Nazir v. Karnataka Bank Ltd.

## **`IN THE HIGH COURT OF KERALA AT ERNAKULAM`** ## **`PRESENT`** ``` THE HONOURABLE MR.JUSTICE K. BABU ``` ``` TUESDAY, THE 31[ST] DAY OF OCTOBER 2023 / 9TH KARTHIKA, 1945 WP(C) NO. 39924 OF 2022 ``` ## **`PETITIONER:`** ``` NAZIR, ``` ``` PROPRIETOR OF M/S. ALFANA CASHEW, HAVING ITS OFFICE AT PAZHANGALAM, KETTIDATHIL VEEDU, CHANDANATHOPE, KOLLAM, PIN – 691515. ``` ``` BY ADVS.SRI.B.J.JOHN PRAKASH P.PRAMEL ASHIK TOM RAMSEENA N. CELINE JOHN ``` ## **`RESPONDENT:`** ``` KARNATAKA BANK LTD. ``` ``` REPRESENTED BY THE AUTHORISED OFFICER, KOLLAM BRANCH, GROUND FLOOR, ROSHEES SQUARE, RESIDENCY ROAD, KADAPAKKADA, KOLLAM – 691008. ``` ``` BY SC SRI.JACOB GEORGE ``` ``` ADV K.P.SUJESH KUMAR ``` ``` THIS WRIT PETITION (CIVIL) HAVING BEEN FINALLY HEARD ON ``` ``` 31.10.2023, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: ``` W.P.(C)No.39924 of 2022 2 ## **JUDGMENT** The petitioner challenges the proceedings initiated under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (for short `SARFAESI Act’). Facts:- 2. The petitioner is running a proprietorship firm named “M/s.Alfana Cashew”, an MSME unit engaged in the processing of raw cashews. The petitioner had availed a credit facility from the respondent Bank to the tune of Rs.7,61,50,000/-. The petitioner suffered a loss due to the massive downfall in the business. He committed default in repaying the loan. On 30.11.2019, the loan account was classified as NPA. The respondent Bank initiated proceedings under Section 13(2) of the SARFAESI Act. The petitioner requested the respondent bank to refer their account to the MSME Committee for devising a Corrective Action Plan as provided in the Master Circular No.RBI/2015-16/338 FIDD issued by the Reserve Bank of India. The respondent Bank refused to accede to the request of the petitioner and proceeded against him under the SARFAESI Act. W.P.(C)No.39924 of 2022 3 3. Heard the learned counsel for the petitioner and the learned Standing Counsel for the respondent. ## Submissions: 4. The learned counsel for the petitioner submitted as follows:- (i) The respondent Bank was bound to refer the matter to the MSME Committee for devising a Corrective Action Plan. (ii) The classification of the petitioner’s loan account as NPA without following the mandates in the Master Circular (Ext.P2) is violative of the procedures laid down by the Reserve Bank of India in exercise of its powers vested under the Banking Regulation Act. (iii) Without exercising the procedures contemplated in Ext.P2 Master Circular, the respondent Bank cannot resort to the provisions of the SARFAESI Act. 5. The learned counsel for the respondent Bank submitted the following:- (i) The Micro, Small and Medium Enterprises Development Act (for short 'MSMED Act') would not prevail over the SARFAESI Act, and therefore, the MSMED Act does not provide any priority over the debt W.P.(C)No.39924 of 2022 4 dues of the secured creditor. (ii) The Master Circular issued by the Reserve Bank of India in the context of the MSMED Act will in no way eclipse the legislative mandate contained in the SARFAESI Act. (iii) The writ petition under Article 226 of the Constitution of India is not maintainable as the petitioner has an alternative remedy. 6. The learned counsel for the petitioner heavily relied on Ext.P2 Circular No.RBI/2015-16/338 FIDD.MSME&NFS.BC.No.21/ 06.02.31/2015-16 dated 17.3.2016 issued by the Reserve Bank of India. It is submitted that the guidelines in the Circular dated 17.3.2016, issued in tune with the MSMED Act, are mandatory, and the respondent Bank was bound to refer the account of the petitioner to the MSME Committee as incipient trust was evident in the account due to the fall in the business. It is further submitted that the petitioner had initiated proceedings under the 'Framework for Revival and Rehabilitation of MSMEs' reasonably apprehending the failure of his business and inability to pay the debts. According to the learned counsel for the petitioner, in order to enable the resolution of the MSME account of the petitioner, the same should have been referred to the Committee for resolving the stress of the micro, small and medium W.P.(C)No.39924 of 2022 5 enterprises. 