Banks are obliged to adopt restructuring process of MSME Loans on its own. Framework contained in the Notification dated 29.05.2015 is mandatory in nature – Supreme Court
In a recent judgment, Hon’ble Supreme Court has held that Banks are obliged to adopt restructuring process of MSME Loans on its own as per Notification dated 29.05.2015.
ABCAUS Case Law Citation:
4183 (2024) (08) Abacus.in SC
In the instant case, batch of Appeals had been filed by the Micro, Small and Medium Enterprises (MSMEs) registered under the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) challenging the impugned common order passed by the Bombay High Court holding that the Banks/ Non-Banking Financial Companies (NBFCs) are not obliged to adopt the restructuring process as contemplated in the Notification dated 29th May, 2015 issued by the Ministry of Micro, Small and Medium Enterprises, on its own without there being any application by the Petitioners/ MSMEs.
In 2015, Ministry of Micro, Small and Medium Enterprises in exercise of the powers conferred under Section 9 of the MSMED Act, issued a notification; namely the Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises. As per the said notification dated 29.05.2015, before a loan account of a MSME turns into a Non-Performing Asset (NPA), banks or creditors were required to identify incipient stress in the account by creating three sub categories under the Special Mention Account (SMA) category based on overdue period.
The Banks/NBFCS took action against the appellants under the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). The main contention was that Banks could not have classified the loan accounts of the MSMEs as Non-Performing Assets (NPA), without following the procedure laid down in the Instructions for Framework issued vide the Notification dated 29th May, 2015.
The MSMEs contended that it was incumbent on the part of the Banks/ NBFCs to identify incipient stress in the account by creating three sub categories as mentioned in the said Notification and to explore various options to resolve the stress in the account as contemplated in the said Notification. That non-observance of the mandatory Instructions contained in the said Notification has rendered all the subsequent actions taken by the respondents under the SARFAESI Act, illegal and void ab initio.
The Hon’ble Supreme Court observed that Thus, Section 21 read with Section 35A makes it clear that the directions issued by the Reserve Bank of India to the Banking companies are binding on them and they are bound to comply with such directions.
The Hon’ble Supreme Court further observed that in exercise of the powers conferred by Section 21 and 35A of the Banking Regulation Act, 1949, the Reserve Bank of India had issued the Master Direction, called the “Reserve Bank of India [Lending to Micro, Small and Medium Enterprises (MSME) Sector] Directions, 2016,” vide the Notification dated 21st July, 2016. The said Directions have been made applicable to every Scheduled Commercial Bank excluding Regional Rural Banks (RRBs). In the said direction, RBI advised all banks to follow the guidelines/instructions pertaining to MSMEs as per Notification dated 29.05.2015 as modified by RBI to make it compatible with the existing regulatory guidelines on ‘Income Recognition, Asset Classification and provisioning pertaining to Advances’.
It was noted that salient features of the adopted Framework provided that before a loan account of an MSME turns into a NPA, banks or creditors should identify incipient stress in the account by creating three sub-categories under the Special Mention Account (SMA) category as given in the Framework. Also, any MSME borrower may also voluntarily initiate proceedings under this Framework.
In view of the above the Hon’ble Supreme Court held that it is absolutely clear that the Instructions for the Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises as notified by the Central Government vide the Notification dated 29th May, 2015 as revised by the RBI are binding to all Scheduled Commercial Banks, licensed to operate in India by the Reserve Bank of India, as stated in the said Directions.
The Hon’ble Supreme Court opined that the entire exercise as contained in the “Framework for Revival and Rehabilitation of MSMEs” is required to be carried out by the banking companies before the accounts of MSMEs turn into Non-Performing Asset. It is true that the security interest created in favour of any Bank or secured creditor may be enforced by such creditor in accordance with the provisions contained in Chapter-III of the SARFAESI Act, and that as per Section 35 of the SARFAESI Act, the provisions of the said Act have the effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force.
The Hon’ble Supreme Court further held that the Banking companies though may be ‘secured creditors’ as per the definition contained in Section 2(zd) of the SARFAESI Act, are bound to follow the same, before classifying the loan account of MSME as NPA.
The Hon’ble Supreme Court further held that 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 and if such an Enterprise allows the entire process for enforcement of security interest under the SARFAESI Act to be over, or it having challenged such action of the concerned bank/creditor in the court of law/tribunal and having failed, 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. It would be equally incumbent on the part of the concerned MSMEs to be vigilant enough to follow the process laid down under the said Framework, and bring to the notice of the concerned Banks, by producing authenticated and verifiable documents/material to show its eligibility to get the benefit of the said Framework.
Accordingly, the Hon’ble Supreme Court held that the findings recorded by the High Court in the impugned order that the Banks are not obliged to adopt the restructuring process on its own or that the Framework contained in the Notification dated 29.05.2015, as revised from time to time could not be said to be mandatory in nature, are highly erroneous and cannot be countenanced.
The impugned order was set aside. Since, in all the cases, the proceedings under the SARFAESI Act had already been concluded and the possession of the respective premises of the petitioners has already been taken over, the Hon’ble Supreme Court was not inclined to remand the matters to the High Court for deciding the Writ Petitions afresh. However, since the High Court has not dealt with the other issues based on the factual aspects of the writ petitions, the Court clarified that it would be open for the appellants to take recourse to any remedy as may be legally available to them for agitating the issues not decided by the High Court.
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