Recovery Under SARFAESI Act With Respect To Secured Assets Would Prevail Over Recovery Under MSMED Act: Reiterates Kerala High Court

While rejecting a petition challenging the proceedings initiated under the provisions of the SARFAESI Act, the Kerala High Court held that provisions of the Micro, Small, and Medium Enterprises Development Act, 2006 (MSMED Act) would not prevail over those of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) with respect to recovery of secured assets.

A Single Judge Bench of Justice K. Babu observed that “Section 17 of the SARFAESI Act is a complete code providing remedies to any person aggrieved by the measures taken by the secured creditor under the provisions of Section 13 of the SARFAESI Act. By virtue of Section 17 of the SARFAESI Act, the Tribunal is clothed with a wide range of powers to interfere with any illegality”.

“The Tribunal has the power to consider whether the measures referred to in Section 13 resorted to by the secured creditors for the enforcement of the security interests are in accordance with the provisions of the Act and the Rules made thereunder. It has the power to restore management or reservation of the possession of the secured assets of the borrower or any person aggrieved”, added the Bench.

Advocate Maria Nedumpara appeared for the Petitioner whereas Advocate ASP. Kurup appeared for the Respondent.

The brief facts of the case were that the petitioner is the proprietor of M/s. Evercool Enterprises, Manjeri. The petitioner availed a credit facility from the first respondent Bank. The proprietorship enterprises of the petitioner obtained registration under the relevant provisions of the MSMED Act. The petitioner committed a default in repaying the loan availed from the respondent Bank. The Bank proceeded under the provisions of the SARFAESI Act. The petitioner’s loan account was classified as a Non-Performing Asset (NPA). The Bank issued a notice under Section 13(2) of the SARFAESI Act, a possession notice, and a sale notice.

The Bank filed a Criminal Miscellaneous Petition before the Chief Judicial Magistrate’s Court, Manjeri, which appointed an Advocate Commissioner to take the physical possession of the mortgaged property. The petitioner applied to the Bank for the constitution of a committee as provided under the MSMED Act and to seek the restructuring of the loan. The Bank, without considering the request submitted by the petitioner, proceeded under the provisions of the SARFAESI Act. Hence, the petitioner approached the Bench.

After considering the submission, the Bench noted that all the contentions raised by the petitioner on the foundation that the MSMED Act will prevail over the provisions of the SARFAESI Act fall to ground.

Referring to the cases namely Kotak Mahindra Bank Limited v. Girnar Corrugators Pvt.Ltd [(2023) 3 SCC 210] and Abdul Nazer v. Union Bank of India [2023(5) KLT 301], the Bench pointed out that the framework in the notification relied on by the petitioner and the other provisions of the MSMED Act cannot prevail over the statutory provisions of the SARFAESI Act in the matter of secured assets.

The Bench also pointed out that the SARFAESI Act has been enacted, for securitization and empowering banks and financial institutions to take possession of the securities and to sell them without the intervention of the court. It is special legislation for the enforcement of security interests that are created in favour of the secured creditor.

The Bench expressed that “a person aggrieved by the course adopted by the secured creditor under Section 13 of the SARFAESI Act has an effective and efficacious remedy. When a Tribunal is constituted, it is expected to go into the issues of fact and law, including statutory violations.”

The Bench also reiterated while referring to the case South Indian Bank Ltd. v. Naveen Mathew Philip (2023 SCC OnLine SC 435), that “the powers conferred under Article 226 of the Constitution of India are rather wide but are required to be exercised only in extraordinary circumstances in matters pertaining to proceedings and adjudicatory scheme qua a statute, more so in commercial matters involving a lender and a borrower, when the legislature has provided for a specific mechanism for appropriate redressal.”

On finding failure from the Petitioner’s side in establishing any extraordinary circumstances warranting interference of the Court under Article 226 of the Constitution, the High Court rejected the petition.

Cause Title: Jayaprakash A. v. Union Bank of India and Ors. [Neutral Citation: 2023/KER/63842]

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