The court emphasized that banks must identify incipient stress and their failure leads to void classifications and proceedings under the SARFAESI Act.

Anil K. Narendran, J.

The appellants are the petitioners in W.P.(C)No.2045 of

2026, which was one filed invoking the extraordinary jurisdiction of this Court under Article 226 of the Constitution of India, seeking the 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 Knits v. Canara Bank & Ors. [ (2024) 10 SCC 292 ] and Shree Shree Swami Samarth Construction & Anr v. The Board of Directors of NKGSB Co-op Bank & Ors. were rendered per incuriam and sub silentio and will not bind the courts and tribunals in this country under Article 141 of the Constitution, inasmuch as— (i) in Pro Knits, the Court had, contrary to the letter and spirit of the notification, observed that if the MSME had allowed its account to be classified as NPA and for recovery action to be initiated, having failed to bring to the notice of the bank that it is an MSME supported by identifiable and verifiable documents, it cannot be allowed to “thwart” the SARFAESI action at a later stage; and (ii) in Shree Shree Swami Samarth, the Court observed that if the MSME had not even replied to the notice under Section 13(2) and claimed protection as an MSME supported by an affidavit, the recovery action cannot thereafter be challenged—which, to repeat, are contrary to the very letter as well as the spirit of the notification and have created a scenario where the said judgments have been instrumental in denying the benefit of the notification to MSMEs across the country.

c) To declare that the entire proceedings initiated by the Respondent against the Petitioners under Sections 13(2), 13(4) and 14 of the SARFAESI Act , are unconstitutional, illegal and void, being in violation of Paragraph 5(4)(iii) of the notification dated 29.05.2015 under the MSMED Act and without jurisdiction for more than one reason;

d) To issue a writ in the nature of certiorari or any other appropriate writ, order or direction, calling for the entire records and proceedings leading to the classification of the Petitioners’ account as a Non-Performing Asset (NPA), the issuance of notices under Sections 13(2) and 13(4), and the order passed under Section 14 of the SARFAESI Act , 2002 as well as the records pertaining to the purported auctions conducted by the Respondent Bank.

e) to declare that insofar as the MSMED Act and the notification dated 29.05.2015 creates certain obligations and burden as against the Bank and certain rights and protection in favour of the MSME borrower in furtherance of larger public interest, and has not provided for any forum for the enforcement of the said inter se rights/adjudication of disputes, the Civil Court jurisdiction is not ousted;

f) To issue an order or direction, calling for the entire records and proceedings leading to the classification of the Petitioners’ account as a Non-Performing