Supreme Court of India
M/S PRO KNITSversusTHE BOARD OF DIRECTORS OF CANARA BANK & ORS.
- Citation
- 2024 INSC 565
- Decided
- 1 August 2024
- Disposal
- Appeal(s) allowed
- Bench
- BELA M TRIVEDI
Holding
The Notification and RBI directions under the MSMED Act and Banking Regulation Act are statutory, mandatory, and binding on all scheduled commercial banks, requiring them to follow the Framework for Revival and Rehabilitation of MSMEs before classifying an MSME loan as an NPA.
Summary
The appellants, MSME borrowers, challenged the classification of their loan accounts as non‑performing assets by Canara Bank and other banks, contending that the banks had violated the procedural framework prescribed in the Government’s 29 May 2015 Notification under Section 9 of the MSMED Act. The High Court had held that the framework was merely directory and that banks could classify accounts as NPA without following it. On appeal, the Supreme Court examined the statutory force of the Notification, the RBI’s master directions under the Banking Regulation Act, and the interplay with the SARFAESI Act. The Court held that the Notification and RBI directions have the force of law, are mandatory, and bind all scheduled commercial banks to identify incipient stress and attempt restructuring before an account becomes an NPA. Consequently, the banks’ actions were illegal, and the High Court’s order was set aside. The appeals were allowed, though the Court did not remand the matters for fresh consideration of the underlying writ petitions.
Issues considered
- Whether the Notification dated 29.05.2015 issued under Section 9 of the MSMED Act is mandatory or directory for banks in restructuring MSME loans
- Whether banks can classify MSME loan accounts as NPA without complying with the Framework for Revival and Rehabilitation of MSMEs
- Whether the provisions of the SARFAESI Act override the mandatory instructions issued under the MSMED Act and RBI directions
Legislation cited
Subjects
Micro, Small and Medium EnterprisesMSMEsFramework for Revival, Rehabilitation of MSMEsPromotion and development of MSMEsInstructions/Directions/Guidelines issued by RBIGuidelines/instructions pertaining to MSMEsLoan accountsNon-Performing Assets (NPA)Banks and Non-Banking Financial Companies (NBFCs)Restructuring processMandatory instructionsMandatoryDirectoryIncipient stressSecured creditorsSecurity interestEnforcement of security interestReserve Bank of India (RBI)Defaulters-BorrowersRBI NotificationBanking companies
Judgment
[2024] 8 S.C.R. 140 : 2024 INSC 565
M/s Pro Knits
v.
The Board of Directors of Canara Bank & Ors.
(Civil Appeal No. 8332 of 2024)
01 August 2024
[Bela M. Trivedi* and R. Mahadevan, JJ.]
Issue for Consideration
Whether the Notification dated 29.05.2015 issued by the Central
Government in exercise of the powers conferred under Section
9 of the Micro, Small and Medium Enterprises Development Act,
2006, containing Instructions for the “Framework for Revival and
Rehabilitation of Micro, Small and Medium Enterprises” as revised
from time to time, is mandatory or directory.
Headnotes†
Micro, Small and Medium Enterprises Development Act, 2006 –
ss.9, 10 – The Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002 –
Banking Regulation Act, 1949 – ss.21, 35A – Loan accounts
of the appellants-MSMEs were classified as Non-Performing
Assets (NPA) by the respondents-Banks/Non-Banking Financial
Companies (NBFCs) without following the procedure laid down
in the Instructions for Framework for Revival and Rehabilitation
of MSMEs issued vide Notification dated 29.05.2015 to provide
a simpler and faster mechanism to address the stress in
the accounts of MSMEs and to facilitate the promotion and
development of MSMEs – Challenged by appellants – Writ
petitions dismissed by High Court holding that the Banks/
NBFCs were not obliged to adopt the restructuring process
contemplated in the aforesaid Notification on its own without
there being any application by the MSMEs – Correctness:
Held: Not correct – Instructions for the “Framework for Revival
and Rehabilitation of MSMEs” as notified vide Notification dated
29.05.2015 in exercise of the powers conferred u/s.9 of the MSMED
Act, as revised by the RBI Notification dated 17.03.2016 and the
Reserve Bank of India (Lending to Micro, Small and Medium
Enterprises Sector) Directions, 2016, issued by RBI in exercise of
the powers conferred by ss.21 and 35(A) of the Banking Regulation
* Author
[2024] 8 S.C.R. 141
M/s Pro Knits v. The Board of Directors of Canara Bank & Ors.
