MSMED Act Does Not Prevail Over SARFAESI Act In Recovery Of Secured Assets: Kerala High Court

The Kerala High Court on Thursday held that provisions of the Micro, Small and Medium Enterprises Development Act, 2006 (‘MSMED Act') would not prevail over those of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ('SARFAESI Act') with respect to recovery of secured assets. 

It thus went on to state when any person is aggrieved by the course for recovery adopted by the secured creditor under Section 13 of the SARFAESI Act, which provides for 'Enforcement of Security Interest', they could approach the Tribunal constituted under the enactment, against the same, regardless of the aggrieved person being a proprietor of an enterprise registered under the MSMED Act. 

Noting that Section 17 of SARFAESI Act ('Application against measures to recover secured debts') is a 'complete code' providing remedies to any person aggrieved by the measures taken by the secured creditor, Justice K. Babu observed:

"By virtue of Section 17 of the SARFAESI Act, the Tribunal is clothed with a wide range of powers to interfere with any illegality. The Tribunal has the power to consider whether the measures referred to in Section 13 resorted to by the secured creditors for the enforcement of the security interests are in accordance with the provisions of the Act and the Rules made thereunder. It has the power to restore management or reservation of the possession of the secured assets of the borrower or any person aggrieved. The Tribunal has the jurisdiction to examine the claims of the tenancy or leasehold rights upon the leasehold assets".

It thus held,

"...a person aggrieved by the course adopted by the secured creditor under Section 13 of the SARFAESI Act has an effective and efficacious remedy. When a Tribunal is constituted, it is expected to go into the issues of fact and law, including statutory violations". 

The petitioner who is the proprietor of M/s.Evercool Enterprises, which is registered under the MSMED Act, had availed a credit facility from the 1st respondent Bank. Upon the petitioner's default in repaying the loan, the Bank initiated recovery proceedings under the SARFAESI Act, and the former's loan account was classified as a Non-Performing Asset (NPA). 

The Bank subsequently issued notice under Section 13 of the SARFAESI Act, possession notice, sale notice, and also filed a plea before the Chief Judicial Magistrate’s Court, which in turn, appointed an Advocate Commissioner to take the physical possession of the mortgaged property. Although the petitioner applied to the Bank for te constitution of a Committee under the MSMED Act, and for restructuring of the loan, the Bank proceeded under the SARFAESI Act, without heeding the said request. 

The present plea has thus been filed by the petitioner challenging the above course adopted by the Bank. 

The Counsel for the petitioner averred that Section 24 of the MSMED Act provides an overriding effect over other prevailing laws, and hence, the provisions concerning the recovery, as provided in the MSMED Act, would prevail over the recoveries under the SARFAESI Act. The petitioner thus claimed that Bank and other financial institutions could not classify an account as NPA without resorting to the provisions of the MSMED Act.

"The MSMED Act being a subsequent legislation against the SARFAESI Act, the Parliament has purposefully and knowingly superseded all the recovery proceedings by virtue of the non-obstante clause contained in Section 24. The MSMED Act is an extension of the welfare policy of the State and, therefore, the same is to be considered in such a way as to balance the larger interest of the small and medium enterprises. The provisions of the MSMED Act, a socio-economic legislation, are to be interpreted as broadly as possible," it was added. 

The counsel for the respondents argued that the provisions of the MSMED Act only provided for a special mechanism for adjudication of the dispute along with enforcing certain other contractual and business terms on the parties, but did not provide any priority for payments under the MSMED Act over the dues of secured creditors. The counsel emphasized that the legislature had expressly provided for a legal framework exclusively on the issue of priority of payment of dues under the SARFAESI Act. 

They also relied upon the decisions in Kotak Mahindra Bank Limited v. Girnar Corrugators Pvt.Ltd (2023), and Abdul Nazer v. Union Bank of India (2023) to emphasize that recoveries under the SARFAESI Act with respect to the secured assets would prevail over the recoveries under the MSMED Act. 

The Court found favour with the above argument by the respondents and held that the framework in the notification relied on by the petitioner and the other provisions of the MSMED Act would not prevail over the statutory provisions of the SARFAESI Act for secured assets. 

As regards the perpetual mandatory and prohibitory injunction upon banks and other agencies from taking any action for the recovery from the petitioner under the SARFAESI Act, the Court was of the view that the same would have to be considered on the touchstone of object and purpose of the SARFAESI Act. 

On this basis, it ascertained that the statute was a complete code in itself, and that the Tribunal constituted under the Act was clothed with a wide range of powers to interfere with any illegality. 

It thus found the present writ petition not to maintainable in view of the alternative remedy that is available. 

The Court also relied upon a plethora of precedents such as Radha Krishan Industries v. State of Himachal Pradesh & Ors (2021), Varimadugu Obi Reddy v. B Sreenivasulu (2023), and so on, wherein the Apex Court had deprecated the practice of entertaining writ applications challenging proceedings under the SARFAESI Act by the High Court in exercise of jurisdiction under Article 226 of the Constitution without exhausting the alternative statutory remedy available under the law. 

It therefore observed that, the petitioner had "failed to establish any extraordinary circumstances warranting interference of this Court under Article 226 of the Constitution".

The writ petition was thus dismissed in limine, having found the same not to be maintainable. 

Cousel for the Petitioner: Advocates Mathews J. Nedumpara, Maria Nedumpara, and Thomas Elavinamannil

Counsel for the Respondents: Standing Cousel for Union Bank Sadchith P. Kurup, and Advocates C.P. Anil Raj, Siva Suresh, and Reshma Raj 

Citation: 2023 LiveLaw (Ker) 588

Case Title: Jayaprakash A. v. Union Bank of India & Ors. 

Case Number: W.P.(C) No.30803 of 2023

Click Here To Read/Download The Judgement