Recoveries Under SARFAESI Act Will Prevail Over Those Under MSMED Act: SC

The apex court noted that the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, has been enacted to regulate securitisation and reconstruction of financial assets and enforcement of security interest and to provide for a central debt of security interest created on property rights.

The top court delivered its verdict on an appeal in which a question was raised as to whether recovery proceedings under the MSMED Act would prevail over the similar proceedings under the provisions of the SARFAESI Act.

"It is observed and held that so far as recoveries under the SARFAESI Act with respect to the secured assets would prevail over the recoveries under the MSMED Act to recover the amount under the award/decree passed by the Facilitation Council," a bench of Justices M R Shah and Krishna Murari said.

The top court set aside the August 2017 judgement of a division bench of the Madhya Pradesh High Court which had ruled that MSMED Act will prevail over the SARFAESI Act in such instances.

The division bench of the high court had quashed a judgment passed by its single judge who had said that the SARFAESI Act would override MSMED Act.

"The short question which is posed for the consideration of this court is 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 apex court mentioned in its judgement.???????

The bench said in the entire MSMED Act, there is no specific express provision giving 'priority' for payments under the Act over the dues of the secured creditors or over any taxes or cesses payable to the central or the state government or the 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," it noted.

The bench further said, "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 (The Insolvency and Bankruptcy Code)."

It said SARFAESI Act has been enacted providing specific mechanism or provision for the financial assets and security interest.

"In view of the above and further reasons stated above, the impugned judgment and order passed by the division bench of the high court is unsustainable and the same deserves to be quashed and set aside. Consequently, the present appeal is allowed," the bench said, while restoring the order passed by the single judge.

- With PTI Input