7. The crux of the contentions of the learned counsel for the petitioner is that the provisions of the MSMED Act and guidelines issued by the Reserve Bank of India have precedence over the provisions of the SARFAESI Act. 8. While considering the question of whether the MSMED Act would prevail over the SARFAESI Act, this Court in **Jayaprakash A** v. **Union Bank of India and Others (2023 LiveLaw (Ker) 588 = 2023 SCC OnLine Ker 9106)** observed thus:- “8. The learned counsel for the respondent Bank placed reliance on **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** . 9. In **Kotak Mahindra** (supra), the Apex Court, while considering the question whether the MSMED Act would prevail over the SARFAESI Act or whether recovery proceedings/recoveries under the MSMED Act would prevail over the recoveries made or recovery proceedings under the provisions of the SARFAESI Act, held thus: “7. While appreciating the above submissions, it is required to be appreciated that Sections 15 to 23 of the MSMED Act only provide for special mechanism for adjudication of the dispute along with enforcing certain other contractual and business terms on the parties such as time limit for payments and interest in case of delayed payments. In the entire MSMED Act, there is no specific express provision giving 'priority' for payments under the MSMED Act over the dues of the secured creditors or over any taxes or cesses payable to Central Government or State Government or Local Authority as the case may be. In sharp contrast to this, Section 26E of the SARFAESI Act which has been inserted vide Amendment in 2016, it W.P.(C)No.39924 of 2022 6 provides that 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. However, the priority to secured creditors in payment of debt as per Section 26E of the SARFAESI Act shall be subject to the provisions of the IBC. Therefore, such dues vis-a-vis dues under the MSMED Act, as per the decree or order passed by the Facilitation Council debts due to the secured creditor shall have a priority in view of Section 26E of the SARFAESI Act which is later enactment in point of time than the MSMED Act. At this stage, it is required to be noted Section 26E of the SARFAESI Act which is inserted in 2016 is also having a non-obstante clause. Even as per the submission on behalf of respondent No.1, two enactments have competing non-obstante provision and nothing repugnant, then the nonobstante clause of the subsequent statute would prevail over the earlier enactments. As per the settled position of law, if the legislature confers the later enactment with a non-obstante clause, it means the legislature wanted the subsequent / later enactment to prevail. Thus, a ‘priority’ conferred / provided under Section 26E of the SARFAESI Act would prevail over the recovery mechanism of the MSMED Act. The aforesaid is to be considered along with the fact that under provisions of the MSMED Act, more particularly Sections 15 to 23, no 'priority' is provided with respect to the dues under the MSMED Act, like Section 26E of the SARFAESI Act. 8. As observed hereinabove, Sections 15 to 23 of the MSMED Act are providing a special mechanism for adjudication of the disputes and to adjudicate and resolve the disputes between the supplier and buyer – micro or small enterprise. At the cost of repetition, it is observed that MSMED Act does not provide any priority over the debt dues of the secured creditor akin to Section 26E of the SARFAESI Act. At the most, the decree / order / award passed by the Facilitation Council shall be executed as such and the micro or small enterprise in whose favour the award or decree has been passed by the Facilitation Council shall be entitled to execute the same like other debts / creditors. Therefore, considering the provisions of W.P.(C)No.39924 of 2022 7 Sections 15 to 23 read with Section 24 of the MSMED Act and the provisions of the SARFAESI Act, as such, there is no repugnancy between two enactments viz. SARFAESI Act and MSMED Act. As such, there is no conflict between two schemes, i.e. MSMED Act and SARFAESI Act as far as the specific subject of 'priority' is concerned.” 10. The Apex Court further held that recoveries under the SARFAESI Act with respect to the secured assets would prevail over the recoveries under the MSMED Act to recover the amount under the award/decree passed by the Facilitation Council. 