In a significant ruling, the Kerala High Court dismissed a petition challenging the recovery proceedings initiated under the SARFAESI Act, clarifying that the Micro, Small, and Medium Enterprises Development Act, 2006 (MSMED Act) does not supersede the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). This decision reinforces the legal standing of the SARFAESI Act in matters concerning the recovery of secured assets.
In his ruling, Justice K. Babu, presiding over a Single Judge Bench, emphasized the comprehensive nature of Section 17 of the SARFAESI Act, which provides a complete set of remedies for individuals aggrieved by actions taken under Section 13. Section 13 grants secured creditors the authority to take possession of secured assets or manage the assets without court intervention. Justice Babu noted that the SARFAESI Act serves as a specialized legal framework specifically designed for the securitization and enforcement of security interests, ensuring the swift recovery of secured assets.
Section 17 of the SARFAESI Act empowers the Debt Recovery Tribunal (DRT) to examine the legality of the actions taken by secured creditors under Section 13. The Tribunal has wide-ranging powers to assess whether the actions comply with the SARFAESI Act and its associated rules. Importantly, it can restore possession or management of secured assets to the borrower if illegality is found, providing a robust remedy for affected parties.
The petitioner in this case, the proprietor of M/s. Evercool Enterprises, had availed a credit facility from a bank but subsequently defaulted on repayment, leading the bank to classify the loan account as a Non-Performing Asset (NPA). The bank invoked the provisions of the SARFAESI Act, initiating recovery proceedings by issuing notices under the Act.
In response, the petitioner sought relief under the MSMED Act, arguing that as a micro or small enterprise, they were entitled to loan restructuring and the formation of a committee to address their financial difficulties. However, the bank proceeded with its actions under the SARFAESI Act, ignoring the petitioner’s request for MSMED Act protections, prompting the petitioner to file a challenge in court.
The petitioner argued that the MSMED Act should have precedence, citing the Act’s focus on providing protections and support to small businesses. However, the Court ruled that the MSMED Act cannot override the SARFAESI Act in matters of secured asset recovery.
Citing cases such as Kotak Mahindra Bank Limited v. Girnar Corrugators Pvt. Ltd and Abdul Nazer v. Union Bank of India, the Court affirmed that the SARFAESI Act remains the dominant legislation governing secured assets, as it is specifically designed for the securitization of financial assets and allows creditors to take possession and sell secured properties without judicial intervention.
Justice Babu emphasized that the SARFAESI Act provides an effective remedy for borrowers and other aggrieved parties through the Debt Recovery Tribunal (DRT). This body is authorized to delve into both the factual and legal issues surrounding the recovery actions, including any statutory violations by the secured creditors. The Court reinforced that borrowers must utilize this dedicated mechanism rather than seeking relief through alternative or general legislation like the MSMED Act.
The Kerala High Court, referring to the precedent set in South Indian Bank Ltd. v. Naveen Mathew Philip, reiterated that Article 226 of the Indian Constitution, which empowers High Courts to issue certain writs, should be used sparingly in commercial disputes where specific statutory remedies are available. The Court found no extraordinary circumstances in this case to warrant intervention and thus dismissed the petition, upholding the bank’s actions under the SARFAESI Act.
This ruling underscores the supremacy of the SARFAESI Act in matters involving secured assets, particularly when weighed against the MSMED Act. The Court's decision clarifies that the MSMED Act, while offering certain protections to small enterprises, does not have the authority to override the statutory provisions of the SARFAESI Act, which is specifically tailored for the recovery of secured assets. By emphasizing the importance of utilizing the specific redressal mechanisms provided by the SARFAESI Act, the Court highlighted the need for adherence to established legal frameworks in resolving commercial disputes