Introduction
Lex Specialis is a Latin term meaning “a law specifically designed for a particular case or context”, in other words it is similar to derogation, which (contrario sensu) deals with laws defining general governance principles contrary thereof. Instead, the rule holds that the more specific law applies in case of overlap between two laws where both are to be applied to the same set of facts (i.e., a special law preempts general ones).
This is one of the important concepts under the interpretation of statutes, namely lex specialis derogat legi generali (“the specific law prevails over the general law”). This not only serves to be a significant point under the interpretation of the statutes but also contributes to the area of importance in terms of analysing conflicts between statutes. Another important concept under the area of interpretation of statutes is that when two statutes relate to the same set of facts, then you will follow the more specific statute over the more general statute.
Factual Matrix
The present case dates back to October 15, 1999, and December 16, 2004, respectively, when the respondent acquired two properties through agreements for sale. Subsequently, on March 21, 2011, the petitioner bank extended an overdraft facility of Rupees 1.2 crores against the said properties.
The respondent on March 30, 2011, mortgaged the properties in favor of the petitioner, depositing the title deeds. The mortgage was registered with the Central Registry as per the SARFAESI Act Section 26-E. Following multiple payment defaults, the account was later declared a Non-Performing Asset on September 30, 2014. The petitioner then sent out a notice under Section 13(2) of the SARFAESI Act on July 20, 2015, requesting the commencement of recovery proceedings against respondent no. 1, who failed to reply to the notice. On April 1, 2016, the Deputy Collector and the Competent Authority published a notification as per Section 4(1) r/w Sections 5, 8, and 12 regarding the MPID Act’s attachment of the aforementioned properties.
The petitioner filed an application for physical possession under Section 14 of the SARFAESI Act on March 1, 2017, and the same was granted on May 9, 2017. The petitioner published a possession notice and, later, a notice of sale on July 1, 2017. However, on August 10, 2017, the Deputy Collector issued a letter under the MPID Act 1999, attaching the properties again. The petitioner sought to lift this attachment through a miscellaneous application filed in June 2014 but was denied by the MPID Court in January 2017.
Main Issue
The primary issue before the Bombay High Court was whether properties mortgaged prior to their attachment under the MPID Act 1999 could be subjected to such attachment, and the Court had to determine whether the secured assets of the petitioner bank, which were mortgaged years before the MPID attachment, could be claimed by the state under the MPID for the benefit of depositors.
The bank argued that the MPID Court had no jurisdiction to attach the properties, as the properties were already mortgaged under SARFAESI, and that the bank had a secured interest in the properties since March 2011, well before the attachment order issued under the MPID Act 1999 in 2017. Another argument by the petitioner was that the MPID Act infringed upon the bank’s rights as a secured creditor, whereas the SARFAESI Act 2002 provided secured creditors with priority over other claims. The petitioner argued that the bank had already completed substantial legal processes, including taking physical possession of the properties and issuing notices of sale.
Judgment
While declaring the judgement in favour of the petitioner, the divisional bench of the Bombay High Court, which was made up of Justices Prithviraj K. Chavan and Revati Mohite Dere, expressed their opinion that the MPID Act of 1999 will be superseded by the SARFAESI Act of 2002. Furthermore, the Court noted that before executing the MPID attachment order, the property had already been mortgaged in the bank’s favor. The SARFAESI Act 2002, as enshrined in Section 26-E, gives secured creditors the upper hand over other creditors, and the High Court subsequently found that the SARFAESI was enacted to protect the interests of secured creditors to enable them to recover their secured debts through the possession of secured property.
The Court also relied on its previous rulings in the case of Invent Assets Securitisation and Aryarup Tourism Club Resorts Criminal Writ Petition (L) No. 22056 of 2023, which had set a clear precedent that when a property is mortgaged prior to its attachment under the MPID Act 1999, the SARFAESI Act, 2002 takes precedence. It was also observed that providing supersession to the MPID over SARFAESI would negatively impact the rights of the secured creditors.
The Court, while quashing the attachment orders issued by the MPID authorities and allowing the bank to continue its recovery proceedings under the SARFAESI Act 2002, reinforced the legal principle that the rights of secured creditors, as outlined in the SARFAESI Act, cannot be overturned by subsequent attachments under other legal frameworks like the MPID Act, 1999.
Conclusion
The judgment decodes significant implications for the intersection of financial law and creditor rights in India. The Bombay High Court has clarified the legal position of the secured creditors by declaring that the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, prevail over the Maharashtra Protection of Interest of Depositors Act, 1999, in cases where properties have been mortgaged before any attachment under the MPID Act.
In a strong affirmation, the decision emphasizes the need to protect the rights of secured creditors. It ensures that subsequent regulatory actions do not compromise their interests. The court’s apparent stance that properties mortgaged before any MPID attachments are exempt from such actions reinforces the principle of priority in financial transactions, thereby fostering a more predictable environment for lending institutions.
The broader impact of this ruling is significant as it extends to financial institution’s security in their lending practices, knowing that their security interests are legally protected against competing claims. This could lead to a potential increase in lenders’ confidence, potentially boosting economic activity through enhanced credit availability.
Additionally, by setting a precedent for future cases involving comparable jurisdictional disputes, the judgment will encourage uniformity and clarity in applying financial legislation. Overall, this decision improves the stability and dependability of India’s financial system by resolving a particular issue and strengthening the legal framework under which secured creditors must operate.
This article has been authored by Sakina Electricwala, Associate at Dhruve Liladhar & Co., Advocates, Solicitors & Notary.