Summary
The Supreme Court held that the Framework for Revival and Rehabilitation of MSMEs, notified by the Central Government on 29.05.2015 under Section 9 of the MSMED Act and implemented through RBI directions under Sections 21 and 35A of the Banking Regulation Act, has statutory force and binds banks, which must follow it before classifying an MSME loan account as NPA. The MSME must, however, produce verifiable proof of its status before classification and cannot raise the plea belatedly to derail SARFAESI action. The High Court's contrary view was set aside without remand.
Issues
- Whether the Framework for Revival and Rehabilitation of MSMEs notified on 29.05.2015, as revised by the RBI, is mandatory and binding on banks.
- Whether banks must follow the Framework before classifying an MSME's loan account as NPA and proceeding under the SARFAESI Act, notwithstanding Section 35 of that Act.
- What obligation rests on the MSME borrower to invoke the Framework.
Provisions considered
- Sections 9 and 10, Micro, Small and Medium Enterprises Development Act, 2006Section 9 empowers the Central Government to notify programmes, guidelines or instructions to promote MSMEs, under which the 2015 Framework was issued; Section 10 requires credit policies for MSMEs to be progressive as specified in RBI guidelines. Instructions under Section 9 were held to have statutory force. (¶¶ 6, 7, 10, 13, 18)
- Sections 21 and 35A, Banking Regulation Act, 1949Directions issued by the RBI under these provisions, including the Master Direction on lending to the MSME sector, 2016 adopting the Framework, bind banking companies; they supplement the Act and are construed as statutory and mandatory. (¶¶ 8, 9, 12, 13, 18)
- Sections 13(2) and 35, Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002Although Section 35 gives the Act overriding effect, enforcement under Chapter III begins only after the account is classified as NPA under Section 13(2); the Framework operates at the earlier stage, before classification, so it must be followed by banks even though they are secured creditors. (¶¶ 5, 14, 15)
- Section 2(zd), Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002Banks being 'secured creditors' under this definition does not relieve them of the duty to follow the Framework before NPA classification. (¶ 15)
Held
- The Framework for Revival and Rehabilitation of MSMEs notified under Section 9 of the MSMED Act on 29.05.2015, as revised by the RBI on 17.03.2016, together with the RBI's Master Direction of 2016 issued under Sections 21 and 35A of the Banking Regulation Act, has statutory force and is binding on all scheduled commercial banks to which the Directions apply. (¶¶ 13, 18)
- The Framework, including identification of incipient stress through the three Special Mention Account sub-categories, must be carried out before an MSME account is classified as NPA. Since SARFAESI enforcement can begin only after NPA classification under Section 13(2), the overriding clause in Section 35 does not displace this prior obligation. (¶¶ 14, 15)
- To apply the Framework, banks must have authenticated and verifiable material from the borrower showing that it is registered as an MSME. The MSME may also voluntarily invoke the Framework by application supported by affidavit. It is equally incumbent on the MSME to be vigilant and produce such material before its account is classified as NPA; once the account is classified, the bank may proceed under Chapter III of the SARFAESI Act. (¶¶ 16, 17)
- An enterprise that does not disclose its MSME status at the stage of NPA classification, and allows the SARFAESI process to conclude or challenges it unsuccessfully, cannot misuse the process of law by raising the MSME plea at a belated stage. (¶ 17)
- The High Court's findings that banks need not adopt the restructuring process on their own and that the Framework is not mandatory were erroneous. (¶ 18)
Result
Appeals allowed; impugned High Court order set aside; no remand since the SARFAESI proceedings had concluded and possession had been taken, but the appellants are free to pursue any legally available remedy on the issues the High Court did not decide.