Non-Compliance With Centre's MSME Framework Does Not Nullify An NPA Declaration Under SARFAESI Act: Kerala High Court

The Kerala High Court recently held that the ‘Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises' issued by the Centre in 2015 is only optional and that its non-compliance does not render an NPA declaration void.

The said Framework outlines a procedure for banks to follow before declaring an MSME's account as an NPA (Non-Performing Asset).

Justice Bechu Kurian Thomas added that the Framework does not prevail over the statutory provisions of the SARFAESI Act in the matter of recovery of loans.

"... failure to abide by the terms of the notification of 2015 cannot render the declaration of the account as NPA void or bad in law. The words in the notification do not provide for a mandatory procedural requirement. No consequence is provided for non-compliance with the Framework... Hence the failure of the Banks to abide by the terms of the Framework cannot be condemned as fatal," the Court observed. 

Notably, the Court also remarked that the benefit of the Framework would be available only upon the registration of an enterprise as a MSME, and not prior to the same. 

"...the procedure stipulated in the notification applies only before declaring an account as an NPA and not after. The date of registration as an MSME assumes significance in this context." 

Factual Background

The petitioner, who conducts a partnership business, was a borrower from the now-merged Corporation Bank and had availed an overdraft cash credit facility in 2011, which later led to a default. His account was thus declared as an NPA. The bank initiated proceedings under the SARFAESI Act, and on May 16, 2022, the Chief Judicial Magistrate appointed an Advocate Commissioner to take possession of the secured asset under Section 14(1) of the SARFAESI Act. 

Ten months later, the petitioner approached the High Court challenging the said order. He also filed an amendment petition seeking a declaration that their enterprise qualifies as an MSME under the MSME Development Act, 2006 ('MSMED Act) and that the notification issued by the Centre under Section 9 of the Act and the circulars and guidelines issued by the RBI. On this ground, it was argued that no proceedings for recovery under the SARFAESI Act would apply to them since the MSMED Act is a special enactment.  

The counsel for the petitioner added that since the petitioner's establishment is registered under the MSMED Act, the bank could have classified his account as an NPA only after following the procedure contemplated under the notification issued by the Centre that laid down the Framework, 2015. The petitioner thus submitted that the very basis of the proceedings under the SARFAESI Act was a non-est. It was added that the purpose of the MSME Act would be rendered redundant if Banks ignored the said 2015 notification. 

The counsel for the respondent, on the other hand, argued that the petition itself was not maintainable since the petitioner had a remedy before the Debts Recovery Tribunal where he could have challenged the proceedings initiated under Section 14(1) of the SARFAESI Act. It was further averred that the contentions raised on the basis of the MSME Act would not have any bearing in the present case, since the registration of the petitioner as an MSME was after the filing of the original petition. 

Findings of the Court

The court initially noted that entertaining writ petitions under Article 226 for SARFAESI Act cases is discouraged. It pointed out that since no exceptional circumstances had been pointed to invoke its jurisdiction under Articles 226 or 227, the challenge against the order was liable to fail on that ground alone. 

Regarding the challenge raised against the impugned order, the Court noted that at the time of filing the original petition, the petitioner had no contention based on the MSME Act. In fact, it was found that the petitioner's firm had registered as an MSME only on April 2, 2023, which was after filing the original petition.

The Court added that while the registration for an enterprise as an MSME was not mandatory, the benefits under the Act accrue only when the enterprise has been registered. 

"Therefore, if at all any rights accrue to the firm Panakkad Agencies as an MSME under the Act, it can only be with effect from April 2023 and not earlier. The date of registration of the petitioner’s firm under the MSME Act lends credence to the contention of the respondent that the claim raised under the MSME Act is only an afterthought," the Court observed. 

The Court also relied upon the decisions in South Indian Bank Ltd. & Ors. v. Naveen Mathew Philip & Anr. (2023), and Authorized Officer, State Bank of Travancore & Anr. v. Mathew K.C. (2018) to ascertain that the present petition was not maintainable since the petitioner had an alternative remedy available before the Debts Recovery Tribunal.

It went on to add that the procedure contemplated under the Framework, 2015, would apply only before declaring an account as an NPA and not after, and the date of registration as an MSME would assume relevance in this context. 

The Court was thus of the view that the benefit under the Framework could not be claimed by the petitioner since the account was declared as an NPA in 2015, and the registration was done only in 2023. 

Moreover, since the Framework was only optional, it was held that the same could not prevail over the statutory provisions of the SARFAESI Act in the matter of recovery of loans.

"Viewed in that perspective also, even if it is assumed that the petitioner’s firm was an MSME registered under the Act even prior to the declaration of the account as an NPA, still the recovery proceedings initiated against the firm under the SARFAESI Act cannot be scuttled for not following the Framework laid down in the notification of 2015," the Court declared. 

The court also noted that the benefit of MSME registration applies to the enterprise, not individual partners, and questioned the maintainability of the original petition.

The plea was accordingly dismissed. 

Counsel for the Petitioner: Advocates Mathews. J. Nedumpara, Maria Nedumpara, and Gens George Elavinamannil

Counsel for the Respondent: Government Pleader K.A. Noushad, Public Prosecutor C.N. Prabhakaran, and Advocate Sachith P. Kurup, C.P. Anil Raj, and Siva Suresh

Citation: 2023 LiveLaw (Ker) 478

Case Title: N.P. Abdul Nazer v. Union Bank of India & Anr. 

Case Number: OP(CRL.) NO. 288 OF 2023

Click Here To Read/Download The Judgment