Act, having statutory force, are mandatory in nature and binding
on all Scheduled Commercial Banks, licensed to operate in India
by RBI – Under the “Framework for Revival and Rehabilitation of
MSMEs”, the banks or creditors are required to identify the incipient
stress in the account of the MSMEs, before their accounts turn into
non-performing assets, by creating three sub-categories under the
“Special Mention Account” Category – Further, it is also incumbent
on the part of the concerned MSME to produce authenticated and
verifiable doucments/material for substantiating its claim of being
MSME, before its account is classified as NPA – If that is not done,
and once the account is classified as NPA, the banks-secured
creditors would be entitled to take the recourse to Chapter III of
the SARFAESI Act for the enforcement of the security interest –
Impugned order set aside. [Paras 13, 16, 19]
The Securitisation and Reconstruction of Financial Assets
and Enforcement of Security Interest Act, 2002 – Chapter III;
ss.35, 13 – Enforcement of security interest created in favour
of secured creditor – Process of initiation:
Held: Security interest created in favour of any Bank or secured
creditor may be enforced by such creditor in accordance with the
provisions contained in Chapter-III of the SARFAESI Act – As
per s.35, the provisions of the SARFAESI Act have the 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 – However, the process of enforcement
of security interest as contained in Chapter III could be initiated
only when the borrower makes any default in repayment of secured
debt or any instalment thereof, and his account in respect of such
debt is classified by the secured creditor as non-performing asset,
in view of Section 13(2) of the said Act. [Para 14]
Banking Regulation Act, 1949 – ss.21, 35A – Directions issued
under, mandatory:
Held: ss.21 and 35A empower the RBI to frame the policy and give
directions to the banking companies in relation to the advances
to be followed – Such directions supplement the provisions of
the Banking Regulation Act and have statutory force and are
mandatory. [Para 13]
Micro, Small and Medium Enterprises Development Act,
2006 – Securitisation and Reconstruction of Financial Assets
142 [2024] 8 S.C.R.
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and Enforcement of Security Interest Act, 2002 – MSMEs
obligated to substantiate their claim of being MSME and to
show their eligibility to get the benefit of the Framework for
Revival and Rehabilitation of MSMEs issued vide Notification
dtd. 29.05.2015:
Held: It is mandatory or obligatory on the part of the Banks to follow
the Instructions/Directions issued by the Central Government and
the RBI with regard to the Framework for Revival and Rehabilitation
of MSMEs – Thus, it is equally incumbent on the part of the
concerned MSMEs to be vigilant enough to follow the process
laid down under the said Framework, and bring to the notice of
the concerned Banks, by producing authenticated and verifiable
documents/material to show its eligibility to get the benefit of the
said Framework. [Para 17]
List of Acts
Micro, Small and Medium Enterprises Development Act, 2006;
The Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002; Banking Regulation
Act, 1949.
List of Keywords
Micro, Small and Medium Enterprises; MSMEs; Framework for
Revival, Rehabilitation of MSMEs; Promotion and development
of MSMEs; Instructions/Directions/Guidelines issued by RBI;
Guidelines/instructions pertaining to MSMEs; Loan accounts;
Non-Performing Assets (NPA); Banks and Non-Banking Financial
Companies (NBFCs); Restructuring process; Mandatory instructions;
Mandatory; Directory; Incipient stress; Secured creditors; Security
interest; Enforcement of security interest; Reserve Bank of India
(RBI); Defaulters-Borrowers; RBI Notification; Banking companies.
Case Arising From
CIVIL APPELLATE JURISDICTION: Civil Appeal No.8332 of 2024
From the Judgment and Order dated 11.01.2024 of the High Court of
Judicature at Bombay in WPL No.20100 of 2023
With
Civil Appeal Nos. 8333, 8334, 8335, 8336 and 8337 of 2024
[2024] 8 S.C.R. 143
M/s Pro Knits v. The Board of Directors of Canara Bank & Ors.
