SARFAESI Act Prevails Over MSMED Act: Kerala High Court Dismisses Challenge to Loan Recovery Proceedings

In a significant legal decision, the Kerala High Court reaffirmed the supremacy of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) over the Micro, Small and Medium Enterprises Development Act (MSMED Act). The court dismissed a challenge brought by the proprietor of M/S. Alfana Cashew against loan recovery proceedings initiated by Karnataka Bank Ltd.

The court's ruling, delivered by THE HONOURABLE MR. JUSTICE K. BABU, emphasized the precedence of SARFAESI Act in matters of loan recovery and NPA classification. The petitioner, a proprietorship firm engaged in cashew processing, had availed a credit facility from the bank. Following a business downturn and loan default, the bank classified the loan account as Non-Performing Asset (NPA) on November 30, 2019, and initiated proceedings under Section 13(2) of the SARFAESI Act.

The petitioner argued that the bank should have referred the matter to the MSME Committee for a Corrective Action Plan, as per RBI guidelines. However, the court held that SARFAESI Act takes precedence over the MSMED Act, stating, ”Section 26E of the SARFAESI Act which has been inserted vide Amendment in 2016 provides that debts due to any secured creditor shall be paid in ‘priority’ over all other debts. The priority to secured creditors in payment of debt as per Section 26E of the SARFAESI Act shall prevail over the recovery mechanism of the MSMED Act.”

The court also highlighted the principle of exhausting alternative statutory remedies before resorting to Article 226 of the Constitution, stating, ”The SARFAESI Act is a complete code providing an effective remedy to any person aggrieved by the proceedings initiated under Section 13. Therefore, the SARFAESI Act is a complete code providing effective and efficacious remedy to any person aggrieved by the proceedings initiated under Section 13.”

This judgment reiterates the importance of adhering to the established legal framework in loan recovery cases and the significance of the SARFAESI Act in matters of secured creditor rights. The court’s decision has implications for similar cases across the country.

Representing the petitioner were Adv. Sri.B.J.JOHN PRAKASH, Adv. P.PRAMEL, Adv. ASHIK TOM, and Adv. RAMSEENA N. CELINE JOHN. SC SRI.JACOB GEORGE and Adv. K.P.SUJESH KUMAR represented Karnataka Bank Ltd.

Date of Decision: 31 OCTOBER 2023

NAZIR,PROPRIETOR OF M/S. ALFANA CASHEW VS KARNATAKA BANK LTD.

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