The Kerala High Court on Thursday had held that provisions of the Micro, Small and Medium Enterprises Development Act, 2006 would not overthrow those of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 with regards to recovery of secured assets.
Specifications under the MSMED and SARFAESI Acts
It then stated that in situations 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’, then they could approach the Tribunal constituted under the enactment, against the same, irrespective of whether the aggrieved person is a proprietor of an enterprise registered under the MSMED Act or not.
Justice K. Babu, after noting that Section 17 of SARFAESI Act (‘application against measures to recover secured debts’) is a ‘complete code’ which provides remedies to any person aggrieved by the measures taken by the secured creditor, observed that by virtue of Section 17 of the SARFAESI Act, the Tribunal is bestowed with a wide range of powers to interfere in case of any illegality.
Thus, the Tribunal has the power to consider whether the measures referred to in Section 13 which are resorted to by the secured creditors for the enforcement of the security interests, which should be in accordance with the provisions of the Act and its Rules.
He also noted that the Tribunal has the power to restore management or reservation of the possession of the secured assets of the borrower or any person aggrieved under the same. Thus it has the jurisdiction to examine the claims of the tenancy or leasehold rights upon the leasehold assets.
Background of the Case
In this case (Jayaprakash A. v. Union Bank of India & Ors.), the petitioner who is the proprietor of M/s.Evercool Enterprises, registered under the MSMED Act, had availed a credit facility from the first respondent Bank. When the petitioner defaulted in repaying the loan, the Bank initiated recovery proceedings under the SARFAESI Act, and the petitioner’s loan account was classified as a Non-Performing Asset (NPA).
Subsequently, the Bank issued notice under Section 13 of the SARFAESI Act, possession notice, sale notice. It 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 had applied to the Bank for the constitution of a Committee under the MSMED Act, and for restructuring of the loan, the Bank ended up proceeding under the SARFAESI Act, without paying much heed to the said request.
The petitioner challenged the course adopted by the Bank
The Counsel for the petitioner argued that Section 24 of the MSMED Act provides an overriding effect over other prevailing laws, therefore the provisions concerning the recovery, as provided in the MSMED Act, would prevail over the recoveries under the SARFAESI Act. Therefore, the petitioner claimed that banks and other financial institutions could not classify an account as NPA without resorting to the provisions of the MSMED Act.
The respondents’ counsel countered that the provisions of the MSMED Act only provides for a specific mechanism for adjudication of the dispute which involves the enforcement of certain other contractual and business terms on the parties, but it does not provide any priority for payments under the MSMED Act over the dues of secured creditors. They emphasised that the legislature had expressly provided for a legal framework exclusively on priority of payment of dues under the SARFAESI Act.
The Court’s Verdict
The High Court favoured the respondents’ argument and held that the framework in the notification referred to by the petitioner and the other provisions of the MSMED Act would not prevail over the statutory provisions of the SARFAESI Act, prescribed specifically for secured assets.
With regards to the perpetual mandatory and prohibitory injunction upon banks and other financial agencies from taking any action for the recovery from the petitioner under the SARFAESI Act, the Court was of the opinion that the same would have to be considered on the touchstone of the purpose of the SARFAESI Act.
The court relied upon a plethora of precedents including Radha Krishan Industries v. State of Himachal Pradesh & Ors (2021) and Varimadugu Obi Reddy v. B Sreenivasulu (2023), and ascertained that the statute was a complete code in itself, and that the Tribunal constituted under the Act was bestowed with a wide range of powers to interfere with any kind of illegality.