Appearances for Parties
Nikhil Goel, Sr. Adv., Nachiketa Vajpayee, Ms. Divyangna Malik,
Sriram P., Mathews J. Nedumpara, Ms. Usha Nandini V., Ms. Maria
Nedumpara, Ms. Hemali Kurne, Ms. Rohini Amin, Shameem Fayiz,
Advs. for the Appellant.
Dinkar Singh, Deepak Goel, Ms. Alka Goyal, Ms. Rubi Kumari,
Ms. Harshita Maheshwari, Rajesh Kumar Gautam, Anant Gautam,
Dinesh Sharma, Ms. Shivani Sagar, R.P. Daida, Ms. Kavitoli G
Yeptho, Kushagra Nilesh Sahay, Ajay Choudhary, Tikshta Modi,
Sonia Munjal, Anshuman Gupta, Prashant Alai, Kunal Mimani, Advs.
for the Respondents.
Judgment / Order of the Supreme Court
Judgment
Bela M. Trivedi, J.
1. Leave granted.
2. The Appellants in this batch of Appeals, who claim themselves to
be the Micro, Small and Medium Enterprises (MSMEs) registered
under the Micro, Small and Medium Enterprises Development Act,
2006 (hereinafter referred to as the “MSMED Act”), have challenged
the impugned common order dated 11.01.2024 passed by the High
Court of Judicature at Bombay in Writ Petition (L) No. 20100 of 2023
and Others, whereby the High Court has dismissed the said Writ
Petitions by holding that the Banks/ Non-Banking Financial Companies
(NBFCs) are not obliged to adopt the restructuring process as
contemplated in the Notification dated 29th May, 2015 issued by the
Ministry of Micro, Small and Medium Enterprises, on its own without
there being any application by the Petitioners/ MSMEs. The High Court
without expressing any opinion on the merits or the factual aspects
of the writ petitions granted leave to the Appellants -Writ Petitioners
to agitate the other issues by adopting alternative remedies as may
be available to them under the law.
3. The learned Counsels for the parties in the instant Appeals have
also restricted their submissions only to the said issue decided by
the High Court, without addressing other issues on the facts and
merits involved in the writ petitions.
144 [2024] 8 S.C.R.
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4. The Appellants who were the Writ Petitioners before the High Court
had basically challenged the actions of the Respondents Banks/
NBFCs taken by them against the appellants under the provisions
contained in The Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002 (hereinafter
referred to as the “SARFAESI Act”). The bone of contention raised
by the learned Counsel Mr. Mathews Nedumpara appearing for the
Appellants in all the Appeals is that the respondents-Banks could
not have classified the loan accounts of the appellants who were
the MSMEs, as Non-Performing Assets (NPA), without following the
procedure laid down in the Instructions for Framework for Revival
and Rehabilitation of MSMEs issued vide the Notification dated
29th May, 2015 by the Ministry of MSME, in exercise of the powers
conferred under Section 9 of the MSMED Act. According to him, it
was incumbent on the part of the Respondents Banks/ NBFCs to
identify incipient stress in the account by creating three sub categories
as mentioned in the said Notification and to explore various options
to resolve the stress in the account as contemplated in the said
Notification. He further submitted that the said Notification and the
subsequent Instructions/Directions issued by the Central Government
and the Reserve Bank of India are for the purpose of facilitating the
promotion and development and enhancing the competitiveness of
MSMEs and therefore it was mandatory on the part of the respondents
to follow the same. Non-observance of the mandatory Instructions
contained in the said Notification has rendered all the subsequent
actions taken by the respondents under the SARFAESI Act, illegal
and void ab initio.
5. However, the learned Counsels appearing for the Respondents
Banks/ NBFCs contended that the High Court has rightly not
considered the process or procedure laid down in the Notification
dated 29.05.2015 as mandatory, in as much as the provisions
contained in the SARFAESI Act override the provisions of the other
Acts including the MSME Act as per Section 35 of the said Act. In
the instant cases, the concerned appellants had not applied to the
Respondents Banks to avail the benefit of the said Notification at the
relevant time and the Respondents Banks have already initiated and
in certain cases concluded the proceedings undertaken under the
SARFAESI Act after following the due process of law. They further
submitted that the process of restructuring as contemplated in the
[2024] 8 S.C.R. 145
M/s Pro Knits v. The Board of Directors of Canara Bank & Ors.
said Notification and classification of borrower’s account as NPA are
two independent subjects and therefore it can not be interpreted that
unless the procedure under the said Notification for restructuring is
adopted, the appellants accounts could not have been classified as
NPAs. According to them, the Instructions issued under Section 9 of
the MSMED Act are mere directory and not mandatory nor do they
have any statutory force.
