The Battle of MSMED Act v. SARFAESI Act - Views of the Supreme Court

 

INTRODUCTION

 

In the recent case of Kotak Mahindra Bank Limited v. Girnar Corrugators Pvt. Ltd., 2023 SCC OnLine SC 15, an interesting question arose before the Hon’ble Supreme Court that: -

 

Whether the Recovery Proceedings under MSMED Act (Micro, Small and Medium Enterprises Development Act, 2006) would prevail over the Recovery Proceedings of the SARFAESI Act (Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002)?

 

REASONING OF THE COURT

 

To answer this question, the Court began its discussion by perusing the provisions of the MSMED Act that provide for a special mechanism for adjudication of contractual and business disputes such as time limit for payments and interest in case of delayed payments. Section 15 to Section 23 of the MSMED Act provide for such adjudicatory mechanism and Section 24 of the MSMED Act is a non-obstante clause that categorically states 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.”

 

The Court also observed that though Section 24 provides for an overriding effect, yet it does not provide for giving ‘priority’ for payments under the MSMED Act over the dues of the Secured Creditors or over any taxes that are payable to any Government under the SARFAESI Act. This is because of Section 26E of the SARFAESI Act that was inserted in the year 2016. It provides that: -

 

“Priority to secured creditors. —Notwithstanding anything 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 revenues, taxes, cesses and other rates payable to the Central Government or State Government or local authority.

 

Explanation. —For the purposes of this section, it is hereby clarified that on or after the commencement of the Insolvency and Bankruptcy Code, 2016 (31 of 2016), in cases where insolvency or bankruptcy proceedings are pending in respect of secured assets of the borrower, priority to secured creditors in payment of debt shall be subject to the provisions of that Code.”

 

Thus, after reading Section 26E, following important points emerge: -

 

a. It provides ‘priority’ to Unsecured Creditors in unequivocal terms, being only subject to the provisions of the Insolvency and Bankruptcy Code.

 

b. Since Section 26E was inserted in the SARFAESI Act vide Amendment Act of 2016; hence, enactment of Section 26E is later in point of time than the MSMED Act of 2006.

 

c. Section 26E of the SARFAESI Act is also a non-obstante clause like Section 24 of the MSMED Act.

 

d. It is a settled principle of statutory interpretation that when there are two enactments having competing non-obstante clauses, then the non-obstante clause of the subsequent statute would prevail over the earlier enactments. This reasoning derives strength from the observation of the Court that “if the legislature confers the later enactment with a non-obstante clause, it means the legislature wanted the subsequent/later enactment to prevail.”

 

e. Further, as stated earlier, unlike Section 26E of the SARFAESI Act, the provisions of the MSMED Act do not provide for any ‘priority’ over the debt dues of the Secured Creditor and thus, as such, there is no repugnancy or conflict between the schemes of the MSMED Act and the SARFAESI Act, “as far as the specific subject of ‘priority’ is concerned.”

 

The Court also discussed the object and purpose of the SARFAESI Act. “The 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.”

 

Whereas no such specific provision for ‘priority’ of dues is present under the MSMED Act. And if MSMED Act of 2006 is allowed to prevail simply on the ground that it is an enactment later in point of time than the SARFAESI Act of 2002, then not only the entire object and purpose of the SARFAESI Act would be frustrated, but also it would make Section 26E of the SARFAESI Act as nugatory, otiose and redundant. Therefore, any such interpretation is liable to be repelled.

 

HELD BY THE COURT

 

Hence, according to the Hon’ble Supreme Court, “recoveries under the SARFAESI Act with respect to the secured assets would prevail over the recoveries under the MSMED Act” and any person aggrieved by actions of the authorities under the SARFAESI Act, then statutory remedies provided therein may be resorted to.

 

CONCLUDING REMARKS

 

I totally concur with the reasoning of the Court simply because Section 26E was inserted vide a subsequent law i.e., Amendment Act of 2016. An Amendment Act has the same force of law as any other parent statute and an Amendment Act cannot be put at a lower pedestal than any other statute.

 

If the date of enactment of parent statutes would be considered for deciding the applicability of the provisions, then the whole purpose of introducing provisions vide an Amendment Act would be an exercise in futility and neither such an interpretation could be permitted, nor such an approach is to be allowed to prevail.