In a significant judgment, the Supreme Court of India has overruled the Bombay High Court’s decision regarding the restructuring process for Micro, Small, and Medium Enterprises (MSMEs). A division bench of Justice Bela M. Trivedi and Justice R. Mahadevan heard the case of M/s. Pro Knits vs. The Board of Directors of Canara Bank & Ors., involved multiple appellants challenging the actions of various banks and Non-Banking Financial Companies (NBFCs) under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act).
Legal Issues Involved
The core legal issue was whether banks and NBFCs are required to adhere to the restructuring process outlined in the Notification dated May 29, 2015, issued by the Ministry of Micro, Small and Medium Enterprises, before classifying MSME loan accounts as Non-Performing Assets (NPAs). The appellants contended that the banks had failed to follow the mandatory restructuring procedures, thus rendering their actions under the SARFAESI Act illegal.
Supreme Court’s Decision
The Supreme Court granted leave to the appellants and addressed the central issue of whether the Notification dated May 29, 2015, was mandatory or directory. The Court concluded that the framework for the revival and rehabilitation of MSMEs, as outlined in the Notification and subsequent instructions from the Reserve Bank of India (RBI), had statutory force and was binding on all scheduled commercial banks.
Important Observations
1. Mandatory Nature of the Notification:
– The Court emphasized that the instructions for the framework for the revival and rehabilitation of MSMEs, issued under Section 9 of the MSMED Act and revised by the RBI, were mandatory and had statutory force. Banks were required to follow these instructions before classifying MSME accounts as NPAs.
– “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.”
2. Identification of Incipient Stress:
– The Court noted that banks must identify incipient stress in MSME accounts by creating sub-categories under the Special Mention Account (SMA) category before classifying them as NPAs.
– “The stage of identification of incipient stress in the loan account of MSMEs and categorization under the Special Mention Account category, before the loan account of MSME turns into NPA is a very crucial stage.”
3. Role of MSMEs:
– The Court also highlighted that MSMEs must be proactive in providing authenticated and verifiable documents to substantiate their claims of being MSMEs under the MSMED Act.
– “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.”
Conclusion
The Supreme Court set aside the Bombay High Court’s order, declaring that the instructions and directions issued by the Central Government and the RBI regarding the MSME restructuring framework were mandatory and binding on all banks. The Court allowed the appeals to the extent of this issue, while leaving other factual issues open for the appellants to pursue through alternative legal remedies.
Also Read
Case Details
– Case Title: M/s. Pro Knits vs. The Board of Directors of Canara Bank & Ors.
– Case Number: Civil Appeal No. 14067 of 2024
– Bench: Justice Bela M. Trivedi and Justice R. Mahadevan
– Appellant’s Counsel: Mr. Mathews Nedumpara
– Respondent’s Counsel: Not specified