11. Given the declaration of law by the Apex Court in **Kotak Mahindra** (supra), I am of the view 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. This Court, following the principles laid down in **Kotak Mahindra** (supra) in **Abdul Nazer** (supra), held 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…….” ## 9. The learned counsel for the petitioner submitted that the RBI Circulars have statutory force and are binding on the constituent banks and financial institutions. Ext.P2 Master Circular is a set of guidelines issued by the Reserve Bank of India in the context of the MSMED Act. Those guidelines/circulars are issued by the Reserve Bank of India in exercise of its power under the Banking Regulation Act. Those are only regulatory in nature. The said guidelines/circulars can in no way affect the statutory mandate of the SARFAESI Act. W.P.(C)No.39924 of 2022 8 10. The further contention of the respondent is that the writ petition is an abuse of process of the Court as the petitioner has an alternative remedy before the Debts Recovery Tribunal under Section 17 of the SARFAESI Act. This Court in **Thara Philip** v. **Federal Bank Ltd. (2023 LiveLaw (Ker) 577),** on the maintainability of writ petitions challenging the proceedings under the SARFAESI Act, held thus:- “15. Sub-section (3) of Section 17 of the SARFAESI Act gives ample power to the Tribunal to interfere with the measures taken by the banks and financial institutions under Section 13. Provision for an appeal to challenge the orders passed by the Debts Recovery Tribunal is also provided under Section 18 of the SARFAESI Act. Therefore, the SARFAESI Act is a complete code providing effective and efficacious remedy to any person aggrieved by the proceedings initiated under Section 13. 16. The maintainability of the writ petition is to be considered in the light of the efficacious remedy provided by the statute. 17. A survey of the judicial precedents is useful. The Apex Court has considered the scope of interference by the High Courts under Article 226 of the Constitution of India in a series of pronouncements. ## 18. In **United Bank of India v. Satyawathi Tondon [(2010) 8 SCC 110]** the Apex Court observed thus: “43. ….....the High Court will ordinarily not entertain a petition under Article 226 of the Constitution if an effective remedy is available to the aggrieved person and that this rule applies with greater rigour in matters involving recovery of taxes, cess, fees, other types of public money and the dues of banks and other financial institutions. In our view, while dealing with the petitions involving challenge to the action taken for recovery of the W.P.(C)No.39924 of 2022 9 public dues, etc. the High Court must keep in mind that the legislations enacted by Parliament and State Legislatures for recovery of such dues are a code unto themselves inasmuch as they not only contain comprehensive procedure for recovery of the dues but also envisage constitution of quasi-judicial bodies for redressal of the grievance of any aggrieved person. Therefore, in all such cases, the High Court must insist that before availing remedy under Article 226 of the Constitution, a person must exhaust the remedies available under the relevant statute.” 19. In **State of Bank of Travancore v. Mathew K.C. [(2018) 3 SCC 85]** , the Supreme Court held that the discretionary jurisdiction under Article 226 is not absolute but has to be exercised judiciously in the given facts of a case and in accordance with law. The normal rule is that a writ petition under Article 226 of the Constitution ought not to be entertained if alternate statutory remedies are available, except in cases falling within the well-defined exceptions. In **State of Bank of Travancore** (supra) the Apex Court further observed thus: “15............Loans by financial institutions are granted from public money generated at the taxpayer's expense. Such loan does not become the property of the person taking the loan, but retains its character of public money given in a fiduciary capacity as entrustment by the public. Timely repayment also ensures liquidity to facilitate loan to another in need, by circulation of the money and cannot be permitted to be blocked by frivolous litigation by those who can afford the luxury of the same.” 20. In **Varimadugu Obi Reddy v. B Sreenivasulu [(2023) 2 SCC 168]** , the Supreme Court deprecated the practice of entertaining writ applications challenging the proceedings under the SARFAESI Act by the High Court in exercise of jurisdiction under Article 226 of the Constitution without exhausting the alternative statutory remedy available under the law. 21. In **Radha Krishan Industries v. State of H.P. [(2021) 6 SCC 771]** , the Supreme Court observed thus: W.P.