Banks are required to follow statutory protocols for MSME accounts before classifying them as NPAs; failure to do so renders the classification invalid.

JUDGMENT :

The first petitioner, M/s PDMC Industries, a partnership firm, engaged in metal crushing and M-sand production, and the second petitioner is a proprietary concern, engaged in the business of rubber processing. The third petitioner is the Managing Partner of M/s PDMC Industries and the proprietor of M/s PDMC CO Rubber.

2. The first petitioner availed a cash credit overdraft facility of Rs. 2 crores from the second respondent Bank in 2018–19. The first petitioner also obtained ECLGS loans of Rs.39 lakhs and Rs.10 lakhs under the Central Government’s COVID-19 relief scheme. The second petitioner availed overdraft facilities of Rs. 1.25 crores and Rs. 50 lakhs in 2018–19, along with ECLGS loans of Rs.76 lakhs and Rs.48 lakhs, working capital term loans of Rs. 9.28 lakhs and Rs. 2.0868 crores, and a funded interest term loan of Rs. 34.66 lakhs. The third petitioner, jointly with his brother Mr. Cyriac Mathew, also availed a KCC/OD facility of Rs. 2.75 crores.

3. The petitioners contend that, being an MSME, they are entitled to the benefits conferred under the MSMED Act and the notifications issued pursuant thereto, including Ext. P3 Notification dated 29.05.2015 issued by the first respondent and Ext. P4 Notification dated 21.07.2016 issued by the Reserve Bank of India. Exhibit P3 and Ext. P4 mandates early identification of stress in MSME loan accounts by banks, and requires classification under SMA-0, SMA-1, and SMA-2 based on the extent of payment delays as specifically provided in Clause 1 of Ext. P3. Ext P4 notification also mandates that such an identification of incipient stress be made before classification of an MSME Account as NPA, as provided in Clause 4.8 therein.

4. The first petitioner’s account was declared NPA as on 29.03.2023, as communicated through Exhibit P7 dated 12.04.2023, followed by Ext. P8 loan recall notice dated 19.04.2023. The second and third petitioners were also issued recall notices on 02.05.2023, despite no overdue in their accounts, solely on the grounds of common security and management. The first petitioner was issued Ext. P9 demand notice under Section 13 (2) on 02.06.2023, and objections raised through Exhibit P10 were rejected with a vague Ext. P11 reply on 07.07.2023. Petitioners contend this was contrary to RBI norms, as the account was in the SMA-0 category and within limits as on March 2023. Ext. P13 revival request of the first petitioner, dated 02.09.2023, was also ignored, leading to a possession notice on 08.09.2023. W.P.(C) No. 29909/2023, challenging this inaction, was filed and dismissed, following which the first petitioner filed S.A. No. 462/2024, and later OP(DRT) No. 258/2024, which was withdrawn. The second petitioner’s objections to the demand notice were rejected via Exhibit P18, leading to W.P.(C) No. 32643/2023 and S.A. No. 600/2024, where the Bank failed to file its counter. The third petitioner’s KCC-OD account was recalled without cause; his objections dated 10.05.2023 and 12.09.2023 were rejected by Exhibit P22. The third petitioner preferred W.P.(C) No. 32498/2023, which was dismissed along with the connected cases on 21.05.2024. Review Petition No. 536/2024 was disposed of on 31.05.2024 on the ground that the petitioners had an alternate statutory remedy before the Debts Recovery Tribunal, and W.A. No. 806/2024 was withdrawn with liberty on 20.06.2024. The third petitioner has since filed S.A. No. 598/2024 before the DRT, which is pending.

5. Petitioners 1 and 2 had preferred W.P.(L) Nos. 30531 and 30600 of 2024 before the High Court of Judicature at Bombay seeking enforcement of MSME protections and to declare the SARFAESI proceedings void, and while these were pending, the respondent Bank proceeded under SARFAESI and obtained Exhibit P23 and P25 orders from the CJM Court, Kottayam, for taking possession of properties mortgaged by the first and third petitioners. Ext. P24 and P26 possession notices issued by Advocate Commissioners were issued accordingly. Cit