The Supreme Court of India, in a judgment delivered on 5 January 2023, held that recoveries under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) with respect to secured assets shall prevail over recoveries under the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act). A Bench of Justice M.R. Shah and Justice Krishna Murari ruled that secured creditors enjoy priority over MSME facilitation council award holders.
Background
The dispute arose when MSME suppliers with awards from the Facilitation Council under the MSMED Act sought to recover their dues from the same assets over which a secured creditor — Kotak Mahindra Bank — held security interests under the SARFAESI Act. Both statutes contain non-obstante clauses claiming overriding effect: Section 24 of the MSMED Act and Section 26E of the SARFAESI Act (inserted by the 2016 amendment). The conflict between these two provisions had generated divergent views across High Courts, necessitating resolution by the Supreme Court. The core question was whether MSME dues enjoy a statutory super-priority that overrides the rights of secured creditors.
Key Holdings
The Supreme Court resolved the conflict as follows:
Section 26E SARFAESI takes precedence: The Court held that the priority conferred under Section 26E of the SARFAESI Act — which grants secured creditors priority in payment over all other debts including government dues — prevails over recovery mechanisms under the MSMED Act.
Later-in-time non-obstante clause: The Court applied the principle that when the legislature inserts a non-obstante clause in a later enactment (Section 26E was inserted in 2016, after the MSMED Act of 2006), it indicates legislative intent for the later provision to have overriding effect.
No express priority in MSMED Act: The Court noted that the MSMED Act contains no specific express provision conferring priority for MSME payments over dues of secured creditors or government taxes. In contrast, Section 26E of the SARFAESI Act explicitly establishes a priority waterfall.
Jurisdictional clarity: The Court clarified that disputes arising from SARFAESI enforcement must be adjudicated by the Debts Recovery Tribunal under Section 17 of the SARFAESI Act. Neither the District Magistrate nor the Metropolitan Magistrate has jurisdiction to decide disputes between secured creditors and debtors in this context.
Implications for Practitioners
This judgment provides definitive clarity on a frequently litigated question affecting both the banking sector and the MSME ecosystem. Practitioners representing secured creditors can now rely on this ruling to resist attempts by MSME suppliers to claim priority over secured assets.
For MSME practitioners, the practical consequence is significant: awards obtained from Facilitation Councils under the MSMED Act will not override the enforcement rights of secured creditors under SARFAESI. MSME creditors will need to explore alternative recovery mechanisms or negotiate directly with resolution professionals in insolvency proceedings where the IBC waterfall applies separately.
Banking and finance lawyers should note the Court's emphasis on the 2016 insertion of Section 26E as reflecting a deliberate legislative policy choice to preserve secured creditor priority. This reasoning may be relevant in future disputes where other statutes claim overriding effect against secured creditor rights.
One open question remains: whether Parliament may revisit this hierarchy through specific MSMED Act amendments to provide enhanced protection for small enterprise creditors, particularly given the policy emphasis on MSME sector development.