IMPORTANT POINT
Borrowers classified as MSMEs must assert their status before NPA classification to invoke benefits under the SARFAESI Act; failure to do so precludes subsequent claims.

JUDGMENT :

[WP(C) Nos.45166/2024 & 46514/2024]

These writ petitions are filed raising identical contentions and can, therefore, be disposed of by common judgment. The 1 ^st petitioner in W.P.(C)No.46514/2024 is a Private Limited Company and the 2 ^nd petitioner in that writ petition is stated to be the Managing Director of the 1 ^st petitioner Company. In the connected writ petition, namely, W.P.(C)No.45166/2024, the 1 ^st petitioner is described as 'M/s. M.D. Esthappan' (a proprietary concern) and the 2 ^nd petitioner (who is also the 2 ^nd petitioner in W.P.(C)No.46514/2024) is stated to be the sole proprietor of the 1 ^st petitioner. The petitioners in these cases have availed credit facilities from the Dhanlaxmi Bank Ltd. (hereinafter referred to as ‘the Bank’). On default being committed, proceedings have been initiated against the petitioners under the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter referred to as the ‘SARFAESI Act’).

2. These writ petitions have been filed seeking various reliefs principally on the contention that the borrowers are ‘Micro, Small or Medium Enterprises’ (hereinafter referred to as ‘the MSME’) as the term is understood under the Micro, Small and Medium Enterprises Development Act, 2006 (hereinafter referred to as ‘the MSMED Act’) and notifications issued thereunder. It is contended that the proceedings initiated by the respondent Bank under the SARFAESI Act without following the procedure contemplated by the notification issued by the Ministry of Micro, Small and Medium Enterprises on 29.05.2015, in the exercise of the powers conferred by Section 9 of the MSMED Act, cannot be sustained in law. It is stated that the notification dated 29.05.2015 is binding on the Bank on account of guidelines dated 17.03.2016 issued by the Reserve Bank of India (hereinafter referred to as ‘the RBI’).

3. Sri. Mathews J. Nedumpara, the learned counsel appearing for the petitioners would submit that the borrowers are entitled to the benefits of the framework for revival and rehabilitation of Micro, Small and Medium Enterprises as contained in the notification produced as Ext.P.2 in W.P. (C)No.46514/2024 (The Exhibits referred to in this judgment are as they are marked in W.P.(C)No.46514/2024 unless specifically indicated otherwise). It is submitted that Ext.P2 is binding on the Bank in terms of Ext.P3 Circular dated 17.03.2016 issued by the the RBI. It is submitted that, when a unit is registered as MSME, Ext.P2 requires that the loan account shall be referred to a committee known as the Committee for Stressed Micro, Small and Medium Enterprises (hereinafter referred to as ‘the Committee’) for implementation of a corrective action plan which may include rectification and restructuring and only when rectification or restructuring is not possible, can the Bank proceed for recovery. It is submitted that the framework contains detailed guidelines for restructuring/rectification and any action for recovery without considering the scope of rectification or restructuring would be contrary to the statutory framework and the guidelines issued by the the RBI.

4. It is submitted that the judgment of the Supreme Court in Pro Knits v. Canara Bank; (2024) 10 SCC 292 deals with the situation where no claim was made by the unit in question that it was an MSME. It is submitted that where the Bank does not dispute that the borrower is an MSME, the question of identification upon a claim being raised by the borrower that the matter is to be referred to the Committee for a corrective action plan as noticed above does not arise. It is submitted that it is clear from the judgment in Pro Knits (supra), especially paragraph No.16 thereof that where there are materials already before the Bank which show that the borrower is to be classified as an MSME, the failure of the Bank to refer the issue for consideration of the Committee is clearly il