MSME must claim status before account is classified as NPA to avail revival benefits under SARFAESI: Kerala High Court - 2025-07-28

MSME Must Claim Status Before NPA Classification to Avail Revival Benefits, Rules Kerala High Court

Thiruvananthapuram: The Kerala High Court, in a significant ruling, has held that a borrower must inform the bank of its Micro, Small, and Medium Enterprise (MSME) status before their loan account is classified as a Non-Performing Asset (NPA) to claim benefits under the MSME revival framework. A Division Bench comprising Justice Anil K. Narendran and Justice Muralee Krishna S. dismissed two review petitions, affirming that raising the MSME plea belatedly cannot be used to thwart recovery proceedings under the SARFAESI Act.

The court reiterated that review jurisdiction cannot be used as an "appeal in disguise" and found no error apparent on the face of its original judgment.

Case Background

The review petitions were filed by M/s. M.D. Esthappan Infrastructure Pvt. Ltd. and its promoter against a High Court judgment dated June 24, 2025. The original judgment had upheld the dismissal of their writ petitions challenging SARFAESI proceedings initiated by Dhanlaxmi Bank Ltd.

The petitioners' businesses had their loan accounts classified as NPAs on July 31, 2023, following which the bank initiated recovery proceedings. The petitioners contended that the bank had violated the mandatory RBI guidelines on the 'Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises', which requires banks to identify incipient stress and take corrective action before classifying an account as an NPA.

Arguments Presented

• Petitioners' Arguments: The petitioners, represented by Senior Advocate Mathews J. Nedumpara, argued that the High Court's earlier decision contained a factual and legal error apparent on the face of the record. They contended that the RBI's MSME framework is a mandatory statutory duty for the creditor bank, irrespective of whether the borrower explicitly raises the claim. They heavily relied on the Supreme Court's decision in M/s. Pro Knits vs. The Board of Directors of Canara Bank , arguing it established that the procedure was mandatory before initiating recovery. They further argued that there can be no estoppel against a statute, meaning their failure to raise the plea earlier should not bar them from claiming a statutory benefit.

• Respondent Bank's Arguments: The counsel for Dhanlaxmi Bank argued that the review petitions were merely an attempt to re-argue the case, which is impermissible. It was pointed out that the petitioners had raised the MSME claim for the first time only after their accounts were declared NPAs. The bank also highlighted that the petitioners had engaged in "piecemeal litigations" across various forums, including the Debts Recovery Tribunal and the Bombay High Court, without raising this specific issue. Crucially, the bank revealed that a Special Leave Petition (SLP) filed by one of the petitioners against the same judgment had already been dismissed by the Supreme Court.

Court’s Analysis and Precedents

The Division Bench meticulously analyzed its original judgment and the scope of its review powers. The court emphasized that a review can only be entertained for correcting patent errors, not for re-hearing an erroneous decision.

On the MSME Claim: The court stood by its earlier finding, which was based on established legal precedents: -

Pro Knits v. Canara Bank (Supreme Court): The bench clarified its interpretation of the Pro Knits case, noting that the Supreme Court itself had highlighted that it is incumbent upon the MSME concerned to substantiate its claim before its account is classified as an NPA. -

P.K. Krishnakumar v. IndusInd Bank (Kerala HC): The court cited this Division Bench ruling, which held that if a borrower fails to notify the bank of its MSME status at the classification stage and allows the SARFAESI process to proceed, they are precluded from raising it belatedly.

The court extracted a key part of its original judgment:

“In view of the law laid down by the Apex Court in Pro Knits and that laid down by the Division Bench of this Court in P.K. Krishnakumar , if, at the stage of classification of the loan accounts as NPA, the writ petitioners-borrowers do not bring to the notice of the Bank that it is an MSME and allowed the proceedings under the SARFAESI Act to go through, then they will be precluded from raising it at the belated stage.”

The court also noted that the bank had, in fact, informed the petitioners that their accounts were in the Special Mention Account (SMA) category and had invited proposals, but the petitioners failed to respond.

Final Decision

Finding no error apparent on the face of the record, the High Court concluded that the grounds raised by the petitioners did not fall within the limited scope of review jurisdiction under Order XLVII Rule 1 of the Code of Civil Procedure.

The court dismissed the review petitions, cementing the legal position that while the MSME revival framework provides important protections, the onus is on the borrower to assert its status in a timely manner, failing which it cannot use the plea as a shield against legitimate recovery actions by financial institutions.