Judge allowed the writ petition against the order passed by the Naib Tehsildar and held that the provisions of SARFAESI would prevail. Against the said order of the Learned Single Judge, an appeal was preferred before the division bench of the Madhya Pradesh High Court which held that the MSMED Act is a special enactment and was enacted after SARFAESI and hence, would prevail over SARFAESI.
Therefore, the present appeal has been preferred against the order passed by the Division Bench of the High Court.
Contentions of the Appellant:
It was submitted that Section 24 MSMED Act is a non-obstante clause and Sections 15-23 of the MSMED Act only provide for a separate mechanism for adjudication of the dispute. It was contended that there is no express priority given for payments under the MSMED Act over the dues of secured creditors. In contrast to this, SARFAESI provides a framework based on the ‘priority’ of payment of dues.
On basis of this, it was argued that in the absence of express provisions, there can be no ground to ignore the specific scheme of SARAFESI in comparison to such a specific scheme under the MSMED Act. It was contended that any such priority of secured creditors has to be expressly provided for and cannot be read by implication. Viewed from this perspective, there would be no conflict between MSMED Act and SARAFESI.
Lastly, it was argued that Section 26E of SARFAESI, being a non-obstante clause should prevail over MSMED Act.
Contentions of the Respondent No.1:
It was contended that to promote and protect the interests of the enterprises, robust provisions were brought in for the recovery of dues under the MSMED Act which are not present anywhere else. Therefore, the non-obstante Section 24 of the MSMED Act will prevail over the SARFAESI.
Observations of the Court:
The main issue to be determined was whether the MSMED ACT has overriding powers over SARFAESI.
The Court observed that Sections 15 to 23 of the MSMED Act only provide for a special procedure for adjudication of the dispute and that there is no specific express provision for ‘priority’ of payments. Whereas Section 26E of SARFAESI provides priority to secured creditors, subject to the provisions of the Insolvency and Bankruptcy Code, 2016. The said provision is a later enactment that the MSMED Act and has a non-obstante clause. Even as per the contentions of the Respondent, the later enactment overrides the previous one, and therefore the Bench opined that Section 26E of SARFAESI would prevail over the recovery mechanism of the MSMED Act.
Moreover, the Apex Court noted that the MSMED Act does not talk about priority unlike SARFAESI, and therefore as such there is no repugnancy between the two enactments as far as the matter of ‘priority’ is concerned.
Noting the object of SARFAESI which is to provide special provisions for the financial assets and security interest, the Top Court expounded that if MSMED Act is given precedence over SARFAESI then the object of SARFAESI would be frustrated.
Further, regarding the validity of the order passed by the Tehsildar, the Hon’ble Court propounded that under Section 14 of SARFAESI, neither District nor Metropolitan Magistrate has any jurisdiction to adjudicate upon the dispute between a secured creditor and debtor. Therefore, the order passed by the Naib Tehsildar was held to be without jurisdiction and set aside.
The decision of the Court:
Observing that as far as the issue of recoveries concerning the secured assets is concerned, the provisions of SARFAESI would prevail over the MSMED Act, the Supreme Court set aside the order of the division bench of the High Court and accordingly allowed the appeal.
Case Title: Kotak Mahindra Bank Limited v. GIrnar Corrugators Pvt. Ltd. & Ors.
Citation: 2023 Latest Caselaw 5 SC
Coram: Hon’ble Mr. Justice M.R. Shah, Hon’ble Mr. Justice Krishna Murari
Case No: Civil Appeal No. 6662 of 2022
Advocate for Appellant: Adv. Krishnayan Sen
Advocates for Respondents: Advs. Pulkit Tare, Arjun Garg
Read Judgement @LatestLaws.com
Picture Source :