CASE TITLE:
Kotak Mahindra Bank Limited v. Girnar Corrugators Pvt. Ltd. & Ors.
DATE OF ORDER:
5 January 2023.
JUDGE(S):
Justice M. R. Shah, Krishna Murari.
PARTIES:
Petitioner: Kotak Mahindra Bank Limited.
Respondent: Girnar Corrugators Pvt. Ltd. & Ors.
SUBJECT:
The present case deals with an appeal filed by Kotak Mahindra Bank because the Division Bench of the High Court had allowed the appeal of the respondent, quashed the judgment and order passed by the Single Judge, and held that the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) would prevail over the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). The bank felt aggrieved and dissatisfied by this decision and thus filed the appeal.
BRIEF FACTS:
- One Mission Vivacare (the debtor) had taken out a loan from the appellant bank (the secured creditor). To secure this loan, the debtor had mortgaged two plots of land (Plot Nos. 16 and 14) located in the SEZ Area of Dhar, along with certain movable fixed assets.
- In this case, the bank filed an application before the District Magistrate under Section 14 of the SARFAESI Act seeking assistance in taking possession of the secured assets.
- The District Magistrate allowed the application and directed the SDM to take vacant possession of the secured assets. However, no action was taken and so the bank submitted applications to the District Magistrate and the SDM complaining non-compliance of the order.
- The SDM then issued a direction to the Naib Tehsildar to comply the order of the District Magistrate and obtain the possession. The Naib Tehsildar refused to take possession, citing a recovery certificate issued in favour of respondent No.1 pursuant to the award passed by the Facilitation Council under the MSMED Act.
- The Naib Tehsildar argued that the MSMED Act, being a special enactment enacted subsequent to SARFAESI Act, would have overriding effect and therefore, MSMED Act would prevail over the SARFAESI Act.
- A writ petition was filed by a bank-secured creditor against the order passed by the Naib Tehsildar.
- The learned Single Judge allowed the writ petition and set aside the order by observing that the provisions of the SARFAESI Act would prevail.
- Respondent No.1, who had an award under the MSMED Act and in whose favour the recovery certificates were issued, filed an appeal before the Division Bench of the High Court.
- The Division Bench of the High Court allowed the appeal and set aside the judgment and order passed by the learned Single Judge. It observed and held that MSMED Act being the later enactment, the same shall prevail over the SARFAESI Act.
- The bank-secured creditor has now filed an appeal against the impugned judgment and order.
QUESTIONS RAISED:
- Whether the MSMED Act would prevail over the SARFAESI Act?
- Whether recovery proceedings / recoveries under the MSMED Act would prevail over the recoveries made / recovery proceedings under provisions of the SARFAESI Act?
ARGUMENTS ADVANCED BY THE APPELLANT:
The learned counsel Shri Amar Dave, the learned counsel for the appellant bank, has argued that there is no repugnancy between the provisions of the SARFAESI Act and the MSMED Act.
He further argued that Section 26E of the SARFAESI Act, an amendment made in 2016, should prevail over the provisions of the MSMED Act.
He argued that the recoveries under the SARFAESI Act should be given priority over those under the MSMED Act, and has prayed for the impugned judgment and order of the Division Bench to be quashed and the judgment and order of the learned Single Judge to be restored.
ARGUMENTS ADVANCED BY THE RESPONDENT:
- The respondent counsel vehemently opposed the present appeal and is arguing that the MSMED Act has been enacted to protect the interests of the small and medium scale enterprises, and provides aggressive provisions for the recovery of dues and compound interests.
- The counsel is further submitting that Section 24 of the MSMED Act provides for an overriding effect over other prevailing laws, with respect to recoveries under MSMED Act, and that the award from the Facilitation Council will also have an overriding effect by virtue of this section.
- The intention of the legislature, according to the counsel, is clear as the overriding provision is for a particular set of delayed payments recovery mechanism provided under MSMED Act.
- The counsel further submitted that the MSMED Act, which is a subsequent legislation, supersedes all recovery procedures that were in effect at the time of its enactment. The non-obstante clause in Section 24 of the MSMED Act is meant to give it precedence over other laws. This means that the decree, award or order passed under provisions of the MSMED Act shall be executed by the Collector of the District concerned and the amount due shall be recovered as arrears of land revenue.
- The SARFAESI Act does not provide that it will have precedence over a decree or award of the decree holder.
- Section 240A of the Insolvency and Bankruptcy Code, 2016 (IBC) provides an exception to certain provisions of Section 29A of the IBC for Micro, Small, and Medium Enterprises (MSMEs).
- The settled law is that the IBC will override the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act). Therefore, the MSMED Act should be considered in order to balance the larger public interest of the small and medium scale enterprises and their means of existence.
- It is argued that to strike the balance of interest for the survival of small and medium scale enterprises, the provisions should be interpreted in favor of the small and medium scale enterprises and that the recoveries under MSMED Act should prevail over the recoveries under SARFAESI Act.
ANALYSIS OF THE COURT:
- In this case, the respondent No.1 argued that because the MSMED Act is a later enactment than the SARFAESI Act, it should prevail over the SARFAESI Act. However, the court noted that while the MSMED Act does provide for a special mechanism for adjudication of disputes and enforcing certain other contractual and business terms on the parties, it does not provide any priority over the debt dues of the secured creditor akin to Section 26E of the SARFAESI Act.
- The court therefore submitted that there is no conflict between the two schemes, and that the priority conferred under Section 26E of the SARFAESI Act would prevail over the recovery mechanism of the MSMED Act.
- The SARFAESI Act is a special legislation enacted to regulate securitization and reconstruction of financial assets and enforcement of security interests. It provides a central registry of security interests created on property rights and provides a specific mechanism for dealing with these types of cases. The Act provides for the priority of dues under MSMED Act in absence of any specific provision. Section 26E of the SARFAESI Act is provided to ensure that the rights of the secured creditor are not overruled by other dues. I
- The Court noted that if the submission on behalf of the respondent is accepted, the provision of Section 26E would become redundant. Naib Tehsildar was not justified in not taking possession of the secured assets/properties as per order dated 24.09.2014 passed by the District Magistrate under Section 14 of the SARFAESI Act.
- The Court also noted that the District Magistrate or Chief Metropolitan Magistrate has no jurisdiction to adjudicate the dispute between secured creditor and debtor, and the aggrieved person has to approach the Debts Recovery Tribunal by way of appeal/application under Section 17 of the SARFAESI Act.
- The Division Bench of the High Court's judgment and order was found to be unsustainable and needed to be quashed and set aside. Therefore, the appeal was allowed and the judgment and order of the Single Judge was restored.
- It was observed that recoveries under the SARFAESI Act with respect to the secured assets would take precedence over recoveries under the MSMED Act to recover the amount under the award/decree passed by the Facilitation Council.
- It was also noted that if respondent No.1 was aggrieved by the order of the District Magistrate under Section 14 of the SARFAESI Act, he could initiate proceedings under Section 17 of the SARFAESI Act which would be considered in accordance with law and on its merits.
CONCLUSION
In conclusion, the Court held that the SARFAESI Act must take precedence over the MSMED Act with regard to recoveries of debt dues on secured assets. The Court also noted that if the respondent was aggrieved by the order of the District Magistrate under Section 14 of the SARFAESI Act, he could initiate proceedings under Section 17 of the SARFAESI Act which would be considered in accordance with law and on its merits
Click here to download the original copy of the judgement
