2023 (1) TMI 244 - SC - Indian Laws

Recovery proceedings - default in payment of loan / debt - whether recovery proceedings / recoveries under the MSMED Act would prevail over the recoveries made / recovery proceedings under provisions of the SARFAESI Act? - HELD THAT - Sections 15 to 23 of the MSMED Act are providing a special mechanism for adjudication of the disputes and to adjudicate and resolve the disputes between the supplier and buyer micro or small enterprise - it is observed that MSMED Act does not provide any priority over the debt dues of the secured creditor akin to Section 26E of the SARFAESI Act. At the most, the decree / order / award passed by the Facilitation Council shall be executed as such and the micro or small enterprise in whose favour the award or decree has been passed by the Facilitation Council shall be entitled to execute the same like other debts / creditors. Therefore, considering the provisions of Sections 15 to 23 read with Section 24 of the MSMED Act and the provisions of the SARFAESI Act, as such, there is no repugnancy between two enactments viz. SARFAESI Act and MSMED Act. As such, there is no conflict between two schemes, i.e. MSMED Act and SARFAESI Act as far as the specific subject of 'priority' is concerned. The object and purpose of the enactment of SARFAESI Act is required to be considered. SARFAESI Act has been enacted to regulate securitization and reconstruction of financial assets and enforcement of security interest and to provide for a central debts of security interest created on property rights, and for matters connected therewith or incidental thereto. Therefore, SARFAESI Act has been enacted providing specific mechanism / provision for the financial assets and security interest. It is a special legislation for enforcement of security interest which is created in favour of the secured creditor financial institution. Therefore, in absence of any specific provision for priority of the dues under MSMED Act, if the submission on behalf of respondent No.1 for the dues under MSMED Act would prevail over the SARFAESI Act, then in that case, not only the object and purpose of special enactment / SARFAESI Act would be frustrated, even the later enactment by way of insertion of Section 26E of the SARFAESI Act would be frustrated. Even otherwise the Naib Tehsildar was not at all 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 order passed by the Naib Tehsildar refusing to take possession of the secured assets / properties despite the order passed under Section 14 of the SARFAESI Act on the ground that recovery certificates issued by respondent No.1 for recovery of the orders passed by the Facilitation Council are pending, is wholly without jurisdiction. The impugned judgment and order passed by the Division Bench of the High Court is unsustainable and the same deserves to be quashed and set aside - Appeal allowed.

Summary

Issues Involved:
1. Whether the MSMED Act would prevail over the SARFAESI Act in recovery proceedings.
2. Whether the Naib Tehsildar was justified in refusing to take possession of secured assets under the SARFAESI Act due to pending recovery certificates under the MSMED Act.

Issue-wise Detailed Analysis:

1. Prevalence of MSMED Act over SARFAESI Act in Recovery Proceedings:
The core issue was whether the provisions of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) would take precedence over the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) in recovery proceedings. The Division Bench of the High Court had ruled that the MSMED Act, being a later enactment, would prevail over the SARFAESI Act. However, the Supreme Court overturned this decision, emphasizing that the MSMED Act does not provide any specific express provision giving 'priority' for payments over the dues of secured creditors, unlike Section 26E of the SARFAESI Act, which explicitly states that debts due to secured creditors shall be paid in priority over all other debts. The Supreme Court further noted that Section 26E, inserted in 2016, includes a non-obstante clause, indicating the legislature's intent for it to prevail over earlier enactments, including the MSMED Act. Therefore, the Court concluded that the 'priority' conferred under Section 26E of the SARFAESI Act would prevail over the recovery mechanism of the MSMED Act.

2. Justification of Naib Tehsildar's Refusal to Take Possession of Secured Assets:
The Naib Tehsildar had refused to take possession of the secured assets as directed by the District Magistrate under Section 14 of the SARFAESI Act, citing pending recovery certificates under the MSMED Act. The Supreme Court found this refusal to be wholly without jurisdiction. It clarified that under Section 14 of the SARFAESI Act, the District Magistrate or Chief Metropolitan Magistrate is required to assist the secured creditor in obtaining possession of the secured assets and does not have the jurisdiction to adjudicate disputes between the secured creditor and debtor. The Court stated that any person aggrieved by the steps taken under Section 13(4) or the order passed under Section 14 should approach the Debts Recovery Tribunal under Section 17 of the SARFAESI Act. Consequently, the order passed by the Naib Tehsildar was set aside.

Conclusion:
The Supreme Court quashed the impugned judgment and order of the Division Bench of the High Court, restoring the judgment of the Single Judge, which held that recoveries under the SARFAESI Act with respect to secured assets would prevail over recoveries under the MSMED Act. The Court reiterated that if any party is aggrieved by the order passed under Section 14 of the SARFAESI Act, they may initiate proceedings under Section 17 of the SARFAESI Act. The appeal was allowed with no order as to costs.