Introduction
The Hon’ble Supreme Court in Pro Knits v. Board of Directors of Canara Bank and Others[i] has held that banking companies and NBFCs are mandatorily required to adopt the restructuring framework as provided in the notification dated 29.05.2015 (‘Notification’) issued under s. 9 of the Micro, Small and Medium Enterprises Development Act, 2006 (‘MSMED Act’). The MSMED Act read with the relevant directions issued by the Reserve Bank of India (‘RBI’) before classifying any loan account of Micro, Small and Medium Enterprises (‘MSMEs’) as a non-performing asset (‘NPA’).
Facts
The Appellants were MSME registered under the MSMED Act.
The Appellants' accounts were classified as NPA by the respective banks without following the procedure in the ‘framework for revival and rehabilitation of the MSMEs’ (‘Framework’) under the Notification. Subsequent to such classification as NPA, proceedings were initiated by the Respondent banks against the Appellants under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (‘SARFAESI Act’).
The above was challenged by the Appellants before the Bombay High Court. One of the contentions taken by the Appellants was that the Framework had to be followed before the accounts could be classified as NPA. It was argued that this classification was bad in law without following the framework.
The High Court dismissed the writ petitions and held that the Respondent banks were not obliged to follow the framework on its own without any application by the Appellants in this regard. The Appellants appealed this decision to the Supreme Court.
Held
The Supreme Court observed that the objective of the MSMED Act is to facilitate the promotion, development and competitiveness of MSMEs, and s. 9 of the MSMED Act empowers the central government to take such measures. The Supreme Court noted that the Framework was issued in this context.
The Supreme Court observed that the RBI issued Master Directions dated 17.03.2016 for the revival and rehabilitation of the MSMEs to make the Framework compatible with the existing banking framework. The Supreme Court noted that the RBI gave such directions in exercising the powers under ss. 21 and 35(A) of the Banking Regulation Act, 1949. It observed that these directions from the RBI were mandatory.
Most importantly, the Supreme Court noted that the proceedings under the SARFAESI Act are triggered once an account is classified as an NPA. Therefore, the classification of NPA accounts as per the Framework assumes significance.
Accordingly, the Supreme Court set aside the impugned order of the Bombay High Court, wherein the High Court held that banks are not obliged to adhere to the framework for MSMEs in the absence of a specific request from MSMEs.
The Supreme Court also observed that MSMEs ought to be vigilant in exercising their rights and bringing their status as MSMEs to the attention of banks/NBFCs.
However, in the present case, the Supreme Court held that since the proceedings under the SARFAESI Act have already been concluded, the matter cannot be remanded back to the High Court for reconsideration.
Analysis and Conclusion
The decision of the Supreme Court effectively gave no relief to the Appellants as the proceedings under the SARFAESI Act had already concluded. Though the Supreme Court, in the exercise of its inherent powers, could have quashed the SARFAESI proceedings on the ground that they have been incorrectly undertaken and concluded, the observation of the Supreme Court that the MSMEs also ought to be vigilant in protecting their rights as MSMEs is crucial and this appears to have weighed with the Supreme Court.
However, this decision should relieve other MSMEs, helping to avoid their classification as NPAs in deserving cases.
End Note
[i] 2024 SCC OnLine SC 1864.
Authored by Eesha Rastogi of Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.
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