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 & C.T. Ravikumar, JJ.
Decided
5 January 2023
Citation
(2023) 3 SCC 210
Background & Facts
Kotak Mahindra Bank was a secured creditor that had financed a borrower against the security of its assets and had taken steps to enforce its security under the SARFAESI Act, 2002. Girnar Corrugators Pvt Ltd, a micro/small enterprise, had supplied goods and obtained an award/recovery in its favour under the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 for delayed payment. A contest arose over the proceeds of the secured assets — Girnar Corrugators claimed that its MSME dues had priority over the bank's secured dues.
The High Court had, by the judgment under appeal, ruled in a manner favourable to the MSME claimant. Kotak Mahindra Bank appealed to the Supreme Court, contending that the SARFAESI Act — a special law for enforcement of security interests, carrying a non-obstante clause and an express priority for secured creditors under Section 26E — must prevail over the MSMED Act, which contains no provision conferring priority on MSME dues over 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 Supreme Court held that the SARFAESI Act, 2002 prevails over the MSMED Act, 2006. The MSMED Act contains no provision conferring priority on the dues of an MSME over the dues of a secured creditor. In the absence of any such specific priority provision, the dues under the MSMED Act cannot prevail over the rights of a secured creditor enforcing its security under the SARFAESI Act.
Holding 2 — Section 26E Gives Secured Creditors Priority
The Court relied on Section 26E of the SARFAESI Act (inserted by the 2016 Amendment), which provides that, notwithstanding anything inconsistent in any other law, the debts due to a secured creditor shall be paid in priority over all other debts and revenues, taxes, cesses and other rates. Read with the non-obstante clause in Section 35, this gives the secured creditor's dues precedence; the proceeds of a SARFAESI enforcement sale must first satisfy the secured creditor and cannot be diverted to an MSMED Act claim ahead of the bank.
Holding 3 — Later, Special Law With Express Priority Governs
Applying the settled principles for resolving conflicts between two special statutes, the Court held that the SARFAESI Act — being the later enactment (as amended in 2016) and the one that expressly creates a priority in favour of secured creditors — must govern. The MSMED Act's mechanism for recovery of delayed payments (Sections 15–23, including the Facilitation Council's award) does not, by itself, displace the secured creditor's statutory priority.
Practical Implications for Creditors
Kotak Mahindra Bank v. Girnar Corrugators is a leading authority confirming the primacy of secured creditors enforcing under the SARFAESI Act. For banks, NBFCs and ARCs, it settles that an MSME's recovery under an MSMED Act award does not leapfrog the secured creditor's priority over the security or its sale proceeds. A secured creditor that has registered its security interest and proceeds under the SARFAESI Act can recover from the secured assets ahead of an MSME claimant.
The decision is frequently cited alongside the broader line of authority on the priority of secured creditors (including the position on Crown/Government dues), and reinforces that Section 26E of the SARFAESI Act and Section 31B of the RDB Act give registered secured creditors a robust statutory priority. 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.
Relevant Statutory Provisions
Practical Application Note
Where a secured creditor's SARFAESI enforcement competes with an MSME's claim under the MSMED Act over the same assets, Kotak Mahindra Bank v. Girnar Corrugators confirms that the registered secured creditor's priority under Section 26E prevails. 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.