Banks must follow MSME Notification procedures to identify stress in accounts before classifying them as NPAs. Failure to do so legitimizes subsequent enforcement measures under the SARFAESI Act.

JUDGMENT :

1. By this Writ Petition, the Petitioners are seeking a direction to the Central Government and Reserve Bank of India to enforce the Notification (‘MSME Notification’) dated 29th May, 2015 and further ensure that the recovery action initiated against the Petitioners that is stated to be in violation of the mandate of the MSME Notification is recalled. The Petitioners have accordingly sought to restrain further action being taken by the Respondent Nos.1 to 3 (“Respondent – Bank”) under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (for short “SARFAESI Act”) for enforcement of its security interest.

2. Petitioner No.1 is stated to be a private limited, small manufacturing company registered as a Micro, Small and Medium Enterprise (MSME) Unit under the Micro, Small and Medium Enterprises Development Act, 2006 (for short “MSMED Act”) and is claiming entitlement to the benefits of the MSMED Act read with the MSME Notification dated 29th May, 2015. The Petitioners have relied upon the Petitioner Company’s MSME Udyog Aadhaar Registration Certificate dated 6th September, 2019 annexed at Exhibit ‘A’ to the Petition and Petitioner Company’s Udyam Registration Certificate No.UDYAM-MH-18-00331519 dated 30th December, 2020 annexed at Exhibit ‘B’ to the Petition.

3. A brief background of the relevant facts are as under:-

(i) Petitioner No.1 has been banking with the Respondent – Bank since the last 14 years.

(ii) The loan account of Petitioner No.1 had slipped into a Non Performing Asset (“NPA”) on 19th May, 2015, 14th January, 2022, 18th August, 2022, 24th January, 2024 and 20th October, 2024. On each of these dates when the loan account of Petitioner No.1 was declared as NPA, the Petitioners had either paid the outstanding installment and / or regularized it and also requested the Respondent – Bank to renew the limits.

(iii) On 28th March, 2024, the OCC / ODBD facility of Petitioner No.1 was renewed by the Respondent – Bank for Rs.176.00 lakhs. One of the sanction conditions provided for starting a recurring deposit (RD) of Rs.5.00 lacs per month. It is pertinent to note that the Petitioners failed to comply with the said condition. The validity of sanction was till 27th September, 2024. The RD was credited only once on 29th April, 2024 and hence the account of Petitioner No. 1 slipped into NPA on 20th October, 2024.

(iv) A notice dated 21^st October 2024 was issued by the Respondent – Bank under Section 13(2) of the SARFAESI Act but there was no response to the same. Interestingly, the Petition does not even disclose this demand notice but instead, refers to an earlier demand notice issued by the Respondent – Bank on 22nd August, 2022 being Exhibit – N at page 78 to the Petition, which was not proceeded with by the Respondent – Bank.

(v) A possession notice dated 8th January, 2025 was then issued by the Respondent – Bank under Section 13(4) read with Rules 8 and 9 of the Security Interest (Enforcement) Rules, 2002.

(vi) The present Writ Petition has thereafter been filed on 22nd February, 2025 without filing any Securitization Application as provided under Section 17 of the SARFAESI Act.

(vii) An Interim Application has also been preferred in the above Petition to restrain the Respondent – Bank from taking further measures pursuant to the measures taken under Section 13(2), 13(4) and 14 and in particular the e-auction sale notice dated 26th August, 2025 issued by the Respondent – Bank to auction