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Kotak Mahindra Bank Limited vs Girnar Corrugators Pvt. Ltd. & Ors.

Civil Appeal · 2023 INSC 12Decided 5 Jan 2023
Civil Appeal No. 6662 of 2022
M.R. Shah · Krishna Murari · C.T. Ravikumar

Background

Kotak Mahindra Bank had lent money to a company called Mission Vivacare, secured by a mortgage over two plots in the SEZ area of Dhar, Madhya Pradesh. When the borrower defaulted, the bank invoked the SARFAESI Act and, in September 2014, the District Magistrate ordered the SDM to take possession of the plots for the bank. Meanwhile, Girnar Corrugators, a small enterprise, had obtained an award against the same borrower from the MSME Facilitation Council under the MSMED Act, with recovery certificates issued to recover the amount as arrears of land revenue. The Naib Tehsildar refused to hand possession to the bank, reasoning that the MSMED Act, being a later special law with an overriding clause (Section 24), would prevail over SARFAESI. A Single Judge of the Madhya Pradesh High Court sided with the bank, but a Division Bench reversed, holding that the MSMED Act prevails.

Decision Breakdown

The Supreme Court allowed the bank's appeal and restored the Single Judge's order. It held that Sections 15 to 23 of the MSMED Act merely set up a special mechanism for adjudicating delayed-payment disputes between suppliers and buyers and contain no provision giving MSME dues "priority" over secured creditors or government taxes. By contrast, Section 26E of the SARFAESI Act, inserted in 2016 and itself carrying a non-obstante (overriding) clause, expressly gives a registered secured creditor's debts priority over all other debts and government dues. Applying the very principle the MSME relied on (that where two laws have competing overriding clauses, the later one prevails) Section 26E (2016) is later than the MSMED Act (2006), so the bank's SARFAESI recovery wins; there is in fact no conflict on the subject of priority because the MSMED Act says nothing about it. The Court also held that the Naib Tehsildar's refusal was wholly without jurisdiction: under Section 14 of SARFAESI, the District Magistrate and subordinate officers only assist the secured creditor in taking possession and cannot adjudicate disputes; anyone aggrieved must go to the Debts Recovery Tribunal under Section 17. The MSME can still execute its award like any other creditor, and may approach the DRT if aggrieved.

Lesson Learnt

A bank's registered security interest under the SARFAESI Act takes priority over an MSME Facilitation Council award: an MSME's award is enforceable, but it does not jump the queue ahead of a secured lender. Revenue officials executing a Section 14 SARFAESI possession order have no power to refuse or second-guess it; objections belong before the Debts Recovery Tribunal.

Official source (sci.gov.in)View Judgment (PDF)

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