WHETHER MSMED ACT OVERRIDES SARFAESI ACT?

[Mr. M. GOVINDARAJAN]

SARFAESI Act

Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (‘Securitization Act’ for short) was formulated with an intent to empower banks to recover Non-Performing Assets (‘NPAs’ for short) without the intervention of a court. This law allows Indian banks and financial institutions to sell or auction the assets/properties of credit defaulters without any intervention from the courts.

Recovery procedure

Section 13 provides that where any borrower, who is under a liability to a secured creditor under a security agreement, makes any default in repayment of secured debt or any installment thereof, and his account in respect of such debt is classified by the secured creditor as non-performing asset, then, the secured creditor may require the borrower by notice in writing to discharge in full his liabilities to the secured creditor within 60 days from the date of notice failing which the secured creditor shall be entitled take recourse measures to recover his secured debt by taking possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realizing the secured asset.

Section 14 provides that the secured creditor may, for the purpose of taking possession or control of any such secured assets, request, in writing, the Chief Metropolitan Magistrate or the District Magistrate within whose jurisdiction any such secured asset or other documents relating thereto may be situated or found, to take possession thereof, and the Chief Metropolitan Magistrate or as the case may be, the District Magistrate shall, on such request being made to him-

• take possession of such asset and documents relating thereto; and
• forward such asset and documents to the secured creditor.

Section 26E, inserted with effect from 24.01.2020 relates to the priority or secured creditors and stipulates that notwithstanding anything contained in any other law for the time being in force, after the registration of a security interest, the debts due to the secured creditors shall be paid in priority over all the other debts and all revenues, taxes, cesses and other rates payable to the Central Government or State Government or Local Authority.

MSMED Act

Micro, Small and Medium Enterprises Development Act, 2006 (‘MSMED Act’ for short) is an Act to provide for facilitating the promotion and development and enhancing the competitiveness of micro, small and medium enterprises and for matters.  

Recovery procedure

Section 15 of the MSMED Act provides for the early payment by the creditors to MSMEs within the agreed period for payment.  If there is no agreement the same is to be paid within 45 days from the date of acceptance.  Section 16 and 17 provide that if there is a default in the payment the buyer is liable to pay compound interest at three times of the bank rate notified by Reserve Bank of India, along with the dues.  Section 23 provides that the payment of such interest shall not be taken for the computation of income and be taken as deduction.

Section 18 provides that if there is any due the same may be referred to MSE Facilitation Council constituted by the respective State Government under Section 20.  The Facilitation Council will make conciliation between the parties.  If the conciliation proceedings fail then the Facilitation Council itself take up the dispute for arbitration or refer the same to any institution or Centre providing alternate dispute resolution.  The dispute shall be decided within 90 days from the date of making such reference. 

Section 19 provides that the award can be challenged before the Court only after depositing 75% of the amount in terms of the decree.  Pending disposal of the application to set aside the decree, award or order, the court shall order that such percentage of the amount deposited shall be paid to the supplier, as it considers reasonable under the circumstances of the case, subject to such conditions as it deems necessary to impose.

Section 24 of the MSMED Act provides that the provisions of sections 15 to 23 shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force.

Overriding act

The SARFAESI Act as well as MSMED Act is facilitating recovery from the debtors but in different ways.  SARFAESI Act was enacted during the year 2002 and the MSMED Act was enacted during the year 2006.  If two enactments have competing non-obstante provision and nothing repugnant, then the non-obstante clause of the subsequent statute would prevail over the earlier enactments.  On this analogy one can infer that MSMED Act is prevailing over the provisions of SARFAESI Act. 

The Supreme Court of India in KOTAK MAHINDRA BANK LIMITED VERSUS GIRNAR CORRUGATORS PVT. LTD. & ORS.- 2023 (1) TMI 244 - SUPREME COURT, held that the SARFAESI Act prevails over the MSMED Act after having a detailed discussions after considering the submissions put forth by the parties to the appeal.

In the above case the appellant bank offered various credit facilities.  One ‘Mission Vivacare’ mortgaged various properties on the banks to get loan.  Since the loan was not repaid, the bank initiated recovery proceedings against the company.  The bank, being a secured creditor, filed a complaint before the District Magistrate on 17.06.2014 under Section 14 of the SARFAESI Act, seeking assistance from taking possession of the properties.  The District Magistrate on 24.09.2014 directed the SDM, Dhar to take possession of the properties.  Since no action was taken in this regard, the Bank filed an application before the District Magistrate.  The SDM complained about the non compliance of the order of District Magistrate.  On 07.11.2015 the SDM directed the Naib Tehsildar to take possession of the secured assets. 

