Introduction:
Both the Micro, Small, and Medium Enterprises Development Act 2006 (MSMED Act) and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (SARFAESI Act) contain non-obstante clauses and often cause confusion with respect to their applicability. In particular, it may appear confusing as to which of the two laws shall prevail if actions under both laws are initiated against the same debtor but by different creditors out of which one is an MSME and the other is a bank. This paper discusses this issue in brief and shows that the provisions of the SARFAESI Act shall prevail over the provisions of the MSMED Act.
Relevant Legal Provisions/Principles:
- As per Section 24 of the MSMED Act, “the provisions of sections 15 to 23 of the MSMED Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force.”
- As per Section 26E of the SARFAESI Act, “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.”
- As per the legal principle developed in the case of Kotak Mahindra Bank Limited v Girnar Corrugators Pvt. Ltd (2022) LiveLaw (SC) 12, if a later enactment contains a non-obstinate clause, it shall prevail over earlier enactments. The same case also states that SARFAESI Act is a special enactment and contains provisions related to the priority of the debt. On the other hand, MSMED was enacted to provide for facilitating the promotion and development and enhancing the competitiveness of micro, small, and medium enterprises.
Analysis and Discussion:
If the legal principle developed in the case of Kotak Mahindra Bank Limited v Girnar Corrugators Pvt. Ltd (2022) LiveLaw (SC) 12 (Kotak) is applied to the instant case, it becomes crucial to consider which enactment, SARFAESI Act or the MSMED Act, is later so as to decide which of the two shall prevail. In this regard, Section 26E was inserted in the SARFAESI Act in the year 2016, which is much later than Section 24 of the MSMED Act enacted in 2006. Accordingly, based on the case of Kotak, Section 26E of the SARFAESI Act shall prevail over the provisions of the MSMED Act.
In addition to the above, the MSMED Act cannot be said to prevail over the SARFAESI Act because it shall defeat the purpose of an enactment that provides for the priority to be given to the debt owed to a secured creditor having registered security interest over other debts (among others). It is worth mentioning that the MSMED Act does not contain provisions concerning the priority of debts, which is a special feature of the SARFAESI Act. The other act that also has a provision related to the priority of debts is the Insolvency and Bankruptcy Code 2016 for which Section 26E of the SARFAESI Act contains necessary provisions. However, it does not make any such provisions for MSMED Act, and rightly so because MSMED Act does not talk about priority.
Further, the MSMED Act is a rather simple enactment having the interest of MSME at its core. The statement of objects and reasons of the act provides that it was enacted to provide for facilitating the promotion and development and enhancing the competitiveness of micro, small, and medium enterprises. Among various other things, it also provides a special mechanism for adjudication of disputes between MSME entities, including delayed payments. On the other hand, the SARFAESI Act is a special enactment whose statement of objects and reasons provide that it has been enacted with a view to making the recovery mechanism in the country robust so that the position of financial institutions in the country is strengthened and the menace of non-performing assets could be controlled.
Conclusion:
In conclusion, the provisions of the MSMED Act shall not prevail over the SARFAESI Act. Put differently, the recovery proceedings initiated under provisions of the MSMED Act shall not prevail over the recovery proceedings initiated under provisions of the SARFAESI Act in view of the non-obstante clause of section 24 of the MSMED Act.
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Disclaimer: This is not professional advice. You may not rely on the opinion expressed in this article to make a business or regulatory compliance-related decision. If you are looking for professional advice, please consult a company secretary. Any comments and/or suggestions concerning this article may be sent to shukla_ashutosh@outlook.com.
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