Summary
Writ petition under Article 32 by an MSME borrower seeking to restrain a co-operative bank from proceeding under the SARFAESI Act on the ground that the bank had not identified incipient stress in its account under the Framework for Revival and Rehabilitation of MSMEs notified on 29.05.2015 before classifying it as NPA. The Court read the Framework harmoniously: a lender may classify the account as NPA and issue a Section 13(2) notice without such identification, but once the borrower, in its Section 13(3-A) response, claims the Framework's benefit with reasons supported by affidavit, the lender must examine the claim keeping further action in abeyance. The petitioner had never invoked the Framework; petition dismissed with liberty under Section 17.
Issues
- Whether a lending bank or secured creditor is obliged under the Notification dated 29.05.2015 (Framework for Revival and Rehabilitation of MSMEs) to identify incipient stress in an MSME borrower's account before classifying it as NPA and taking measures under the SARFAESI Act.
- Whether an MSME which never claimed the benefit of the Framework after the demand notice can, at the stage of compliance with an order under Section 14 of the SARFAESI Act, obtain relief under Article 32 restraining the secured creditor.
Provisions considered
- Notification dated 29.05.2015 (Framework for Revival and Rehabilitation of MSMEs), paragraph 1, sub-paragraphs 2 and 3, Micro, Small and Medium Enterprises Development Act, 2006Paragraph 1 and its sub-paragraphs must be read together. 'Identification by Banks or Creditors' is immediately followed by 'Identification by the Enterprise'; under sub-paragraph 2 an MSME that reasonably apprehends failure or inability to pay debts may voluntarily initiate proceedings by an application verified by affidavit, whereupon the lender must constitute a committee to identify incipient stress. Reading the Framework as placing the sole obligation on the lender would render sub-paragraphs 2 and 3 redundant. (¶¶ 5, 6)
- Section 13(2), Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002A lender with no conscious knowledge that the defaulting borrower is an MSME is not prohibited by the Framework from classifying the account as NPA and issuing the demand notice without first identifying incipient stress. (¶¶ 2, 6, 7)
- Section 13(3-A), Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002If, in its response to the demand notice, the borrower asserts that it is an MSME and claims the benefit of the Framework with reasons supported by an affidavit, the lender is mandatorily bound to examine that claim, keeping further action under the SARFAESI Act in abeyance, and if the claim is found worthy, to act under the Framework for revival and rehabilitation. (¶ 6)
- Section 14, Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002The petition was presented only at the stage of compliance with the Magistrate's order appointing a Court Commissioner, without the petitioner ever having claimed the Framework's benefit; its bona fides were found suspect. (¶¶ 2, 7)
- Section 17, Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002Liberty reserved to the petitioner to pursue its remedy before the Debts Recovery Tribunal in accordance with law. (¶ 10)
- Article 32, Constitution of IndiaNo case for interference under Article 32 was made out; the respondents were not even required to be noticed. (¶¶ 4, 9)
Held
- The seemingly confusing terms of the Framework must be read harmoniously so that a right under the MSME Act is not destroyed by the SARFAESI Act or vice versa. The Framework does not place the entire obligation of identifying incipient stress on the lending bank or secured creditor; an MSME which finds its business failing has its own obligation to voluntarily initiate proceedings, failing which sub-paragraphs 2 and 3 of paragraph 1 would be rendered redundant. (¶¶ 5, 6)
- The Framework does not prohibit a lending bank or secured creditor (assuming it has no conscious knowledge that the defaulting borrower is an MSME) from classifying the account as NPA and issuing a demand notice under Section 13(2) without identifying incipient stress. However, if upon receipt of the notice the borrower in its response under Section 13(3-A) asserts that it is an MSME and claims the benefit of the Framework with reasons supported by an affidavit, the lender is mandatorily bound to look into the claim, keeping further action under the SARFAESI Act in abeyance, and if the claim is worthy of acceptance, to act under the Framework for revival and rehabilitation. (¶ 6)
- Pro Knits v. Canara Bank holds that the Notification binds lenders but equally stresses that MSMEs must be vigilant, follow the Framework's process and produce authenticated material to show eligibility, and that an enterprise which allows SARFAESI enforcement to run its course cannot raise the MSME plea belatedly to thwart it; the present decision supplies what that judgment left unsaid. (¶ 8)
- The petitioner never claimed the Framework's benefit after the Section 13(2) notice and approached the Court only at the stage of compliance with the Section 14 order; its bona fides were suspect and no case for interference under Article 32 was made out. (¶¶ 7, 9)
Result
Writ petition dismissed; pending applications closed; petitioner at liberty to pursue its remedy under Section 17 of the SARFAESI Act in accordance with law.