Supreme Court: MSMED Act ‘Dues’ Will Not Be Prevailed Over SARFAESI

The Supreme Court in the case Kotak Mahindra Bank Limited vs Girnar Corrugators Pvt. Ltd observed and has stated that the dues under Micro, Small and Medium Enterprises Development Act, 2006 would not be prevailed over the SARFAESI Act. In the present case, it has been held by the Madhya Pradesh High Court that the MSMED Act will prevail over Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. As per the High Court, in view of Section 24 of the MSMED Act which provides that the provisions of Section 15 to Section 23 of the MSMED Act which would have an overriding effect and shall have effect notwithstanding anything inconsistent therewith which is contained in any other law for the time being in force and in view of the fact that the MSMED Act being a later enactment, then the MSMED Act and the SARFAESI Act would be prevailing over the SARFAESI Act. In an appeal, the Apex Court bench comprising of Justice M R Shah and Justice Krishna Murari observed and has noted the following aspects about relevant provisions of MSMED Act and SARFAESI Act. (1) Under the provisions of the MSMED Act, more particularly with regards to Section 15 to Section 23, no ‘priority’ is being provided with respect to the dues under the MSMED Act, as stated under Section 26E of the SARFAESI Act. (2) Section 26E of the SARFAESI Act which has been inserted vide Amendment in 2016, wherein providing that notwithstanding anything inconsistent therewith contained in any other law for the time being in force, after the registration of security interest, the debts which are being due to any of the secured creditor and the same shall be paid in ‘priority’ over all other debts and all the revenue taxes and cesses and the other rates which are payable to the Central Government or State Government or local authorities The bench while allowing the appeal observed that the purpose and object of the enactment of SARFAESI Act is required to be considered. Thus, the 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 which are created on property rights, and for the matters which are being connected therewith or incidental thereto. Therefore, the said SARFAESI Act has been enacted providing specific mechanism / provision for the financial assets and security interest. It being a special legislation for enforcement of security interest which is created in favour of the secured creditor – financial institution. In relation with the 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 be prevailing 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. If the court accepted 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. Further, in view of any other contrary view would be defeating the provision of Section 26E of the SARFAESI Act and also the object and purpose of the SARFAESI Act.