(C)No.39924 of 2022 10 “27. The principles of law which emerge are that:: 27.1. The power under Article 226 of the Constitution to issue writs can be exercised not only for the enforcement of fundamental rights, but for any other purpose as well. 27.2. The High Court has the discretion not to entertain a writ petition. One of the restrictions placed on the power of the High Court is where an effective alternate remedy is available to the aggrieved person. 27.3. Exceptions to the rule of alternate remedy arise where : (a) the writ petition has been filed for the enforcement of a fundamental right protected by Part III of the Constitution; (b) there has been a violation of the principles of natural justice; (c) the order or proceedings are wholly without jurisdiction; or (d) the vires of a legislation is challenged. 27.4. An alternate remedy by itself does not divest the High Court of its powers under Article 226 of the Constitution in an appropriate case though ordinarily, a writ petition should not be entertained when an efficacious alternate remedy is provided by law. 27.5. When a right is created by a statute, which itself prescribes the remedy or procedure for enforcing the right or liability, resort must be had to that particular statutory remedy before invoking the discretionary remedy under Article 226 of the Constitution. This rule of exhaustion of statutory remedies is a rule of policy, convenience and discretion. 27.6. In cases where there are disputed questions of fact, the High Court may decide to decline jurisdiction in a writ petition. However, if the High Court is objectively of the view that the nature of the controversy requires the exercise of its writ jurisdiction, such a view would not readily be interfered with.” ## 22. In **South Indian Bank Ltd. v. Naveen Mathew Philip (2023 SCC OnLine SC 435) = [2023 (4) KLT 29 (SC)]** the Apex Court held thus: “18.........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 W.P.(C)No.39924 of 2022 11 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.” ## 23. In **Celir LLP v. Bafna Motors (Mumbai) Pvt. Ltd., [2023 (5) KLT 599 (SC)]** the Supreme Court held as follows: “96. More than a decade back, this Court had expressed serious concern despite its repeated pronouncements in regard to the High Courts ignoring the availability of statutory remedies under the RDBFI Act and the SARFAESI Act and exercise of jurisdiction under Article 226 of the Constitution. Even after, the decision of this Court in Satyawati Tondon (supra), it appears that the High Courts have continued to exercise its writ jurisdiction under Article 226 ignoring the statutory remedies under the RDBFI Act and the SARFAESI Act.” ## 11. There is nothing to show that there has been a violation of the principles of natural justice. The writ petition has not been filed to enforce a fundamental right protected by part III of the Constitution. The petitioner has not placed any materials to show that the nature of the dispute requires exercise of the jurisdiction of this Court under Article 226 of the Constitution of India. Resultantly, the writ petition is dismissed in limine. Pending interlocutory applications, if any, stand closed. **K.BABU Judge** TKS W.P.(C)No.39924 of 2022 12 ## **APPENDIX OF WP(C) 39924/2022** PETITIONER’S EXHIBITS Exhibit-P1 TRUE COPY OF THE DEMAND NOTICE DATED 05.11.2020. Exhibit-P2 TRUE COPY OF THE MASTER CIRCULAR NO. RBI/2015-16/338 FIDD.MSME & NFS. BC. NO. 21/06.02.31/2015-16 DATED ON 17.03.2016. Exhibit-P3 TRUE COPY OF THE LETTER DATED 19.08.2020 ISSUED BY THE RESPONDENT BANK. Exhibit-P4 TRUE COPY OF THE POSSESSION NOTICE DATED 01.07.2021 Exhibit-P5 TRUE COPY OF THE LETTER DATED 01.09.2021 SUBMITTED BY THE PETITIONER. - Exhibit-P6 TRUE COPY OF THE NOTICE DATED 11.11.2022 ISSUED BY THE ADVOCATE COMMISSIONER APPOINTED IN M.C. NO. 63 OF 2021 OF THE HON'BLE CHIEF JUDICIAL MAGISTRATE AT KOLLAM. Exhibit-P7 TRUE COPY OF THE NOTICE DATED 14.11.2022 ISSUED BY THE ADVOCATE COMMISSIONER APPOINTED IN M.C. NO. 63 OF 2021 OF THE HON'BLE CHIEF JUDICIAL MAGISTRATE AT KOLLAM. - Exhibit-P8 TRUE COPY OF THE G.O.NO. 224/2022/1D DATED 14.03.2022. Exhibit-P9 TRUE COPY OF THE G.O.NO. 562/2022/1D DATED 16.06.2022. TKS