6. Before delving into the issue involved in the instant appeals as to
whether the Notification dated 29.05.2015 issued by the Central
Government in exercise of the powers conferred under Section 9
of the MSMED Act, as revised from time to time, is mandatory or
directory, let us have a glance over the relevant provisions of the
MSMED Act. It may be noted that the very object and purpose
of the MSMED Act is to provide for facilitating the promotion and
development and enhancing the competitiveness of Micro, Small
and Medium Enterprises and for matters connected therewith
and incidental thereto. Section 9 thereof empowers the Central
Government to take measures for the purpose of facilitating such
promotion and development and enhancing competitiveness of
MSMEs by specifying the programmes, guidelines or instructions
as it may deem fit, by issuing Notifications.
7. Section 10 of the MSMED Act states that the policies and practices
in respect of the credit to the Micro, Small and Medium Enterprises
shall be progressive and such as may be specified in the guidelines
or instructions issued by the Reserve Bank, from time to time, to
ensure timely and smooth flow of credit to such enterprises, minimize
the incidence of sickness among and enhance the competitiveness
of such enterprises.
8. At this juncture, it would also be apt to refer to the relevant provisions
contained in the Banking Regulation Act, 1949. Section 21 of the
said Act empowers the Reserve Bank of India to control advances by
Banking companies. The said section inter alia provides that where
the Reserve Bank is satisfied that it is necessary or expedient in the
public interest or in the interest of the depositors or banking policy
so to do, it may determine the policy in relation to advances to be
followed by banking companies generally or by any company in
particular and when the policy has been so determined, all banking
companies or the banking company concerned, as the case may be,
146 [2024] 8 S.C.R.
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shall be bound to follow the policy as so determined. Sub-section (3)
of Section 21 states that every banking company shall be bound to
comply with any directions given to it under the said Section. Further,
Section 35A of the said Banking Regulation Act reads as under: -
“35A. Power of the Reserve Bank to give directions. —
(1) Where the Reserve Bank is satisfied that-
(a) in the public interest; or
(aa) in the interest of banking policy; or
(b) to prevent the affairs of any banking company being
conducted in a manner detrimental to the interests
of the depositors or in a manner prejudicial to the
interests of the banking company; or
(c) to secure the proper management of any banking
company generally,
it is necessary to issue directions to banking companies
generally or to any banking company in particular, it may,
from time to time, issue such directions as it deems fit,
and the banking companies or the banking company, as
the case may be, shall be bound to comply with such
directions.
(2) The Reserve Bank may, on representation made to it
or on its own motion, modify or cancel any direction issued
under sub-section (1), and in so modifying or cancelling
any direction may impose such conditions as it thinks
fit, subject to which the modification or cancellation shall
have effect.”
9. Thus, Section 21 read with Section 35A makes it clear that the
directions issued by the Reserve Bank of India to the Banking
companies are binding on them and they are bound to comply with
such directions.
10. As stated earlier, the whole controversy in the instant appeals
centers around the Notification dated 29.05.2015 issued by the
Central Government in exercise of the powers conferred by Section
9 of the MSMED Act. The said Notification contains the Instructions
for the “Framework for Revival and Rehabilitation of MSMEs”. The
[2024] 8 S.C.R. 147
M/s Pro Knits v. The Board of Directors of Canara Bank & Ors.
relevant part thereof with regard to the identification of the incipient
stress and the committees for stressed MSMEs being relevant are
reproduced hereunder: -
“NOTIFICATION
S.O.(E). 1432 In exercise of the powers conferred in section
9 of the Micro, Small and Medium Enterprises Development
Act, 2006, the Central Government, for the purpose of
facilitating the promotion and development of Micro, Small
and Medium Enterprises, hereby notifies the instructions
for the Framework for Revival and Rehabilitation of Micro,
Small and Medium Enterprises (hereinafter referred to
as the “Framework”), which shall come into force on the
date of its publication in the official Gazette, namely the
Framework for Revival and Rehabilitation of Micro,
Small and Medium Enterprises.
