Case Note: M/s. Pro Knits Vs. The Board of Directors of Canara Bank & Ors. & Others & Other 5 connected matters. (Special Leave to Appeal (C) No(s).7898/2024) SC
- Court: Supreme Court of India
- Judges Bela M. Trivedi, J. & R. Mahadevan JJ
Introduction
This Article is brief about a set of appeals consolidated for consideration by the Supreme Court concerning the obligations of banks and Non-Banking Financial Companies (NBFCs) under the Micro, Small, and Medium Enterprises Development Act, 2006 (MSMED Act) to follow procedure laid down in the Instructions for Framework for Revival and Rehabilitation of MSMEs issued vide the Notification no. 1432 dated 29th May, 2015 by the Ministry of MSME, in exercise of the powers conferred under Section 9 of the MSMED Act.
The appeals challenge a common order by the Bombay High Court which dismissed writ petitions (L) no. 20100 of 2023, filed by various Micro, Small, and Medium Enterprises (MSMEs) against banks and NBFCs. The High Court had ruled that banks were not obligated to adopt the restructuring process under Notification no. 1432 dated 29th May, 2015 issued by the Ministry of MSME without a specific application from the MSMEs.
Facts about the Case
The appellants in these cases are MSMEs registered under the MSMED Act. They contested actions taken by their respective banks under SARFAESI Act provisions. They argued that their accounts should not have been classified as Non-Performing Assets (NPAs) without following the restructuring process mandated by a Notification issued by the Ministry of MSME. The appellants asserted that this notification imposed a mandatory obligation on banks to identify incipient stress and explore restructuring options before classifying accounts as NPAs.
Issues
1. Is the framework for restructuring MSMEs under Notification No. 1432 dated 29th May 2015 mandatory or merely directory for banks and NBFCs?"
2. Whether banks and NBFCs are required to follow the Notification's restructuring process before classifying MSME accounts as NPAs?
Judgment
1. Nature of Notification no. 1432 dated 29th May, 2015
The Supreme Court analysed the nature of the Notification issued by the Ministry of MSME, which provided a framework for the revival and rehabilitation of MSMEs. This Notification included provisions for identifying incipient stress in accounts by categorizing them under Special Mention Accounts (SMA) and recommended the formation of committees to address stressed accounts.
The Court noted that Section 9 of the MSMED Act empowers the Central Government to issue guidelines to promote and develop MSMEs. The Court observed that the notification's instructions are binding, forming a statutory framework aimed at facilitating MSMEs' financial stability.
2. Interaction between the MSMED Act and the SARFAESI Act
The Court explored the interaction between the MSMED Act's provisions and the SARFAESI Act, which provides for the enforcement of security interests. Section 35 of the SARFAESI Act gives it precedence over other laws, potentially conflicting with MSMED Act guidelines.
However, the Court emphasized that the provisions of the MSMED Act, particularly the framework for restructuring, must be observed before classifying accounts as NPAs. It is mandatory for banks to follow these guidelines to ensure proper handling of MSME accounts before initiating proceedings under SARFAESI Act.
3. Statutory Force of Directions
The Supreme Court held that the Directions issued by the Reserve Bank of India (RBI) under the Banking Regulation Act, which includes implementing the MSME framework, carry statutory force and are binding on all scheduled commercial banks. Thus, the banks are legally obligated to adhere to these instructions, and failure to do so invalidates actions taken under the SARFAESI Act.
4. Relief and Further Proceedings
The Supreme Court overturned the Bombay High Court's order, which had incorrectly determined that the restructuring framework was not mandatory. It clarified that while banks are bound to follow the MSME framework, MSMEs must also prove their status as MSMEs and comply with the framework to avail of its benefits.
Given that proceedings under the SARFAESI Act had concluded in the cases at hand, the Court did not remand the cases to the High Court but allowed the appeals to the extent that the High Court's erroneous findings were set aside. The appellants were given the option to seek other legal remedies for unresolved issues.
Conclusion
The Supreme Court's judgment brings a welcome step in the eyes of author and underscores the mandatory nature of the MSME restructuring framework and the obligation of banks to follow it before classifying accounts as NPAs. It affirms that the guidelines issued under the MSMED Act and the RBI Directions have statutory force, thus binding banks and ensuring that MSMEs receive due consideration in the financial restructuring process. The decision reinforces the need for adherence to procedural mandates to protect the rights of MSMEs while balancing the enforcement of security interests under the SARFAESI Act.
The views expressed and interpretations made are solely those of the author and should not be construed as official opinions or advice. Best Regards.
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