MSME - Framework does not prevent banks from classifying MSME accounts as NPA or issuing demand notices
Banks whether under obligation to identify "incipient stress" in the loan account before classifying it as an NPA
The matter in question concerns a writ petition filed under Article 32 of the Indian Constitution by Shri Shri Swami Samarth Construction & Finance Solution, an enterprise registered under the Micro, Small, and Medium Enterprises Development Act, 2006 (MSME Act). The dispute is with the Board of Directors of NKGSB Co-Op. Bank Ltd., and others, in relation to the classification of the petitioner's account as a Non-Performing Asset (NPA) and subsequent actions taken by the bank under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act).
Background:
The petitioning enterprise had entered into a loan agreement with NKGSB Cooperative Bank but failed to fulfill its repayment obligations. Consequently, the account was classified as an NPA. The bank issued a demand notice under Section 13(2) of the SARFAESI Act, requiring repayment within 60 days. The enterprise did not object to this classification or the demand notice based on the "Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises" (Framework) issued in 2015.
Legal Contentions:
1. Petitioner's Arguments: The petitioner argued that the bank had an obligation to identify "incipient stress" in the loan account before classifying it as an NPA, which it failed to do.
It was submitted that the Framework is binding on lending banks/secured creditors, and actions taken under the SARFAESI Act without complying with the Framework exceed jurisdiction.
The petitioner claimed there was no mandatory requirement for MSMEs to notify banks initially about stress, and therefore the bank's defenses should not be allowed.
2. Court's Findings:
The court emphasized that MSMEs are obliged to proactively claim benefits under the Framework and notify lenders about their eligibility, supported by authenticated documents.
It was clarified that the Framework does not prevent banks from classifying MSME accounts as NPA or issuing demand notices under Section 13(2) without prior identification of stress.
The court found that the petitioner did not assert its status as an MSME or claim benefits under the Framework after receiving the demand notice.
The writ petition was dismissed due to lack of merit, as the petitioner did not follow the process outlined in the Framework in a timely manner.
Conclusion:
The Supreme Court dismissed the writ petition, highlighting the lack of merit in the petitioner's claim and emphasizing the obligations of MSMEs to proactively engage with the Framework to claim benefits. The court noted that while the Framework imposes certain responsibilities on banks, MSMEs also bear the duty to alert lenders to their status and claim benefits accordingly. The decision reinforces the dual obligations under the Framework and clarifies the procedural expectations from MSMEs in relation to the SARFAESI Act.
Overall, the judgment underscores the importance of timely and proactive engagement by MSMEs to avail benefits under the Framework for Revival and Rehabilitation, while balancing the rights under the MSME Act and SARFAESI Act.