1. Identification of incipient stress
(1) Identification by Banks or creditors - Before a loan
account of a Micro, Small and Medium Enterprise
turns into a Non-Performing Asset (NPA), banks or
creditors are required to identify incipient stress in the
account by creating three sub - categories under the
Special Mention Account (SMA) category as given
in the Table below:
Special Mention Basis for
Account classification
Sub-categories
(1) (2)
SMA-0 Principal or interest payment
not overdue for more than 30
days but account showing
signs of incipient stress
SMA-1 Principal or interest payment
overdue between 31-60 days
SMA-2 Principal or interest payment
overdue between 61-90 days
148 [2024] 8 S.C.R.
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(2) Identification by the Enterprise - Any Micro, Small
or Medium Enterprise may voluntarily initiate
proceedings under this Framework if enterprise
reasonably apprehends failure or its business or its
inability or likely inability to pay debts and before
the accumulated losses of the enterprise equals to
half or more of its entire net worth.
(3) The application for initiation of the proceedings under
this Framework shall be verified by an affidavit of
authorised person.
(4) When such a request is received by lender, the
account should be processed as SMA-0 and the
Committee under this Framework should be formed
immediately.
2. Committees for Stressed Micro, Small and Medium
Enterprises.
(1) Subject to any regulations prescribed by the Reserve
Bank of India for this Framework, all banks shall
constitute one or more Committees at such locations
as may be considered necessary by the board
of directors of such bank to provide reasonable
access, to all eligible Micro, Small and Medium
enterprises which have availed of credit facilities
from such bank.
(2) Subject to inclusion in categories referred to in
paragraph 1, stressed Micro, Small and Medium
Enterprises shall have access to the Committee for
stressed Micro, Small and Medium Enterprises for
deciding on a corrective action plan and determining
the terms thereof in accordance with regulations
prescribed in this Framework
Provided that where the Committee decides that recovery
is to be made as part of the corrective action plan, the
manner and method of recovery shall be in accordance
with the existing policies approved by the board of directors
of the bank which has extended credit facilities to the
[2024] 8 S.C.R. 149
M/s Pro Knits v. The Board of Directors of Canara Bank & Ors.
enterprise, subject to any regulations prescribed by the
Reserve Bank of India.
3-16 ...….”
11. The RBI in order to make the said Framework contained in the
Notification dated 29.05.2015 compatible with the existing regulatory
guidelines on “Income Recognition, Asset Classification and
provisioning pertaining to Advances” issued to the banks by the RBI,
had made certain changes in the said Framework, in consultation
with the Central Government and issued revised Framework along
with the operating Instructions vide the Communication dated 17th
March, 2016, addressed to all the Scheduled Commercial Banks.
12. It is pertinent to note that in exercise of the powers conferred by
Section 21 and 35A of the Banking Regulation Act, 1949, the Reserve
Bank of India, after having being satisfied that it was necessary and
expedient in the public interest to do so, had issued the Master
Direction, called the “Reserve Bank of India [Lending to Micro, Small
and Medium Enterprises (MSME) Sector] Directions, 2016,” vide the
Notification dated 21st July, 2016. The said Directions have been
made applicable to every Scheduled Commercial Bank excluding
Regional Rural Banks (RRBs) licensed to operate in India by the
Reserve Bank of India. Amongst the other Directions, the Direction 4
contained in Chapter IV thereof, pertained to the common guidelines/
instructions for lending to MSME Sector. While advising all the
Scheduled Commercial Banks to follow the guidelines/ instructions
pertaining to MSMEs, it was directed in the Direction 4.8 as under: -
“4.8 Framework for Revival and Rehabilitation of MSMEs.
