A registered MSME must disclose its status before NPA classification to invoke protections under relevant frameworks; failure to do so precludes later challenges to recovery actions.

 JUDGMENT :

MOHAMMED NIAS C.P., J.

In W.P.(C) No. 42050 of 2024, the petitioners, comprising a private limited company and its Managing Director, had availed multiple credit facilities from the respondent Bank, including working capital and term loans aggregating over Rs. 10 crores, secured by mortgage of immovable properties. Upon default, the loan account was classified as a Non- Performing Asset (NPA) with effect from 20.10.2020. Recovery proceedings were initiated under the SARFAESI Act, including issuance of notice under Section 13(2), followed by filing of an application before the Debts Recovery Tribunal for recovery of the outstanding dues. Though the petitioners were sanctioned a one-time settlement (OTS), they repeatedly defaulted in making the committed payments, leading to the withdrawal of settlement terms and continuation of enforcement proceedings.

2. After several unsuccessful litigations before this Court and the DRAT, the petitioners have now approached this Court contending that they are a registered Micro, Small and Medium Enterprise (MSME) as per Udyam Registration obtained prior to NPA classification, and are therefore entitled to protection under the revival and rehabilitation framework notified by the Central Government through Ext. P8 notification dated 29.05.2015, and made binding on banks by the Ext. P9 RBI circular dated 17.03.2016. It is their case that the Bank proceeded under SARFAESI without first referring their account to the Committee for stressed MSMEs as mandated in the said framework, and hence the proceedings are legally untenable. They rely on the judgment of the Hon’ble Supreme Court in Pro Knits v. Canara Bank, [(2024) 10 SCC 292], to contend that where MSME status is evident prior to NPA classification, the Bank is obligated to consider corrective steps under the statutory framework before resorting to coercive recovery.

3. The petitioners contend that the defaults were due to unforeseen business losses and the impact of the pandemic, and that they made bona fide efforts to settle the dues through various proposals. The petitioners contend that the MSME Notification dated 29.05.2015, issued under Section 9 of the MSMED Act, has statutory force equivalent to legislation and mandates that recovery against MSMEs shall only proceed after stress identification and resolution through the Committee mechanism under para 5(4)(iii). The Bank’s failure to comply with this precondition, despite the petitioners’ registration as an MSME, renders the recovery proceedings void ab initio.

4. The petitioners submit that the MSME Notification dated 29.05.2015 lays down a mandatory three-stage framework for stressed accounts—rectification, restructuring, and only thereafter, recovery— applicable upon classification of the borrower under Special Mention Account (SMA) categories. Clause 3 of the framework mandates the constitution of an expert, impartial Committee with representatives from creditors, the State, and external MSME professionals. This Committee is statutorily tasked with formulating a Corrective Action Plan (CAP) prior to any coercive action. The petitioners contend that in their case, the respondent Bank bypassed both the rectification an