MSME Revival Framework Claim Must Be Raised Before NPA Classification: Kerala High Court

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Kerala High Court: MSME Revival Benefits Not Applicable Post NPA Declaration

Ernakulam, Kerala - In a recent judgment, the High Court of Kerala dismissed writ petitions filed by M/s. M.D. Esthappan and M/s. M.D. Esthappan Infrastructure Pvt. Ltd., affirming that claims for benefits under the Micro , Small and Medium Enterprises Development (MSMED) Act's revival framework must be raised before a loan account is classified as a Non-Performing Asset (NPA). Justice Gopinath P. , presiding over the case on March 11, 2025, delivered the verdict, citing precedents set by the Supreme Court and the Kerala High Court itself.

Case Overview

The petitioners, engaged in business as MSMEs, sought relief against recovery proceedings initiated by Dhanlaxmi Bank under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002. They argued that as MSMEs, they were entitled to the revival and rehabilitation framework outlined by the Ministry of MSME and the Reserve Bank of India (RBI). The core contention was that the bank should have referred their case to a committee for corrective action before initiating SARFAESI proceedings.

Arguments Presented

Petitioners' Counsel, Sri. Mathews J. Nedumpara, argued:

• The petitioners are registered MSMEs and are entitled to the benefits of the MSME revival framework (Ext.P2).
• RBI guidelines (Ext.P3) mandate banks to follow this framework.
• Prior to recovery, the bank should have considered rectification and restructuring through a committee as per Ext.P2.
• The Supreme Court's judgment in Pro Knits v. Canara Bank was distinguishable, as in that case, no MSME claim was made, whereas in this case, the bank was aware of their MSME status.
• The Division Bench judgment in P.K. Krishnakumar v. IndusInd Bank , which held against similar claims, was incorrectly decided.
• MSMEs are crucial to the Indian economy and deserve the protections afforded by the revival framework.

Respondent Bank's Counsel, Sri. C.K. Karunakaran, countered:

• The petitioners' claim is squarely covered and rejected by the Supreme Court in Pro Knits and the Division Bench in P.K. Krishnakumar .
• As per Pro Knits , the MSME framework applies only if a claim is made before NPA classification.
• The bank had communicated to the borrowers about their SMA (Special Mention Account) status, requesting an action plan, which was not provided.
• The borrowers approached the court only after SARFAESI proceedings began.
• The petitioners had engaged in multiple prior litigations without raising the MSME claim, indicating a belated and opportunistic attempt to stall recovery.
• For W.P.(C)No.46514/2024, the loan exposure exceeded ₹25 crores, making the MSME framework inapplicable as per RBI guidelines, which direct cases above ₹25 crores to Corporate Debt Restructuring (CDR)/Joint Lenders’ Forum (JLF) mechanism.
• Relied on Celir LLP v. Sumati Prasad Bafna against piecemeal litigation.
• Cited Abdul Nazer v. Union Bank of India stating that the MSME framework is optional and does not override SARFAESI.

Court's Reasoning and Decision

Justice Gopinath P. upheld the respondent bank's arguments, relying heavily on the precedents cited. The court reiterated that, based on Pro Knits and P.K. Krishnakumar , the MSME revival framework must be invoked before the account becomes an NPA.

The judgment quoted paragraph 16 and 17 of Pro Knits :

>“What is contemplated in the “Framework for Revival and Rehabilitation of MSMEs” contained in the Instructions/Directions stated hereinabove, is required to be followed prior to the classification of the borrower's account, (in the instant case MSMEs loan account), as non-performing assets.”

and

>“If at the stage of classification of the loan account of the borrower as NPA, the borrower does not bring to the notice of the concerned bank/creditor that it is a Micro , Small or Medium Enterprise under the MSMED Act… such an Enterprise could not be permitted to misuse the process of law for thwarting the actions taken under the SARFAESI Act by raising the plea of being an MSME at a belated stage.”

The court emphasized that the petitioners had failed to raise the MSME claim before their accounts were classified as NPAs and had engaged in multiple litigations without mentioning it. It also noted that for one of the petitioners, the loan amount exceeded ₹25 crores, rendering the MSME framework inapplicable based on RBI guidelines.

Furthermore, the court acknowledged the principle against piecemeal litigation, as highlighted in Celir LLP v. Sumati Prasad Bafna , stating that parties should not fragment litigation across proceedings to gain unfair advantages.

Referring to Abdul Nazer v. Union Bank of India , the court agreed that the MSME framework is optional and subordinate to the SARFAESI Act in loan recovery matters.

Final Verdict and Implications

The High Court dismissed both writ petitions, denying any relief to the petitioners. The judgment reinforces the principle that MSMEs seeking benefits under the revival framework must proactively engage with banks and raise their claims before their loan accounts are categorized as NPAs. This ruling clarifies the timeline for invoking the MSME framework in the context of SARFAESI proceedings within the Kerala High Court's jurisdiction and aligns with Supreme Court precedents.

Additionally , the court noted with concern the unauthorized recording and circulation of court proceedings and directed the Registry to bring this matter to the attention of the Chief Justice for potential contempt of court proceedings. ```