Borrowers classified as MSMEs must provide verifiable evidence to banks before their accounts are classified as Non-Performing Assets, as protections under MSMED Act and SARFAESI Act apply only when necessary procedures are followed.

JUDGMENT

(Dated this the 27^th day of February 2026)

The averments in the Writ Petition are as follows:- The 1st petitioner is a Micro, Small & Medium Enterprise engaged in manufacture of food products and Ext.P1 is the UDYAM certificate issued by the Ministry of Micro, Small & Medium Enterprises (MSME), Government of India. According to the petitioners, the 1^st petitioner, being an MSME, is entitled to the protection of the notification No.S.O.1432 (E) dated 29.5.2015, which mandates that banks and financial institutions shall identify incipient stress in the account of MSMEs and to make effort towards resolution of stress by classifying as SMA - 0 before there is default in the account.

2. The respondent Banks classified the account of the petitioners as NPA and invoked SARFAESI Act without following the mandatory procedure prescribed as per Ext.Nos.P2 and P3, without ascertaining the possibility of revival of the MSME Enterprise facing financial stress or to restructure the loan including providing additional financial assistance.

3. For its working capital towards trade and export of agricultural produce, the petitioners availed credit facilities from respondent Nos.1 to 9 and the same was renewed from time to time. All the loan facilities were covered by collateral facilities in respect of the respective loan. When there was default in loan repayment, without following the mandatory procedure prescribed under ‘Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises’, the 2^nd respondent invoked the provision under the SARFAESI Act and issued notice under Section 13(2) of the Act on 9.5.2025 calling the petitioners to pay the amounts due and threatening coercive proceedings. This was followed by notice under Section 13(4) dated 29.7.2025. The 5^th respondent also issued demand notice under Section 13(2) of the Act to the petitioners on 11.4.2025 and the 8^th respondent issued demand notice under Section 13(2) of the Act on 2.9.2025, followed by notice under Section 13(4) of the Act on 2.12.2025. The 2^nd respondent filed M.C. No.1054 of 2025 before the Additional Chief Judicial Magistrate, Ernakulam and an Advocate Commissioner was appointed, who issued notice dated 5.12.2025 to take physical possession of the properties on 19.12.2025. The 3^rd respondent filed M.C. No.705 of 2025 before the Chief Judicial Magistrate and the Advocate Commissioner issued notice dated 19.12.2025 to take physical possession of the properties at Cherpulassery. The respondent Bank also initiated O.A. No. 952 of 2025 before the DRT-1, Ernakulam invoking Section 19 of the RDB Act . The 6^th respondent also instituted O.A. No.778 of 2025 before the DRT- 1, Ernakulam. Therefore, the petitioners have filed this Writ Petition seeking following reliefs:

“a): To declare that the notification dated 29-05-2015, in unmistakable terms, declares that the MSME-borrower has no obligation to make an application for resolution of stress and, on the contrary, that banks and financial institutions are duty-bound to identify incipient stress based on the illustrative signs indicated in Annexure-I to the RBI Circular dated 17-03-2016; and further, that in any case where the bank has failed to identify incipient stress, it is duty-bound to classify the account as SMA-1 if the default is more than 31 days and as SMA-2 if the default is more than 61 days, and thereafter shall constitute a Committee and make a reference to that Committee for resolution of stress; and further, that the Committee is empowered to permit recovery in terms of Para 5(3)(iv) if the resolution of stress is not feasible; and b) In furtherance of prayer (a) above, to declare that the judgments of the Supreme Court in Pro