MSMED Act 'Dues' Will Not Prevail Over SARFAESI Proceedings : Supreme Court

The Supreme Court observed that the dues under Micro, Small and Medium Enterprises Development Act, 2006 would not prevail over the SARFAESI Act.

In this case, the Madhya Pradehs High Court held that MSMED Act will prevail over Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. According to the High Court, in view of Section 24 of the MSMED Act which provides that the provisions of Sections 15 to 23 of the MSMED Act would have overriding effect and shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force and in view of the fact that the MSMED Act being a later enactment, then the SARFAESI Act, the MSMED Act would prevail over the SARFAESI Act. 

In appeal, the Apex Court bench of Justices M R Shah and Krishna Murari noted the following aspects about relevant provisions of MSMED Act and SARFAESI Act.

(1) Under provisions of the MSMED Act, more particularly Sections 15 to 23, no 'priority' is provided with respect to the dues under the MSMED Act, like Section 26E of the SARFAESI Act.

(2) Section 26E of the SARFAESI Act which has been inserted vide Amendment in 2016, it provides that 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

Considering this, while allowing the appeal, the bench observed:

"The object and purpose of the enactment of SARFAESI Act is required to be considered. SARFAESI Act has been enacted to regulate securitization and reconstruction of financial assets and enforcement of security interest and to provide for a central debts of security interest created on property rights, and for matters connected therewith or incidental thereto. Therefore, SARFAESI Act has been enacted providing specific mechanism / provision for the financial assets and security interest. It is a special legislation for enforcement of security interest which is created in favour of the secured creditor – financial institution. Therefore, 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 Section 26E of the SARFAESI Act would be frustrated. If the submission on behalf of respondent No.1 is accepted, then in that case, Section 26E of the SARFAESI Act would become nugatory and would become otiose and/or redundant. Any other contrary view would be defeating the provision of Section 26E of the SARFAESI Act and also the object and purpose of the SARFAESI Act."

Case details

Kotak Mahindra Bank Limited vs Girnar Corrugators Pvt. Ltd | 2023 LiveLaw (SC) 12 | CA 6662 OF 2022 | 5 Jan 2023 | Justices M R Shah and Krishna Murari

For Appellant(s) Mr. Himanshu Bhushan, Adv. Mr. Krishnayan Sen, AOR

For Respondent(s) Mr. Pulkit Tare, AOR Mr. Aditya Shekhar, Adv. Mr. Arjun Garg, AOR

Headnotes

SARFAESI Act ; Section 26E - MSMED Act, ; Sections 15-23 - 'Priority’ conferred / provided under Section 26E of the SARFAESI Act would prevail over the recovery mechanism of the MSMED Act.

SARFAESI Act ; Section 14, 17 - Neither District Magistrate nor Metropolitan Magistrate would have any jurisdiction to adjudicate and/or decide the dispute even between the secured creditor and the debtor. 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. (Para 10)

Interpretation of Statutes - If the legislature confers the later enactment with a non-obstante clause, it means the legislature wanted the subsequent / later enactment to prevail.

Click here to Read/Download Judgment