Dues under MSMED Act will not prevail over SARFAESI Proceedings

In the case of Kotak Mahindra Bank Ltd. v Girnar Corrugators Pvt Ltd decided by Hon’ble Supreme Court on 05.01.2023.

FACTS

The present appeal is preferred by Kotak Mahindra Bank ltd against the Judgment dated 11.08.2017 of the Division Bench of the High Court of Madhya Pradesh  in Writ Appeal No. 248 of 2017, by which the Division bench has observed and held that Micro, Small and Medium Enterprises Development Act, 2006 (hereinafter referred to as ‘MSMED Act’) will prevail over Securitisation and Reconstruction of Financial assets and Enforcement of Security Interest Act, 2002 (hereinafter referred to as ‘SARFAESI Act’).

One Mission Vivacare (hereinafter referred to as ‘debtor’) advanced various credit facility by the Kotak Mahindra Bank and further defaulted in payment of loan/ debt. The Bank initiated recovery proceedings under Section 13(2) of the SARFAESI Act. The bank then filed an application before the District Magistrate under Section 14 of the SARFAESI Act seeking assistance from taking possession of the secured assets. The District Magistrate allowed the application on 24.09.2014 however no action was taken. Finally, SDM issued direction to the Naib Tehsildar to comply the order of the District Magistrate.

Thereafter the Naib Tehsildar refused to take possession on the ground that one recovery proceeding is pending for recovery of certain amount from the secured assets and recovery certificate is issued in favour of Girnar Corrugators Pvt Ltd (herein after referred to as Respondent no. 1) under the provisions of MSMED Act. The order of the Naib Tehsildar was subject to matter of writ petition before the learned Single Judge of the High Court by way of Writ Petition No.2569 of 2016.

The Ld Single Judge allowed the writ petition and set aside the order passed by Naib Tehsildar by observing that the SARFAESI Act will prevail over MSMED Act. Feeling aggrieved Respondent No. 1 filed a writ appeal and the Division Bench vide impugned judgment allowed the appeal and observed that the MSMED Act being the later enactment shall prevail over SARFAESI Act.

Hence the Present appeal.

OBSERVATION

The Hon’ble Supreme Court observed that in the entire MSMED Act there is no provision giving priority for payments under the MSMED Act over the dues of the secured creditors or over any taxes or cesses payable to Central Government or State Government or Local Authority as the case may be. In sharp contrast to this, 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 Authority. However, the priority to secured creditors in payment of debt as per Section 26E of the SARFAESI Act shall be subject to the provisions of the Insolvency and Bankruptcy Code.

The Bench further held that in Section 15 to 23 of MSMED Act,no priority is provided with respected to the dues under MSMED Act like Section 26E of the SARFAESI ACT, 2002.

The Hon’ble Court while setting aside the Division Bench judgment and allowing the appeal further observed that so far as 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.