Micro, Small and Medium Enterprises Development Act, 2006 – ss.9, 10 – The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 – Banking Regulation Act, 1949 – ss.21, 35A – Loan accounts of the appellants-MSMEs were classified as Non-Performing Assets (NPA) by the respondents-Banks/Non-Banking Financial Companies (NBFCs) without following the procedure laid down in the Instructions for Framework for Revival and Rehabilitation of MSMEs issued vide Notification dated 29.05.2015 to provide a simpler and faster mechanism to address the stress in the accounts of MSMEs and to facilitate the promotion and development of MSMEs – Challenged by appellants – Writ petitions dismissed by High Court holding that the Banks/NBFCs were not obliged to adopt the restructuring process contemplated in the aforesaid Notification on its own without there being any application by the MSMEs – Correctness: Held: Not correct – Instructions for the “Framework for Revival and Rehabilitation of MSMEs” as notified vide Notification dated 29.05.2015 in exercise of the powers conferred u/s.9 of the MSMED Act, as revised by the RBI Notification dated 17.03.2016 and the Reserve Bank of India (Lending to Micro, Small and Medium Enterprises Sector) Directions, 2016, issued by RBI in exercise of the powers conferred by ss.21 and 35(A) of the Banking Regulation Act, having statutory force, are mandatory in nature and binding on all Scheduled Commercial Banks, licensed to operate in India by RBI – Under the “Framework for Revival and Rehabilitation of MSMEs”, the banks or creditors are required to identify the incipient stress in the account of the MSMEs, before their accounts turn into non-performing assets, by creating three sub-categories under the “Special Mention Account” Category – Further, it is also incumbent on the part of the concerned MSME to produce authenticated and verifiable doucments/material for substantiating its claim of being MSME, before its account is classified as NPA – If that is not done, and once the account is classified as NPA, the banks-secured creditors would be entitled to take the recourse to Chapter III of the SARFAESI Act for the enforcement of the security interest – Impugned order set aside. [Paras 13, 16, 19]
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 – Chapter III; ss.35, 13 – Enforcement of security interest created in favour of secured creditor – Process of initiation:
Held: 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 – As per s.35, the provisions of the SARFAESI Act have the effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law – However, the process of enforcement of security interest as contained in Chapter III could be initiated only when the borrower makes any default in repayment of secured debt or any instalment thereof, and his account in respect of such debt is classified by the secured creditor as non-performing asset, in view of Section 13(2) of the said Act. [Para 14] Banking Regulation Act, 1949 – ss.21, 35A – Directions issued under, mandatory:
Held: ss.21 and 35A empower the RBI to frame the policy and give directions to the banking companies in relation to the advances to be followed – Such directions supplement the provisions of the Banking Regulation Act and have statutory force and are mandatory. [Para 13]
Micro, Small and Medium Enterprises Development Act, 2006 – Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 – MSMEs obligated to substantiate their claim of being MSME and to show their eligibility to get the benefit of the Framework for Revival and Rehabilitation of MSMEs issued vide Notification dtd. 29.05.2015:
Held: It is mandatory or obligatory on the part of the Banks to follow the Instructions/Directions issued by the Central Government and the RBI with regard to the Framework for Revival and Rehabilitation of MSMEs – Thus, it is 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. [Para 17]
As published in the Supreme Court Reports, Supreme Court of India. Headnotes prepared by: Divya Pandey. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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