Supreme Court of India · 5 January 2023
Kotak Mahindra Bank Ltd v. Girnar Corrugators Pvt Ltd
(2023) 3 SCC 210 · SARFAESI Act Prevails Over MSMED Act
Court
Supreme Court of India
Bench
M.R. Shah & Krishna Murari, JJ.
Decided
5 January 2023
Citation
(2023) 3 SCC 210
Background & Facts
Kotak Mahindra Bank was the secured creditor of a borrower, Mission Vivacare, whose plots in the SEZ area of Dhar and certain movable fixed assets were mortgaged to the bank. On default, the bank proceeded under Section 13(2) of the SARFAESI Act, 2002 and, on 24 September 2014, obtained an order of the District Magistrate under Section 14 for taking possession of the secured assets. Girnar Corrugators Pvt Ltd held an award of the Facilitation Council dated 11 September 2014 under the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, and recovery certificates had been issued on it against the same assets. On 21 March 2016 the Naib Tehsildar refused to take possession for the bank, citing the pending recovery and observing that the MSMED Act, as a later special enactment, would prevail.
A Single Judge of the Madhya Pradesh High Court allowed the bank's writ petition and set the Naib Tehsildar's order aside. On 11 August 2017 a Division Bench at Indore reversed, holding that the MSMED Act, being the later enactment, prevails over the SARFAESI Act. Kotak Mahindra Bank appealed, contending that Section 24 of the MSMED Act gives overriding effect only to Sections 15 to 23, which create no priority for MSME dues, whereas Section 26E of the SARFAESI Act, inserted in 2016 with its own non-obstante clause, expressly gives priority to secured creditors.
The Supreme Court was therefore required to decide which statute prevails where the dues of an MSME under the MSMED Act, 2006 compete with the dues of a secured creditor enforcing its security under the SARFAESI Act, 2002 over the same assets.
Key Issues Before the Court
Holdings of the Court
Holding 1 — SARFAESI Act Prevails Over the MSMED Act
The Court held that Sections 15 to 23 of the MSMED Act “only provide for special mechanism for adjudication of the dispute” and related contractual terms such as time limits and interest on delayed payment. In the entire MSMED Act there is no specific express provision giving priority to payments under it over the dues of secured creditors. At most, a Facilitation Council award may be executed “like other debts / creditors”. There is therefore no repugnancy between the two Acts on the subject of priority, and recoveries under the SARFAESI Act with respect to the secured assets prevail over recoveries under the MSMED Act award.
Holding 2 — Section 26E Gives Secured Creditors Priority
The Court relied on Section 26E of the SARFAESI Act, inserted in 2016, under which, notwithstanding anything inconsistent in any other law, after registration of the security interest the debts due to a secured creditor are paid in priority over all other debts and all revenues, taxes, cesses and other rates payable to the Central Government, State Government or local authority. The Court noted that this priority is subject to the provisions of the Insolvency and Bankruptcy Code. As against dues under a Facilitation Council award, the secured creditor's debts therefore have priority.
Holding 3 — The Later Non-Obstante Clause in Section 26E Prevails
Accepting the respondent's own premise that, between two competing non-obstante provisions, the later enactment prevails, the Court noted that Section 26E is itself a later provision (2016) with a non-obstante clause. A “priority” under Section 26E would therefore prevail over the recovery mechanism of the MSMED Act. Holding otherwise would make Section 26E “nugatory” and frustrate the object of the SARFAESI Act as a special legislation for enforcement of security interest.
Holding 4 — Section 14 Authorities Cannot Adjudicate
The Naib Tehsildar's refusal to take possession under the District Magistrate's Section 14 order was “wholly without jurisdiction”. Under Section 14, the District Magistrate or Chief Metropolitan Magistrate is required to assist the secured creditor in getting possession and has no jurisdiction to adjudicate disputes; a person aggrieved by measures under Section 13(4) or an order under Section 14 must approach the Debts Recovery Tribunal under Section 17. The Division Bench's judgment was set aside and the Single Judge's judgment restored.
Practical Implications for Creditors
Kotak Mahindra Bank v. Girnar Corrugators confirms the priority of secured creditors enforcing under the SARFAESI Act against MSME claimants. For banks, NBFCs and ARCs, it holds that recovery under a Facilitation Council award does not displace the secured creditor's priority over the secured assets. Section 26E operates after registration of the security interest, and is subject to the IBC where insolvency or bankruptcy proceedings are pending in respect of the secured assets.
Section 31B of the RDB Act, inserted by the same 2016 amendment, contains a parallel priority for secured creditors. MSME suppliers, conversely, should be alive to the limits of MSMED Act recovery where the counterparty's assets are already charged to a secured lender; the Court left it open to the MSME award-holder to challenge the Section 14 order under Section 17 of the SARFAESI Act.
Relevant Statutory Provisions
Practical Application Note
Where a secured creditor's SARFAESI enforcement competes with an MSME's recovery under a Facilitation Council award against the same assets, Kotak Mahindra Bank v. Girnar Corrugators confirms that the registered secured creditor's priority under Section 26E prevails, subject to the IBC. This note is general legal information, not legal advice. Our partner-led team advises banks, NBFCs and ARCs on SARFAESI enforcement and priority disputes with MSME and other claimants.