Two Special Laws. Two Non-Obstante Clauses. Which will prevail?

One of the important aspects of legal practice is the interpretation of statutes. A small provision like the Article 21 of the Constitution might contain a catena of interpretations that ultimately expand its horizon to contain several fundamental rights impliedly recognized under the Constitutional law of India. Each and every provision under the law has a specific interpretation to it. This interpretation has not been guided by the Legislature but is the skill and wisdom of the Judges and Advocates. Several provisions might have a plain text of interpretation while some might contain ambiguity and intermingled interpretations. Thus, harmonizing such provisions is one of the crucial functions of the efforts undertaken by the Bar as well as the Bench.

While learning the interpretation of statutes, every law scholar must have heard the maxim “Generalia Specialibus Non Derogant” which means “Special laws shall prevail over the General laws”. For Instance, if there is a conflict between the provisions of the Indian Penal Code, 1860 (the “IPC”) and the Narcotic Drugs and Psychotropic Substances Act, 1985 (the “NDPS Act”), the subsequent legislation i.e., the NDPS Act, shall prevail over the IPC. However, what would be the situation when there is a conflict between the provisions of two special laws?

Generally, when there is a conflict between two provisions of two different special laws, the first step is to apply the Doctrine of Harmonious Construction which aims at reconciling an interpretation which preserves the sanctity of both the provisions in conflict. However, when the same isn’t possible, the Courts try to carry out an interpretation which provides a win-win situations for both the provisions. But when both the provisions are such that they carry a non-obstante clause, the interpretation of statutes requires all the more skill and judicious application.

A non-obstante clause provides an overriding power vis-à-vis other provisions contained either in the same Act or even in some other Act. That provision carries superiority when there is a conflict with some other provision. The provision is usually understood to begin with the text “Notwithstanding anything contained in any other law”. For instance, see the text of Article 31C of the Constitution which says “Notwithstanding anything contained in article 13…”. This means, the provisions of Article 31C shall have an overriding effect against the provisions of Article 13 of the Constitution.

The Prevention of Money Laundering Act, 2002 (hereinafter referred to as the “PMLA”) and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter referred to as the “SARFAESI Act”) are two special legislations enacted in the year 2002. Both the provisions have a distinct area of application; the former deals with the prevention and control over instances of money laundering whereas the former, as the title of the Act suggests, deals with the securitisation and reconstruction of financial assets and enforcement of security interests. It allows the Indian Banks and Financial Institutions to auction or sell the properties of the creditors in default.

The conflict arises with respect to Section 5 of the PMLA and Section 13 of the SARFAESI Act. The conflict between the two Acts arises when there is an attachment order under the PMLA and an Order of disposal/possession of the property of the person involved under the SARFAESI Act. An illustration would make it easier to understand the conflict. For instance, A, during the course of money laundering, purchases 2 properties out of the income he made out of money laundering. These properties are further mortgaged with a Financial Institution. He gets suspected of the crime and thereby prosecuted for the same. Now, the Authority under the PMLA has the power to attach such property because it forms a pat of the “proceeds of crime”. On the other hand, the Authority under the SARFAESI Act also has the power to issue an Order directing the concerned Financial Institution to either dispose or even take into possession such property. Thus, there arises a conflict between the two Acts. Whose Order shall prevail? Further, Section 71 of the PMLA and Section 35 of the SARFAESI Act exacerbate the situation because:

Section 71 of the PMLA states: “Act to have overriding effect.—The provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force.”

And Section 35 of the SARFAESI Act states: “The provisions of this Act to override other laws.—The provisions of this Act shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.”

Thus, which of the two provisions shall prevail?

A Full Bench of the hon’ble Supreme Court in Shri Ram Narain v. Simla Banking & Industrial Co. Limited; 1956 SCC OnLine SC 1 had held that the subsequent Act has an overriding effect over the earlier one. Similarly, in Solidaire India Ltd. v. Fairgrowth Financial Services Ltd.; (2001) 3 SCC 71 the hon’ble apex Court held a same view by relying on the decision in Bhoruka Steel Ltd. v. Fairgrowth Financial Services Ltd.; (1997) 89 Comp Cas 547 (Special Court) wherein it was held that:

“Where there are two special statutes which contain non obstante clauses the later statute must prevail. This is because at the time of enactment of the later statute, the Legislature was aware of the earlier legislation and its non obstante clause. If the Legislature still confers the later enactment with a non obstante clause it means that the Legislature wanted that enactment to prevail. If the Legislature does not want the later enactment to prevail then it could and would provide in the later enactment that the provisions of the earlier enactment continue to apply.”

The SARFAESI Act received the assent of the President on 17.12.2002 whereas, the PMLA received the assent of the President on 17.01.2003. Thus, it becomes clear that the PMLA shall override the SARFAESI Act. However, Section 26E of the SARFAESI Act must also be introduced in this discussion.

Section 26E of the SARFAESI Act states: “Priority to secured creditors.—Notwithstanding anything 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 revenues, taxes, cesses and other rates payable to the Central Government or State Government or local authority.”

Section 26E is another such provision carrying an overriding effect. The word “priority” is of utmost relevance here. The following provision was inserted vide the 2016 amendment and creates a situation wherein it lays down that the secured creditors i.e., inter alia, the Banks and Financial Institution, are to be provided priority. Thus, in such a case, the PMLA being the subsequent legislation, will it have prevalence over the SARFAESI Act?

A division Bench of the hon’ble Supreme Court in Kotak Mahindra Bank Ltd. v. Girnar Corrugators Pvt. Ltd.; (2023) 3 SCC 210 was again posed with the issue as to whether the Micro, Small and Medium Enterprises Development Act, 2006 (hereinafter referred to as the “MSMED Act”) overrides the SARFAESI Act in lieu of Section 24?

With regards to the conflict with Section 26E of the SARFAESI Act, the hon’ble apex Court held that:

“The SARFAESI Act has been enacted to regulate securitisation and reconstruction of financial assets and enforcement of security interest and to provide for a Central database of security interest created on property rights, and for matters connected therewith or incidental thereto. Therefore, the SARFAESI Act has been enacted providing specific mechanism/provision for the financial assets and security interest. It is a special legislation for enforcement of security interest which is created in favour of the secured creditor — financial institution. Therefore, in absence of any specific provision for priority of the dues under the MSMED Act, if the submission on behalf of Respondent 1 for the dues under the MSMED Act would prevail over the SARFAESI Act, then in that case, not only the object and purpose of special enactment/the SARFAESI Act would be frustrated, even the later enactment by way of insertion of Section 26-E of the SARFAESI Act would be frustrated. If the submission on behalf of Respondent 1 is accepted, then in that case, Section 26-E of the SARFAESI Act would become nugatory and would become otiose and/or redundant. Any other contrary view would be defeating the provision of Section 26-E of the SARFAESI Act and also the object and purpose of the SARFAESI Act.”

Thus, it becomes clear that although the MSMED Act being a subsequent legislation to the SARFAESI Act, Section 26E being a provision inserted vide an amendment of 2016, it was construed to be a subsequent legislation to the MSMED Act and thus, carrying an overriding effect irrespective of the bar created under Section 24 of the MSMED Act.