Recoveries under SARFAESI Act with respect to secured assets would prevail over recoveries under MSMED Act: SC

Case Details: Kotak Mahindra Bank Ltd. v. Girnar Corrugators (P.) Ltd. - [2023] 146 taxmann.com 119 (SC)[05-01-2023]

Judiciary and Counsel Details

• • M.R. Shah & Krishna Murari, JJ.

Facts of the Case

In the instant case, debtor was advanced various credit facilities by the appellant bank. In order to secure the credit facilities, certain plots were mortgaged by the debtor along with certain movable fixed assets. Later, due to debt default, the bank started recovery actions regarding the secured assets covered by Section 13(2) of the SARFAESI Act.

The bank, being the secured creditor filed an application before the District Magistrate under Section 14 of the SARFAESI Act seeking assistance from District Magistrate for taking possession of the secured assets. The district magistrate subsequently approved the same and issued directions to Naib Tehsildar for obtaining possession.

Consequently, Naib Tehsildar refused to take possession on the ground that recovery proceeding was pending for recovery of certain amounts under the provisions of MSMED Act. Naib Tehsildar observed that 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.

Consequently, the question of whether the MSMED Act will prevail and have the overriding effect over the SARFAESI, 2002 was raised.

It was observed that SARFAESI Act had been enacted providing specific mechanism/provision for financial assets and security interest. It is a particular piece of legislation designed to help secured creditors to enforce their security interests.

In contrast, unlike section 26E of the SARFAESI Act, the MSMED Act does not grant secured creditors any priority over their debt obligations. At the most, decree/order/award passed by Facilitation Council shall be executed as such and MSME in whose favour award or decree has been passed by Facilitation Council shall be entitled to execute same like other debts/creditors.

Supreme Court Held

The Hon’ble SC held that the Naib Tehsildar was not at all justified in not taking possession of the secured assets / properties as per order passed by the District Magistrate under Section 14 of the SARFAESI Act.

The Hon’ble Supreme Court further held that in order to recover the money due under the award or decree issued by the Facilitation Council, recoveries under the SARFAESI Act, 2002 with regard to the secured assets would take precedence over recoveries under the MSMED Act, 2006.