The Supreme Court of India ('Supreme Court') in the case of Kotak Mahindra Bank Limited vs. Girnar Corrugators Pvt. Ltd. and Ors.1 has 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').

Brief Facts

The Kotak Mahindra Bank Limited ("Appellant") initiated recovery proceedings on account of default by a debtor under Section 13(2) of the SARFAESI Act. The Appellant's application to seek assistance from the District Magistrate to take possession of the secured assets was allowed, following which the Sub Divisional Magistrate, then directed the Naib Tehsildar to acquire possession.

However, the Naib Tehsildar observed that a recovery certificate had already been issued in favour of another creditor under the MSMED Act and refused to take possession since the MSMED Act was a special enactment that came into effect after the SARFAESI Act. As such, it would take precedence over the provisions of the SARFAESI Act ("Tehsildar's Order").

The Tehsildar's Order was challenged in a writ petition before the Madhya Pradesh High Court. The Single Judge declared that provisions of the SARFAESI Act would take precedence. The Single Judge's decision was challenged before the Division Bench of the High Court where the Division Bench held that since the MSMED Act was a later enactment, it will not take precedence over the provisions of the SARFAESI Act. The Appellant challenged the Division Bench's judgement before the Supreme Court.

Issue

The issue before the Supreme Court was whether recovery proceedings/recoveries under the MSMED Act would prevail over the recoveries made/recovery proceedings under provisions of the SARFAESI Act.

Findings

The Supreme Court held as under:

  1. The MSMED Act's provisions, more specifically Sections 15 to 23 do not have a "priority" clause for payment of dues under the MSMED Act over dues made under any other enactment. Section 26E of the SARFAESI Act provides precedence to the secured creditors in payment of their dues.
  2. Section 26E of the SARFAESI Act was inserted by way of an amendment in 2016. The provision states 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.
  3. While both the sections, Section 24 of the MSMED Act and Section 26E of the SARFAESI Act have a non-obstante clause, Section 26E 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.
  4. According to the established legal position, 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.
  5. Furthermore, Tehsildar's Order for not taking possession was without jurisdiction because neither the Naib Tehsildar nor the District Magistrate have 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.

Accordingly, the appeal was allowed, and the impugned judgment of the Division Bench of Madhya Pradesh High Court was set aside. The judgment of the Single Judge was thereby restored.

JSA Comment

The Supreme Court has emphasized the importance of recovery proceedings under the SARFAESI Act taking precedence over other recovery dues by way of Section 26E. The judgment has its significance rooted in the fact that in future litigations, the dues of secured creditors will have to be paid first in contrast to other dues pending under the provisions of the MSMED Act.

Footnote

1. 2023 SCC OnLine SC 15.

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