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IN THE HIGH COURT OF KERALA AT ERNAKULAM
GOPINATH P, J
M/s. M.d. Esthappan, Represented By Its Sole Proprietor, Mr. M.D. Esthappan – Appellant
Versus
Reserve Bank Of India – Respondent
WP(C) NO. 45166 OF 2024
(A) Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 - Micro, Small and Medium Enterprises Development Act, 2006 - Proceedings initiated under SARFAESI Act without adhering to MSME notification dated 29.05.2015 - Petitioners claimed to be MSMEs entitled to benefits under the framework for revival and rehabilitation. (Paras 2, 3)
(B) The Supreme Court in Pro Knits v. Canara Bank; (2024) 10 SCC 292 established that failure to refer MSME claims for corrective action prior to NPA classification is illegal. (Paras 4, 8)
(C) The petitioners did not raise MSME status prior to NPA classification, thus forfeiting rights to claim benefits. (Paras 8, 14)
(D) The High Court held that the petitioners are not entitled to relief as the claims were raised belatedly and were covered by existing precedents. (Paras 9, 14) (E) The petitioners' conduct, including previous litigations, demonstrated a lack of diligence in asserting their MSME status. (Paras 10, 18) (F)
Result: Writ petitions dismissed.
Certainly. Based on the provided legal document, the key points are as follows:
The petitioners, who claim to be MSMEs, did not raise their MSME status prior to the classification of their accounts as Non-Performing Assets (NPAs). Their claims for benefits under the MSME revival framework were made belatedly, after the accounts had already been classified as NPAs, which is contrary to the established legal principles and guidelines (!) (!) .
The law clearly states that if a borrower does not notify the bank of their MSME status before the account is classified as NPA, they cannot later invoke the benefits of the MSME framework. The borrower’s failure to act diligently at the appropriate time precludes subsequent claims (!) (!) (!) .
The borrower’s conduct, including previous litigations and participation in the recovery process without objection, has been considered as waiver and acquiescence, disqualifying them from raising the MSME status at a later stage (!) (!) .
The statutory and procedural framework for MSME benefits is mandatory and prevails over optional guidelines or frameworks. The notifications issued under the MSME Act and the RBI guidelines are binding, and their non-compliance by the borrowers results in the dismissal of their claims (!) (!) .
For loans exceeding a specified threshold (above Rs.25 crore), the restructuring and recovery process is governed by separate guidelines, which the petitioners’ liabilities fall under, thus excluding them from the MSME-specific framework (!) (!) (!) .
The legal principles emphasize that proceedings initiated without proper adherence to the prescribed procedures and without prior assertion of MSME status are invalid. The courts have consistently held that claims for benefits under the MSME framework must be made prior to the classification of the account as NPA (!) (!) (!) .
The law discourages piecemeal litigation and deliberate fragmentation of issues to gain procedural advantages. The petitioners’ multiple proceedings and the timing of their claims are viewed as an abuse of process and are thus rejected (!) (!) (!) .
The court has reaffirmed its stance that the law is binding and that earlier judgments and guidelines must be followed. The petitioners’ claims are dismissed because they did not adhere to the procedural requirements and raised their claims belatedly (!) (!) .
The conduct of the petitioners, including their participation in the recovery process and previous litigations, has been deemed as a waiver of their right to later challenge the proceedings on the ground of MSME status or procedural irregularities (!) (!) .
The court has also expressed concern over the unauthorized recording and circulation of proceedings, which may constitute contempt of court, emphasizing the importance of maintaining the dignity and integrity of judicial processes (!) (!) (!) .
These points collectively underscore that the legal framework and procedural requirements for claiming MSME benefits are strict and must be adhered to at the appropriate time, failing which such claims are barred and dismissed.
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 1st petitioner in W.P.(C)No.46514/2024 is a Private Limited Company and the 2nd petitioner in that writ petition is stated to be the Managing Director of the 1st petitioner Company. In the connected writ petition, namely, W.P.(C)No.45166/2024, the 1st petitioner is described as 'M/s. M.D. Esthappan' (a proprietary concern) and the 2nd petitioner (who is also the 2nd petitioner in W.P.(C)No.46514/2024) is stated to be the sole proprietor of the 1st 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 inPro 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 illegal and co
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