The restructuring provisions under the MSMED Act are applicable only to active units; a closed unit cannot claim such benefits, justifying the bank's recovery actions.

Headnote:(A) Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 - Articles 226 and 227 of the Constitution of India - Quashing of notices issued under the Act for recovery of dues from a Micro, Small and Medium Enterprise (MSME) - Court finds that the petitioner, a partnership firm, had become a Non-Performing Asset (NPA) due to irregular repayments, and had subsequently closed operations, rendering them ineligible for the benefits of restructuring under the MSMED Act. (Paras 1, 10, 12, 14)

(B) MSMED Act - Guidelines for MSME restructuring - The court held that the provisions for revival and rehabilitation apply only to functioning units, and since the petitioner's unit was closed, the bank's recovery actions were justified. (Paras 10, 12)

Facts of the case:
The petitioners, a partnership firm, sought to quash recovery notices issued by the bank after their account was classified as NPA due to repayment irregularities. The firm admitted to closing operations and sought restructuring benefits under MSMED Act, which the bank denied.

Findings of Court:
The court found that the petitioner's closure of operations disqualified them from MSME benefits, allowing the bank's recovery actions to proceed.

Issues: The main issues were whether the petitioner could claim restructuring benefits under the MSMED Act despite their unit being closed and whether the bank's actions were justified.

Ratio Decidendi: The court ruled that the MSMED Act's restructuring provisions apply only to active units, and since the petitioner's business was closed, the bank's recovery actions were valid.

Result: Petition dismissed.

CAV ORDER

The petitioners are before this Court seeking quashing of notices issued on 14-12-2023, 12-03-2024 and 18-03-2024 by respondent invoking the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter referred to as ‘the Act’ for short).

2. Heard Sri R.S.Rajesh, learned counsel appearing for the petitioners and Smt. Sadhana Desai, learned counsel appearing for the respondent.

3. Facts, in brief, germane are as follows:-

The 1^st petitioner is a partnership firm constituted by the 2^nd petitioner along with his wife and mother, petitioners 3 and 4. For the sake of convenience in this order all the petitioners would be referred to as the petitioner/firm/unit. The office of the petitioner was in Bangalore. The firm was said to have been registered under the Micro, Small and Medium Enterprises Development Act, 2006 (‘MSMED Act’ for short) and the firm was eligible for all Government schemes in terms of notifications issued from time to time by the Ministry of Finance concerning benefits, obligations and liability. The firm on 05-10-2022 approaches the respondent/State Bank of India (‘the Bank’ for short) requesting to sanction fund-based cash credit facilities and submits an application to that effect. The Bank sanctioned fund-based cash credit facility of ₹15.50 crores under Advance-2 SME segment in terms of sanction communication dated 05-10-2022. The credit facility that was availed was utilized by the petitioner for the purpose of business and working capital requirements. The trading of the petitioner was said to be well and became a little problematic when the firm went into losses and showed signs of sickness from the month of August 2023. It is then, the repayment into the account became irregular.

4. On the account becoming irregular, it was classified as Non-Performing Asset (‘NPA’) on 03-11-2023 and the account was transferred to stress assets management branch of the Bank. Once it was transferred to stress assets management branch coercive action of recovery began invoking the provisions of the Act. In furtherance whereof, the impugned notices under Section 13 of the Act were issued against the firm by the Bank. Notices being issued is what has driven the petitioner to this Court in the subject petition.

5. The learned counsel appearing for the petitioner Sri R. S. Rajesh submits that the petitioner is a MSME. Guidelines stipulated for all MSME schemes for revival, rehabilitation and restructuring of the unit should have been the first step taken by the Bank against the petitioner/MSME. No such decision was taken and the Bank straight away invoked the provisions of the Act, not once but twice. One-time settlement offer was sought for, but it went unheeded and, therefore, left with no choice the petitioner is before this Court in the subject petition. This Court protected the interest of the petitioner by grant of interim order a year ago.

6. The learned counsel Smt. Sadhana S.Desai, appearing for the respondent/Bank who has filed an application seeking vacation of interim order and statement of objections, would vehemently contend that there can be no condition which the petitioner wanting to project with regard to Reserve Bank of India circulars of restructuring or breathing life into a unit whose account has become a NPA. She would contend that when the unit of the petitioner itself is closed where is the question of restructuring or reviving the unit. The firm itself has communicated that the unit has been closed. This matter has been completely suppressed while filing the petition and securing the interim order from the hands of this Court. The learned counsel would submit that as on today ₹18.50 crores are in due and for the last one year the interim order has stopped the Bank from initiating any steps seeking recovery of the amount. She would, therefore, contend that the petition be dismissed with exemplary costs for such suppression.

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