Directions Issued By Central Govt. Under MSMED Act & RBI Under Banking Regulation Act Have Statutory Force & Binding To All Banking Companies: SC

The Supreme Court observed that the directions or instructions issued by the Central Government under Section 9 of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) and by the Reserve Bank of India (RBI) under Sections 21 and 35A of the Banking Regulation Act, 1949 have statutory force and are binding to all the Banking companies.

The Court observed thus in a batch of civil appeals filed by the MSMEs registered under MSMED Act, challenging the common order of the Bombay High Court by which it dismissed the writ petitions and held that the Banks/Non-Banking Financial Companies (NBFCs) are not obliged to adopt the restructuring process as per the notification issued by the Ministry of MSMEs on its own without there being any application by the MSMEs.

The two-Judge Bench comprising Justice Bela M. Trivedi and Justice R. Mahadevan held, “… we are of the opinion that 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. The Instructions/Directions issued by the Central Government under Section 9 of the MSMED Act and by the RBI under Section 21 and Section 35A have statutory force and are binding to all the Banking companies.”

The Bench also held that when it is mandatory or obligatory on the part of the Banks to follow the instructions or directions issued by the Central Government and the RBI with regard to the Framework for Revival and Rehabilitation of MSMEs, 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.

Senior Advocate Nikhil Goel and Advocate Mathews J. Nedumpara represented the appellants while Advocate Dinkar Singh represented the respondents.

In this case, the appellants/MSMEs challenged the actions of the respondents i.e., Banks/NBFCs taken by them against the appellants under the provisions contained in The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) before the High Court. The counsel for the appellants contended that the respondents could not have classified the loan accounts of the appellants as Non-Performing Assets (NPAs) without following the procedure laid down in the Instructions for Framework for Revival and Rehabilitation of MSMEs issued via notification by the Ministry of MSMEs under Section 9 of MSMED Act.

The counsel further argued that it was incumbent on the part of the respondents to identify incipient stress in the account by creating three sub categories as mentioned in the notification and to explore various options to resolve the stress in the account as contemplated in the notification. It was further submitted that the said notification and the subsequent instructions/directions issued by the Central Government and RBI are for the purpose of facilitating the promotion and development and enhancing the competitiveness of MSMEs and therefore it was mandatory on the part of the respondents to follow the same.

The Supreme Court after hearing the contentions of the counsel noted, “… it is absolutely clear that the Instructions for the Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises as notified by the Central Government vide the Notification dated 29th May, 2015 in exercise of the powers conferred under Section 9 of the MSMED Act, as revised by the RBI Notification dated 17th March, 2016, and the Master Directions i.e. the Reserve Bank of India (Lending to Micro, Small and Medium Enterprises Sector) Directions, 2016, issued by the Reserve Bank of India in exercise of the powers conferred by Section 21 and 35(A) of the Banking Regulation Act, having statutory force, are binding to all Scheduled Commercial Banks, licensed to operate in India by the Reserve Bank of India, as stated in the said Directions.”

The Court further elucidated that 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, and therefore it would be incumbent on the part of the concerned MSME also to produce authenticated and verifiable documents/material for substantiating its claim of being MSME, before its account is classified as NPA. It added that if the same is not done, and once the account is classified as NPA, the banks i.e., secured creditors would be entitled to take the recourse to Chapter III of the SARFAESI Act for the enforcement of the security interest.

“Since, it has been submitted by the Learned Counsels for the Respondents-banks that in all the cases, the proceedings under the SARFAESI Act have already been concluded and the possession of the respective premises of the petitioners has already been taken over, we do not propose to remand the matters to the High Court for deciding the Writ Petitions afresh. However, since the High Court has not dealt with the other issues based on the factual aspects of the writ petitions, we clarify that it would be open for the appellants to take recourse to any remedy as may be legally available to them for agitating the issues not decided by the High Court in the impugned order”, it concluded.

Accordingly, the Apex Court allowed the appeals to an extent and set aside the impugned order.

Cause Title- M/s Pro Knits v. The Board of Directors of Canara Bank & Ors (Neutral Citation: 2024 INSC 565)

Appearance:

Appellants: Senior Advocate Nikhil Goel, Advocates Mathews J. Nedumpara, Nachiketa Vajpayee, Divyangna Malik, Maria Nedumpara, Hemali Kurne, Rohini Amin, Shameem Fayiz, AORs Sriram P., and Usha Nandini V.

Respondents: Advocates Dinkar Singh Deepak Goel, Rubi Kumari, Harshita Maheshwari, Rajesh Kumar Gautam, Dinesh Sharma, Shivani Sagar, R.P. Daida, Kavitoli G Yeptho, Kushagra Nilesh Sahay, Ajay Choudhary, Sonia Munjal, Anshuman Gupta, Prashant Alai, Kunal Mimani, AORs Alka Goyal, Anant Gautam, and Tikshta Modi.

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