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SARFEASI Act prevails over MSMED Act

Cause Title : Canara Bank vs State of Himachal Pradesh & Ors., CWP No. 5194 of 2023, Himachal Pradesh High Court

Date of Judgment/Order : 21/8/2023

Corum : Tarlok Singh Chauhan, Judge & Ranjan Sharma, Judge

Citied: 

  1. Kotak Mahindra Bank Ltd. vs. Girnar Corrugators Private Limited and Others, (2023) 3 SCC 210
  2. State of H.P. & LPA No. Ors vs. State Bank of India & Anr, 156 of 2021
  3. Central Bank of India vs. State of H.P. & Ors, CWP No. 4751 of 2023
  4. Punjab National Bank vs. Union of India & Ors (2022), 7 SCC 260

Background

The Petitioner Bank had auctioned off the secured mortgaged property to recover the dues from the loanee. However after the issuance of Sale Certificate, when the Bank tried to get the property registered in the name of Auction Purchaser, the Sub-Registrar-cum-Assistant Collector verbally conveyed its inability, without disclosing any cogent and tangible reasons. Hence the instant petition.

Judgment

Allowing the petition and directing the Collector to register the property in the name of the Auction Purchaser, the High Court also answered the question whether the MSMED Act would prevail over the SARFAESI Act? The question is whether recovery proceedings / recoveries under the MSMED Act would prevail over the recoveries made / recovery proceedings under provisions of the SARFAESI Act?

The Court held that it is required to be appreciated 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.

In the entire MSMED Act, 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 as the case may be. 

In sharp contrast to this, Section 26E of the SARFAESI Act which has been inserted vide Amendment in 2016, it 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. However, the priority to secured creditors in payment of debt as per Section 26E of the SARFAESI Act shall be subject to the provisions of the IBC. Therefore, such dues vis-a-vis dues under the MSMED Act, as per the decree or order passed by the Facilitation Council debts due to the secured creditor shall have a priority in view of Section 26E of the SARFAESI Act which is later enactment in point of time than the MSMED Act.

As per the settle position of law, if the legislature confers the later enactment with a non-obstante clause, it means the legislature wanted the subsequent / later enactment to prevail. Thus, a ‘priority’ conferred / provided under Section 26E of the SARFAESI Act would prevail over the recovery mechanism of the MSMED Act. The aforesaid is to be considered along with the fact that under provisions of the MSMED Act, more particularly Sections 15 to 23, no 'priority' is provided with respect to the dues under the MSMED Act, like Section 26E of the SARFAESI Act.

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