Justice Dipankar Datta, Justice Augustine George Masih, Supreme Court
Lending Bank Not Prohibited Under 2015 Framework From Classifying Account Of Defaulting MSME As NPA Without Identification Of Incipient Stress: Supreme Court
|The Writ Petition before the Supreme Court was filed under Article 32 of the Constitution by an enterprise registered under the Micro, Small and Medium Enterprises Development Act, 2006.
While dismissing a Petition filed by an Enterprise, the Supreme Court has observed that the Notification dated May 29, 2015, containing the ‘Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises’ does not prohibit the lending bank/secured creditor from classifying the account of the defaulting MSME as NPA and from issuing demand notice under Section 13(2) of the SARFAESI Act without identification of incipient stress in the account of the defaulting borrower (MSME).
The Writ Petition before the Apex Court was filed under Article 32 of the Constitution of India by an enterprise registered under the Micro, Small and Medium Enterprises Development Act, 2006.
The Division Bench of Justice Dipankar Datta and Justice Augustine George Masih held, “In our reading, the terms of the FRAMEWORK do not prohibit the lending bank/secured creditor (assuming that it has no conscious knowledge that the defaulting borrower is an MSME) to classify the account of the defaulting MSME as NPA and to even issue the demand notice under Section 13(2) of the SARFAESI Act without such identification of incipient stress in the account of the defaulting borrower (MSME); however, upon receipt of the demand notice, if such borrower in its response under Section 13(3-A) of the SARFAESI Act asserts that it an MSME and claims the benefit of the FRAMEWORK citing reasons supported by an affidavit, the lending bank/secured creditor would then be mandatorily bound to look into such claim keeping further action under the SARFAESI Act in abeyance; and, should the claim be found to be worthy of acceptance within the framework of the FRAMEWORK, to act in terms thereof for securing revival and rehabilitation of the defaulting borrower.”
Advocate Mathews J Nedumpara represented the Petitioner.
Factual Background
The petitioning enterprise executed a loan agreement with the NKGSB Cooperative Bank but failed in its obligation to repay the loan. In due course, the account of the petitioning enterprise was classified as a non-performing asset and the authorized officer of the second respondent issued a demand notice under Section 13(2) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, calling upon the petitioning enterprise to repay the dues within 60 days. An application was moved before the relevant Magistrate under Section 14 of the SARFAESI Act, and a Court Commissioner was appointed.
Arguments
It was the case of the petitioning enterprise that it was the obligation of the second respondent to identify “incipient stress” in the loan account of the petitioning enterprise, but it did not so identify before classifying the loan account as NPA, and the same was thus illegal. It was also submitted that the Notification dated May 29, 2015, containing the “Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises” is binding on the lending banks/secured creditors under the SARFAESI Act and, therefore, any measure taken under the SARFAESI Act without complying with the terms of the Framework against a micro, small or medium enterprise would amount to an act in excess of jurisdiction.
Reasoning
Referring to the Notification, the Bench explained that in the sequence of the Framework “Identification by Banks or Creditors” comes first, but it is immediately followed by “Identification by the Enterprise”. In terms of sub-paragraph 2, any MSME may choose to voluntarily initiate proceedings under the Framework if it “reasonably apprehends failure of its business or its inability or likely inability to pay debts and before the accumulated losses of the enterprise equal to half or more of its entire net worth”. The Bench also noted that for initiation of proceedings under the Framework, the application has to be verified by an affidavit of an authorized person and upon receipt of a request, the lending bank/secured creditor is mandatorily bound to proceed in terms of the Framework and to constitute a committee to identify incipient stress in the account.
It was further noticed that the petitioning enterprise did not ever claim the benefit of the terms of the Framework after the demand notice under Section 13(2) of the SARFAESI Act was issued. It was at the stage of compliance with an order passed by the relevant Magistrate under Section 14 of the SARFAESI Act that the writ petition had been presented before the Apex Court claiming benefits of the Framework to restrain the respondent and its officers from proceeding further under the SARFAESI Act and other enactments except in the manner contemplated under the said Notification. “We find the bona fides of the petitioning enterprise to be suspect”, it mentioned while dismissing the Petition.
“Needless to observe, the petitioning enterprise will be at liberty to pursue its remedy under Section 17 of the SARFAESI Act, in accordance with law”, the Bench concluded.
Cause Title: Shri Shri Swami Samarth Construction & Finance Solution v. The Board of Directors of Nkgsb Co-op. Bank Ltd. (Neutral Citation: 2025 INSC 908)
Appearance
Petitioner: Advocates Mathews J Nedumpara, Maria Nedumpara, Hemali Suresh Kurne, Shameem Fayiz, AOR Chand Qureshi, Advocate Dewashish Vishwakarma