The Naib Tehsildar refused to carry out the order of SDM on the ground that the recovery certificate issued in favor of the company is pending for the recovery of certain amounts from the said two assets under  the recovery certificate was issued on the basis of the award passed by the Facilitation Council under the provisions of MSMED Act.  Naib Tehsildar was of the opinion that MSMED Act, being a special enactment, enacted subsequent to the enactment of SARFAESI Act, the MSMED Act will prevail over the SARFAESI Act.

Against this order the bank filed a writ petition before the High Court.  The Single Judge allowed the appeal and set aside the impugned order.  The Single Judge observed that the provisions of SARFAESI Act would prevail.  If the respondent is aggrieved by the order of District Magistrate he may prefer an appeal before the Debts Recovery Tribunal under section 17 of the SARFAESI Act.  The Division Bench, on appeal held that MSMED Act would prevail over the SARFASEI Act.

Against the order of Division Bench, the Bank filed the present appeal before the Supreme Court.  The bank submitted the following before the Supreme Court-

• There is no repugnancy between the provisions of SARFAESI Act and MSMED Act.
• Non-obstante  clause in the MSMED Act, i.e. Section 24 provides that provisions under Sections 15 to 23 shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force.
• Sections 15 to 23 of the MSMED Act only provide for special mechanism for adjudication of the dispute along with enforcing certain other contractual and business terms on the parties such as time limit for payments and interest in case of delayed payments.
• There is no express 'priority' envisaged for payments under the MSMED Act over the dues of secured creditors or over any taxes or cesses payable to Central Government or State Government or Local Authority.
• The provisions of SARFAESI Act leave no room for doubt that the legislature has expressly and unambiguously provided for a legal framework exclusively on the issue of 'priority' of payment of dues.
• In certain legislations such as Central Excise Act, Workmen Compensation Act, there is express provision for the manner in which the dues there under may either have a charge over the property or have 'priority' over other dues.
• In the absence of such express provisions, there can be no basis to ignore the specific scheme of the SARFAESI Act in comparison to such specific scheme under the MSMED Act with regard to 'priority' of payments.
• Sections 26E of the SARFAESI Act, being subsequently inserted vide amendment in 2016, the non-obstante clause in Section 26E of the SARFAESI Act shall prevail over the provisions of MSMED Act.

In view of the above submissions, the appellant bank prayed the Supreme Court to allow their appeal and to quash and set aside the impugned judgment and order passed by the Division Bench and restore the order passed by the Single Judge.

The appeal was opposed by the respondent No.1.  The respondent No. 1submitted the following before the Supreme Court-

• The MSMED Act has been enacted to promote and protect the interests of the small and medium scale enterprises which is a source of livelihood for several citizens and contributes towards 27% to the GDP.
• The aggressive provisions were brought in for the recovery of dues and compound interests are given in MSMED Act which is not present in any other legislation and is in the nature of a beneficial legislation.
• The financial institutions have various other means of recovery including SARFAESI Act, Insolvency and Bankruptcy Code etc., as being a secured creditor to an extent of also taking personal guarantee from the Directors of the company in certain cases.
• Such liberty of taking personal guarantees etc., is not available to MSMEs.
• MSMEs have only one method of recovery by virtue of the award which is in the nature of a decree from the Facilitation Council.
• In the above said context, an overriding provision is provided under Section 24 of the MSMED Act.
• The entire scheme of provisions under Chapter V – Sections 15 to 23 which includes delayed payments, recovery of amounts due, and establishment of Facilitation Council and its award has an overriding effect on all other legislations including SARFAESI Act.
• The intention of the legislature is clear as the overriding provision is for a particular set of delayed payments recovery mechanism provided under MSMED Act which is also in consonance with object and purpose of the MSMED Act.
• If SARFAESI Act is given overriding effect over the MSMED Act, then it would render awards of the Facilitation Council as non-executable in all cases where there is a secured creditor.
• The above would severely affect the existence and growth of the MSME and is also against object of the MSMED Act.
• If two enactments have competing non-obstante provision and nothing repugnant, then the non-obstante clause of the subsequent statute would prevail over the earlier enactments.
• The decree, award or order passed under provisions of 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 land revenue would have first charge on the proceeds of the recovery of dues from the subject property.
• The SARFAESI Act does not provide that it will have precedence over a decree /award of the decree holder.
• Section 240A of the Insolvency and Bankruptcy Code, 2016 provides exception of certain provisions of Section 29A of the Insolvency and Bankruptcy Code  to MSME.
• The MSMED Act is an extension of the welfare policy of the State and may need to be considered in order to balance the larger public interest of the small and medium scale enterprises and their means of existence.