The Ministry of Micro, Small and Medium Enterprises,
Government of India, vide their Gazette Notification dated
May 29, 2015 had notified a ‘Framework for Revival and
Rehabilitation of Micro, Small and Medium Enterprises’
to provide a simpler and faster mechanism to address
the stress in the accounts of MSMEs and to facilitate the
promotion and development of MSMEs. The Reserve
Bank was advised to issue necessary instructions to
banks for effective implementation and monitoring of the
said Framework. After carrying out certain changes in the
captioned Framework in consultation with the Government
150 [2024] 8 S.C.R.
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of India, Ministry of MSME so as to make it compatible with
the existing regulatory guidelines on ‘Income Recognition,
Asset Classification and provisioning pertaining to
Advances’ issued to banks by RBI, the guidelines on the
captioned Framework along with operating instructions
were issued to banks on March 17, 2016. The revival and
rehabilitation of MSME units having loan limits up to Rs.25
crore would be undertaken under this Framework. Banks
were required to put in place their own Board approved
policy to operationalize the Framework not later than June
30, 2016. The revised Framework supersedes our earlier
Guidelines on Rehabilitation of Sick Micro and Small
Enterprises issued vide our circular RPCD. CO. MSME
& NFS.BC.40/06.02.31/2012-2013 dated November 1,
2012, except those relating to Reliefs and Concessions
for Rehabilitation of Potentially Viable Units and One Time
Settlement, mentioned in the said circular.
The salient features of the Framework are as under:
i) Before a loan account of an MSME turns into a Non-
Performing Asset (NPA), banks or creditors should
identify incipient stress in the account by creating
three sub-categories under the Special Mention
Account (SMA) category as given in the Framework.
ii) Any MSME borrower may also voluntarily initiate
proceedings under this Framework.
iii) Committee approach to be adopted for deciding
corrective action plan.
iv) Time lines have been fixed for taking various decisions
under the Framework.”
13. In view of the above, it is absolutely clear that the Instructions for
the Framework for Revival and Rehabilitation of Micro, Small and
Medium Enterprises as notified by the Central Government vide
the Notification dated 29th May, 2015 in exercise of the powers
conferred under Section 9 of the MSMED Act, as revised by the
RBI Notification dated 17th March, 2016, and the Master Directions
i.e. the Reserve Bank of India (Lending to Micro, Small and Medium
Enterprises Sector) Directions, 2016, issued by the Reserve Bank of
[2024] 8 S.C.R. 151
M/s Pro Knits v. The Board of Directors of Canara Bank & Ors.
India in exercise of the powers conferred by Section 21 and 35(A)
of the Banking Regulation Act, having statutory force, are binding
to all Scheduled Commercial Banks, licensed to operate in India by
the Reserve Bank of India, as stated in the said Directions. It cannot
be gainsaid that the Banking Regulation Act 1949 basically seeks to
regulate banking business and mandates a statutory comprehensive
and formal structure of banking regulation and supervision in India.
Section 21 and Section 35A of the said Act empower the Reserve
Bank of India to frame the policy and give directions to the banking
companies in relation to the advances to be followed by the banking
companies. Such directions have got to be read as supplement to
the provisions of the Banking Regulation Act and accordingly are
required to be construed as having statutory force and mandatory.
14. As transpiring from the said Instructions/Directions, the entire exercise
as contained in the “Framework for Revival and Rehabilitation of
MSMEs” is required to be carried out by the banking companies
before the accounts of MSMEs turn into Non-Performing Asset. It
is true that the security interest created in favour of any Bank or
secured creditor may be enforced by such creditor in accordance
with the provisions contained in Chapter-III of the SARFAESI Act,
and that as per Section 35 of the SARFAESI Act, the provisions of
the said Act have the 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. However,
pertinently the whole process of enforcement of security interest as
contained in Chapter III of the SARFAESI Act, could be initiated only
when the borrower makes any default in repayment of secured debt
or any instalment thereof, and his account in respect of such debt is
classified by the secured creditor as non-performing asset, in view
of Section 13(2) of the said Act.
