Bank vs MSME: Who gets paid first when both claim the same property?
A bank held a mortgage. A small supplier held a recovery certificate. The Supreme Court had to decide whose claim comes first — and why a 2016 law change tipped the scales.
13
days.
A bank held a mortgage. A small supplier held a recovery certificate. The Supreme Court had to decide whose claim comes first — and why a 2016 law change tipped the scales.
The Naib Tehsildar was sent to hand over the factory land to the bank. He refused — because a small supplier's recovery certificate was already there. Two competing claims on the same property. One from a bank that held a registered mortgage. The other from a small enterprise that had supplied goods and never got paid. The local revenue officer, standing in his cramped office in Dhar, Madhya Pradesh, had to decide which piece of paper mattered more. He chose the small supplier. The bank went to court. And the Supreme Court had to answer a question that affects every lender and every small business in India: when a bank and an MSME both have legal claims on the same property, who gets paid first?
The Naib Tehsildar's refusal
Kotak Mahindra Bank had lent money to a company called Mission Vivacare. As security, the borrower mortgaged two plots of land in Dhar, Madhya Pradesh. When the borrower defaulted, the bank did what any secured creditor does: it started recovery proceedings under the SARFAESI Act (a law that lets banks seize and sell mortgaged property without going to court). The bank obtained an order from the District Magistrate, Dhar, on 24 September 2014, to take physical possession of the land.
But when the Naib Tehsildar — the local revenue officer — was sent to hand over the property to the bank, he stopped. His reason: a small enterprise called Girnar Corrugators also had a claim against the same borrower for unpaid dues. Girnar had won an award from the MSME Facilitation Council on 11 September 2014 — just thirteen days before the District Magistrate's order. The Facilitation Council had issued recovery certificates against the same two plots of land. The Naib Tehsildar, on 21 March 2016, formally refused to execute the District Magistrate's order, citing the pendency of the MSME recovery certificates and what he believed was the overriding effect of the MSMED Act.
He chose the small supplier. The bank went to court.
Two laws, one property, no clear answer
The bank challenged the Naib Tehsildar's refusal in the Madhya Pradesh High Court at Indore. A Single Judge sided with the bank, ruling that the bank's secured debt came first. But Girnar appealed, and a Division Bench of the same High Court reversed that decision on 11 August 2017. The Division Bench held that the MSMED Act (the law protecting small businesses) prevailed because it was a later enactment that contained an overriding clause — a non-obstante clause (a legal provision that says "this law will prevail over any other law").
The bank then appealed to the Supreme Court.
At the heart of the dispute was a timing puzzle. The MSMED Act was passed in 2006. But the SARFAESI Act was amended in 2016 to insert Section 26E — a provision that expressly gives secured creditors priority over all other debts, including government dues. Section 26E also contains a non-obstante clause. So which law's overriding clause wins — the one from 2006 or the one from 2016?
What each side argued
The bank's lawyers argued that Section 26E of the SARFAESI Act was clear: a secured creditor's debt has priority over "all other debts" — and that includes MSME recovery certificates. They pointed out that Section 26E was inserted in 2016, a decade after the MSMED Act. A later law with its own overriding clause, they said, must prevail over an earlier one.
Girnar Corrugators argued that the MSMED Act was a special law designed to protect small businesses. The Facilitation Council's award, they said, was a statutory recovery mechanism that should not be defeated by a bank's mortgage. The Division Bench had agreed with this view, holding that the MSMED Act's overriding effect protected MSME claims from being pushed aside by banks.
The Supreme Court had to decide which argument carried more weight.
The court's reason for choosing the bank
The bench — Justice M.R. Shah and Justice Krishna Murari — allowed the bank's appeal. Their reasoning turned on three points.
First, Section 26E of the SARFAESI Act expressly says that debts owed to secured creditors "shall be paid in priority over all other debts." The provision includes a non-obstante clause — meaning it overrides anything inconsistent in any other law. The MSMED Act, by contrast, only provides a mechanism for recovering delayed payments. Sections 15 to 23 of the MSMED Act set up the Facilitation Council and the recovery process, but nowhere does the MSMED Act say that MSME claims have priority over secured creditors. There is no provision in the MSMED Act that says "this recovery certificate beats a bank's mortgage."
Second, Section 26E was inserted in 2016 — a decade after the MSMED Act was passed in 2006. When two laws have non-obstante clauses, the later one prevails. The court applied a well-established rule: if Parliament wanted the MSMED Act to override later banking laws, it would have said so. It did not.
Third, the court clarified the limited role of the District Magistrate under Section 14 of the SARFAESI Act. The District Magistrate's job is only to assist in taking physical possession of the secured property. The DM cannot adjudicate disputes between the bank and third parties like MSME claimants. If Girnar Corrugators wanted to challenge the bank's priority, it had to approach the Debt Recovery Tribunal (DRT) under Section 17 of the SARFAESI Act — not block the bank's possession through the Naib Tehsildar.
The Supreme Court was emphatic on this point. In its operative order, the Court held: "Neither the District Magistrate nor the Metropolitan Magistrate has jurisdiction to adjudicate disputes between secured creditor and debtor or between secured creditor and third-party claimants. Their role is limited to assisting in taking possession. Any aggrieved person must approach the DRT under Section 17 of the SARFAESI Act."
The precedent that sealed it
The court relied on its earlier judgment in Bank of India v. Ketan Parekh & Ors., where it had held that a secured creditor's priority under the SARFAESI Act prevails over other claims. Though that case dealt with government dues, the principle applied here: when a statute expressly gives priority to secured creditors, that priority cannot be defeated by a general recovery mechanism in another law.
What this means for lenders and small businesses
For banks and financial institutions, the judgment is a clear win. A registered mortgage under the SARFAESI Act now stands above MSME recovery certificates. Banks can enforce their security without worrying that a Facilitation Council award will block possession. The Naib Tehsildar cannot refuse to hand over property simply because an MSME claim is pending.
For small businesses, the message is more sobering. An MSME that supplies goods on credit and wins a Facilitation Council award still has a valid claim — but that claim is unsecured. If the buyer has already mortgaged its property to a bank, the MSME will be paid only after the bank is fully satisfied. The MSME cannot use its recovery certificate to block the bank's possession.
THE PLAY: If you are an MSME lending to a buyer who has mortgaged assets to a bank, demand a personal guarantee or a separate security — because your Facilitation Council award will not beat the bank's registered mortgage.
The walk-off
The Naib Tehsildar handed over the land. The bank took possession. And the small supplier learned that a recovery certificate, no matter how valid, cannot stand between a bank and its collateral.