The respondent, therefore, prayed to interpret the provisions in favor of the small and medium scale enterprises and to hold that the recoveries under MSMED Act would prevail over the recoveries under SARFAESI Act to strike the balance of interest for survival of small and medium scale enterprises.

The Supreme Court considered the submissions put forth by the parties to the appeal.  The issues to be decided by the Supreme Court are-

• 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 the SARFAESI Act?

The Supreme Court considered the submissions of the respondent No. 1 that Section 24 of the MSMED Act provides that the provisions of Section 15 to 23 of the said Act would have overriding effect and shall have effect notwithstanding anything inconsistent therewith contained in other law for the time being in force.  The MSMED Act being a later enactment, the MSMED Act will prevail over the SARFAESI Act.

The Supreme Court observed that Sections 15 to 23 of the MSMED Act only provide for special mechanism for adjudication of the dispute along with enforcing certain other contractual and business terms on the parties such as time limit for payments and interest in case of delayed payments.  There is no specific express provision giving 'priority' for payments under the MSMED Act over the dues of the secured creditors or over any taxes or cesses payable to Central Government or State Government or Local Authority.

At the same time the Supreme Court observed that Section 26E of the SARFAESI Act which has been inserted vide Amendment in 2016, provides that notwithstanding anything inconsistent therewith contained in any other law for the time being in force, after the registration of security interest, the debts due to any secured creditor shall be paid in ‘priority’ over all other debts and all revenue taxes and cesses and other rates payable to the Central Government or State Government or Local Authority.  The provisions of SARFAESI Act are subject to the provisions of the Insolvency and Bankruptcy Code. 

The contentions of the respondent No. 1 is that when two enactments have competing non-obstante provision and nothing repugnant, then the non-obstante clause of the subsequent statute would prevail over the earlier enactments.  It means the legislature wanted the subsequent / later enactment to prevail. Therefore the Supreme Court was of the opinion that a ‘priority’ conferred / provided under Section 26E of the SARFAESI Act. 

Then the Supreme Court observed 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.  The Act does not provide any priority over the debt dues of the secured creditor akin to Section 26E of the SARFAESI Act.  The award passed by the Facilitation Council shall be entitled to execute the same like other debts / creditors. 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.  There is no conflict between the two schemes.

Then the Supreme Court considered the objects and purpose of the enactment of SARFAESI Act.  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 favor of the secured creditor – financial institution.   If the submission on behalf of respondent No.1 is accepted, then in that case, Section 26E of the SARFAESI Act would become nugatory and would become otiose and/or redundant.

The Supreme Court further observed that 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 for the reason the recovery certificate under MSMED Act is pending and also without jurisdiction.  Even the District Magistrate is not having jurisdiction in this regard to decide the dispute.  The District Magistrate is only to give assistance the secured creditor to take over the assets.   If any person is

aggrieved by the steps under Section 13(4) / order passed under Section 14, then the aggrieved person has to approach the Debts Recovery Tribunal by way of appeal / application under Section 17 of the SARFAESI Act.

Therefore the Supreme Court set aside the order passed by the Naib Tehsildar and also set aside the order of Division Bench and restored the order of the Single Judge holding that the provisions of SARFAESI Act would prevail over the provisions of MSMED Act.  The Supreme Court advised the respondent No. 1 that if it is aggrieved by the order passed by the District Magistrate under Section 14 of the SARFAESI Act, it will be open for him to initiate proceedings under Section 17 of the SARFAESI Act which be considered in accordance with law and on its merits and subject to the provisions of Section 17 and the provisions of the SARFAESI Act.

Conclusion

Even though there is non-obstante class in both SARFAESI Act and MSMED Act. The MSMED Act is silent on the payment of dues under this Act on priority basis whereas in the SARFAESI Act Section 26E it is provided that the secured creditors are having the priority over the other dues.  On that basis Supreme Court held that SARFAESI Act overrides the provisions of MSMED Act.