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Supreme Court: Recovery under the SARFAESI Act with respect to the secured assets would prevail over the recovery under the MSMED Act

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In a recent ruling, the Supreme Court held that recoveries under the 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. [Kotak Mahindra Bank Limited vs. Girnar Corrugators Pvt. Ltd. & Ors., Civil Appeal No. 6662 of 2022, Supreme Court]

Brief Facts

1. The appellant bank advanced various credit facilities to the debtor which were secured through mortgage of various assets (”secured assets”).
2. The debtor made a default in loan repayments and therefore the appellant bank initiated recovery proceedings under SARFAESI Act.
3. However, the authorities refused to assist bank in obtaining possession of the secured assets as recovery proceedings under MSMED Act were pending in respect of these secured assets.
4. Aggrieved by the decision of authorities, the appellant approached the High Court through a writ petition. The single judge bench of the High Court allowed the writ petition by observing that the provisions of SARFAESI Act would prevail. The court observed that the beneficiary of the award under MSMED Act, if aggrieved by the action taken under the SARFAESI Act, can approach Debt Recovery Tribunal under Section 17 of the SARFAESI Act.
5. This order was challenged before the division bench of the High Court which eventually set aside the single judge order. The division bench’s order was challenged by the bank before the Supreme Court.

Issue before the Supreme Court

Whether recovery proceedings under the MSMED Act would prevail over the recovery proceedings under provisions of the SARFAESI Act.

Statutory Provisions

• Section 13(4) of the SARFAESI Act, 2002 empowers secured creditor to take possession of the secured assets in case the borrower fails to discharge his liability within the defined timelines after the default.
• Section 14 of the SARFAESI Act, 2002 requires District Magistrate to assist bank in taking possession of the secured assets.
• The non-obstante clause, Section 26E of the SARFAESI Act, 2002, was inserted through an amendment in 2016 as “26E. Notwithstanding anything 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 revenues, taxes, cesses and other rates payable to the Central Government or State Government or local authority.”
• The non-obstante clause in Section 24 of the MSMED Act, 2006 provides “The provisions of sections 15 to 23 shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force.”

Supreme Court’s Order

The Supreme Court set aside the order of the division bench of the high court and restored the order of the learned single judge.

The court observed 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 on the parties such as time limit for payments and interest in case of delayed payments.

The court further noted that in the entire MSMED Act, there is no specific express provision giving ‘priority’ for payments under the MSMED Act over the dues of the secured creditors whereas Section 26E of the SARFAESI Act clearly provides that debts due to any secured creditor shall be paid in ‘priority’ over all other debts.

The court observed that if the legislature confers the later enactment with a non-obstante clause, it means the legislature wanted the subsequent/later enactment to prevail. Thus, the court concluded that the ‘priority’ conferred/provided under Section 26E of the SARFAESI Act would prevail over the recovery mechanism of the MSMED Act.

Concluding Remarks

It is well settled that the rights of the secured creditor in respect of the security interest prevails over all other dues.