The Supreme Court of India recently pronounced a landmark judgement in the case of Kotak Mahindra Bank Limited vs. Girnar Corrugators Pvt. Ltd. and Ors., [https://indiankanoon.org/doc/34834631/] wherein it held that the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) for recovery of dues payable to a secured creditor will prevail over the provisions of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act).
The case arose when Kotak Mahindra Bank Limited initiated recovery proceedings against a debtor for default under Section 13(2) of the SARFAESI Act. The District Magistrate granted permission to the bank to take possession of the secured assets, following which the Naib Tehsildar refused to take possession on the ground that a recovery certificate had already been issued in favour of another creditor under the MSMED Act, which was a later enactment and would take precedence over the SARFAESI Act. The matter was taken to the Madhya Pradesh High Court, where the Division Bench held that the provisions of the SARFAESI Act would prevail over those of the MSMED Act.
The issue before the Supreme Court was whether recovery proceedings/recoveries under the MSMED Act would take precedence over the recoveries made/recovery proceedings under provisions of the SARFAESI Act. The Supreme Court, after examining the provisions of both Acts, held that the SARFAESI Act would prevail over the MSMED Act. The Court observed that the provisions of the MSMED Act, more specifically Sections 15 to 23, did not have a priority clause for payment of dues under the MSMED Act over dues made under any other enactment. On the other hand, Section 26E of the SARFAESI Act provided precedence to secured creditors in payment of their dues.
The Court also noted that Section 26E of the SARFAESI Act was inserted by way of an amendment in 2016 and it provided that after a security interest has been registered, debts owed to any secured creditor must be paid in priority over all other debts as well as all revenue taxes, cesses, and other rates owed to the statutory authorities. While both Acts had a non-obstante clause, Section 26E of the SARFAESI Act was enacted later in time than the MSMED Act, and as such, dues relative to debts under the MSMED Act are to be paid in priority.
The Supreme Court also relied on the established legal position that when the legislature inserts a section having a non-obstante clause to a legislation later in time, it indicates that the legislature intended for the later enactment having the non-obstante clause to take precedence.
The Court also noted that the Tehsildar’s Order for not taking possession was without jurisdiction because neither the Naib Tehsildar nor the District Magistrate had the authority to adjudicate a dispute between a secured creditor and a debtor under Section 14 of the SARFAESI Act. The District Magistrate under Section 14 is only required to assist the secured creditor in getting possession of the secured assets.
In conclusion, the Supreme Court has clarified that the provisions of the SARFAESI Act for recovery of dues payable to a secured creditor will prevail over the provisions of the MSMED Act. This judgement has significant implications for the banking and financial sector, as it reinforces the primacy of the SARFAESI Act in debt recovery proceedings. It also provides much-needed clarity on the priority of dues under the two Acts and establishes a legal precedent for future cases.