15. What is contemplated in the “Framework for Revival and Rehabilitation
of MSMEs” contained in the Instructions/ Directions stated
hereinabove, is required to be followed prior to the classification of
the borrower’s account, (in the instant case MSMEs loan account),
as Non-Performing Assets. The said Instructions contained in the
Notification dated 29.05.2015 as part of measures taken for facilitating
the promotion and development of MSMEs issued by the Central
Government in exercise of powers conferred under Section 9 of the
MSMED Act, followed by the Directions issued by the RBI in exercise
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of the powers conferred under Section 21 and 35A of the Banking
Regulation Act, the Banking companies though may be ‘secured
creditors’ as per the definition contained in Section 2 (zd) of the
SARFAESI Act, are bound to follow the same, before classifying the
loan account of MSME as NPA.
16. We may hasten to add that under the “Framework for Revival and
Rehabilitation of MSMEs”, the banks or creditors are required to
identify the incipient stress in the account of the Micro, Small and
Medium Enterprises, before their accounts turn into non-performing
assets, by creating three sub-categories under the “Special Mention
Account” Category, however, while creating such sub-categories,
the Banks must have some authenticated and verifiable material
with them as produced by the concerned MSME to show that loan
account is of a Micro, Small and Medium Enterprise, classified and
registered as such under the MSMED Act. The said Framework also
enables the Micro, Small or Medium Enterprise to voluntarily initiate
the proceedings under the said Framework, by filing an application
along with the affidavit of an authorized person. Therefore, the stage
of identification of incipient stress in the loan account of MSMEs and
categorization under the Special Mention Account category, before
the loan account of MSME turns into NPA is a very crucial stage, and
therefore it would be incumbent on the part of the concerned MSME
also to produce authenticated and verifiable doucments/material for
substantiating its claim of being MSME, before its account is classified
as NPA. If that is not done, and once the account is classified as
NPA, the banks i.e. secured creditors would be entitled to take the
recourse to Chapter III of the SARFAESI Act for the enforcement of
the security interest.
17. It is also pertinent to note that sufficient safeguards have been
provided under the said Chapter for safeguarding the interest of the
Defaulters-Borrowers for giving them opportunities to discharge their
debt. However, if at the stage of classification of the loan account
of the borrower as NPA, the borrower does not bring to the notice
of the concerned bank/creditor that it is a Micro, Small or Medium
Enterprise under the MSMED Act and if such an Enterprise allows
the entire process for enforcement of security interest under the
SARFAESI Act to be over, or it having challenged such action of the
concerned bank/creditor in the court of law/tribunal and having failed,
such an Enterprise could not be permitted to misuse the process
[2024] 8 S.C.R. 153
M/s Pro Knits v. The Board of Directors of Canara Bank & Ors.
of law for thwarting the actions taken under the SARFAESI Act by
raising the plea of being an MSME at a belated stage. Suffice it to
say, when it is mandatory or obligatory on the part of the Banks to
follow the Instructions/Directions issued by the Central Government
and the Reserve Bank of India with regard to the Framework for
Revival and Rehabilitation of MSMEs, it would be equally incumbent
on the part of the concerned MSMEs to be vigilant enough to follow
the process laid down under the said Framework, and bring to the
notice of the concerned Banks, by producing authenticated and
verifiable documents/material to show its eligibility to get the benefit
of the said Framework.
18. In that view of the matter, we are of the opinion that the findings
recorded by the High Court in the impugned order that the Banks
are not obliged to adopt the restructuring process on its own or that
the Framework contained in the Notification dated 29.05.2015, as
revised from time to time could not be said to be mandatory in nature,
are highly erroneous and cannot be countenanced. The Instructions/
Directions issued by the Central Government under Section 9 of
the MSMED Act and by the RBI under Section 21 and Section 35A
have statutory force and are binding to all the Banking companies.
19. The impugned order therefore is set aside. Since, it has been
submitted by the Learned Counsels for the Respondents-banks
that in all the cases, the proceedings under the SARFAESI Act
have already been concluded and the possession of the respective
premises of the petitioners has already been taken over, we do not
propose to remand the matters to the High Court for deciding the Writ
Petitions afresh. However, since the High Court has not dealt with
the other issues based on the factual aspects of the writ petitions,
we clarify that it would be open for the appellants to take recourse
to any remedy as may be legally available to them for agitating the
issues not decided by the High Court in the impugned order. All the
appeals stand allowed to the aforesaid extent.
Result of the case: Appeals allowed.
†
Headnotes prepared by: Divya Pandey
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