The court upheld the shared responsibility of MSMEs and lenders in identifying loan stress, clarifying the application of the Framework for Revival and Rehabilitation of MSMEs.

JUDGMENT :

(Dipankar Datta, J.)

1. This is a writ petition under Article 32 of the Constitution of India by an enterprise registered under the Micro, Small and Medium Enterprises Development Act, 2006¹[MSME Act].

2. The petitioning enterprise had executed a loan agreement with the NKGSB Co-operative Bank²[respondent no.2] but had failed in its obligation to repay the loan. In due course, the account of the petitioning enterprise was classified as a non-performing asset³[NPA]. The authorised officer of the respondent no.2 issued a demand notice dated 13th May, 2024 under Section 13 (2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002⁴[SARFAESI Act], calling upon the petitioning enterprise to repay the dues of the respondent no.2 within 60 days. It does not appear from the writ petition, filed on 14th July, 2025, that the petitioning enterprise objected to classification of its account as NPA as well as issuance of the demand notice on the ground that the action of the respondent no.2 was in violation of Notification⁵[Notification] dated 29th May, 2015, containing the “FRAMEWORK FOR REVIVAL AND REHABILITATION OF MICRO, SMALL AND MEDIUM ENTERPRISES”⁶[FRAMEWORK] issued by the Joint Secretary to the Government of India, Ministry of Micro, Small and Medium Enterprises. The respondent no.2 having moved an application before the relevant Magistrate under Section 14 of the SARFAESI Act, a Court Commissioner was appointed per order dated 3rd April, 2025. Such order was communicated by the Court Commissioner to the petitioning enterprise on 18th June, 2025.

3. Mr. Nedumpara, learned counsel appearing for the petitioning enterprise, submits that it was the obligation of the respondent no.2 to identify “incipient stress” in the loan account of the petitioning enterprise but it did not so identify prior to classifying the loan account as NPA which, according to him, is wholly illegal. Mr. Nedumpara further submits that the Notification 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 enterprise⁷[MSME] would amount to an act in excess of jurisdiction. The decision in Pro Knits v. Canara Bank , (2024) 10 SCC 292, forming part of the writ petition and though not formally cited, was referred to by Mr. Nedumpara in course of his arguments in support of this submission. Also, Mr. Nedumpara submits that such Notification/FRAMEWORK does not mandatorily require an MSME to notify the lending bank/secured creditor first that the MSME wishes to have incipient stress in its account identified; therefore, any defence that the MSME did not voluntarily initiate proceedings ought not to be allowed to be raised. He, thus, prayed for admission of the writ petition and grant of ad-interim relief against the respondents.

4. The respondents are not required to be noticed since we are not persuaded to agree with any of the submissions advanced by Mr. Nedumpara.

5. The Notification detailing the FRAMEWORK, more particularly paragraph 1 and its sub-paragraphs, have to be read together to make its terms effective and meaningful. Although, in the sequence of the FRAMEWORK “Identification by Banks or Creditors” comes first, 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 equals to half or more of its entire net worth” (emphasis ours). The obligation of the MSME does not end there. For initiation of proceedings under the FRAMEWORK, the application has to be verified by an affidavit of an authorised person and upon receipt of a request, the lending bank/secured creditor is mandat