Court’s Decision
The Bombay High Court, comprising Justice R.I. Chagla and Justice Farhan P. Dubash, dismissed a writ petition filed by a company registered as a Micro, Small and Medium Enterprise (MSME), which sought to restrain Canara Bank from proceeding under the SARFAESI Act, 2002 without first following the MSME revival framework notified by the Government of India on 29 May 2015.
The Bench held that the benefit of the MSME Notification cannot be claimed after an account has already been classified as a Non-Performing Asset (NPA). The borrower’s failure to submit authenticated documents and invoke the MSME revival process before NPA classification disentitles it from relief under Article 226.
The Court observed:
“The revival framework for MSMEs is not an open-ended shield to stall recovery. Borrowers must act before the account slips into NPA. Having slept over their rights, they cannot invoke the MSME Notification belatedly to defeat lawful recovery under the SARFAESI Act.”
Consequently, the Court upheld the auction proceedings and directed that the petitioner must avail its statutory remedy before the Debt Recovery Tribunal (DRT) under Section 17 of the SARFAESI Act.
Facts
The petitioner, a private manufacturing company registered as an MSME, had been availing banking facilities from Canara Bank since 2010. The account was renewed several times, with the last renewal on 14 March 2024, granting an Overdraft Cash Credit limit of ₹ 1.76 crore, subject to the condition of maintaining a recurring deposit of ₹ 5 lakh per month.
The petitioner defaulted on the condition. The account was classified as SMA-1 on 4 September 2024, SMA-2 on 23 September 2024, and finally as NPA on 20 October 2024. A demand notice under Section 13(2) of the SARFAESI Act was issued on 21 October 2024, and possession was taken under Section 13(4) on 8 January 2025. An auction sale notice was subsequently issued on 26 August 2025.
Instead of approaching the DRT, the borrower invoked Article 226 of the Constitution, alleging that the bank had failed to comply with the MSME Notification of 29 May 2015 requiring identification of incipient stress and consideration of rectification or restructuring before resorting to recovery.
Issues
- Whether a bank can proceed under the SARFAESI Act without first following the MSME revival and rehabilitation framework.
- Whether the MSME Notification is mandatory and overrides the provisions of SARFAESI.
- Whether a borrower can invoke MSME benefits after its account has already been classified as NPA.
Petitioner’s Arguments
The petitioner argued that the MSME framework of 2015 was binding on all scheduled banks. It mandates early detection of financial stress in MSME accounts and requires banks to explore rectification, restructuring, and only thereafter, recovery.
It was submitted that Canara Bank failed to constitute a Committee for Stressed MSMEs as envisaged under the framework and proceeded directly to SARFAESI recovery. The petitioner contended that its Udyam Registration Certificate clearly established its MSME status, thereby entitling it to protection under Sections 9 and 12 of the Micro, Small and Medium Enterprises Development Act, 2006.
Relying on the Supreme Court’s decision in Pro Knits v. Canara Bank (2024 SCC Online SC 560), counsel argued that banks must adhere to the MSME guidelines before classifying an account as NPA. The petitioner also cited A. K. Karthikeyan v. Authorized Officer (Madras HC, 2025) and PDMC Industries v. Union of India (Kerala HC, 2025) to contend that banks are statutorily obliged to follow the MSME framework, failing which their recovery actions are void.
Respondent’s Arguments
The bank contended that the petition was an abuse of process, filed only to delay recovery. It asserted that the MSME framework applies only prior to NPA classification, not thereafter.
The petitioner had never submitted any request or authenticated documents under the MSME framework before the NPA classification. The bank had repeatedly reminded the borrower of overdue payments, yet it remained non-compliant.
Citing Pro Knits (supra) and Shri Shri Swami Samarth Construction v. NKGSB Co-operative Bank (SC, 2025), the bank argued that once the account becomes NPA, the MSME framework ceases to apply, and banks are legally entitled to proceed under the SARFAESI Act.
The respondent further pointed out that the petitioner’s conduct—concealing the latest possession and auction notices and approaching the High Court at a late stage—demonstrated lack of bona fides. It urged that the proper remedy lay before the DRT.
Analysis of the Law
The Court examined the interplay between the SARFAESI Act, 2002 and the MSME Notification of 29 May 2015. It observed that while the notification aims to support stressed MSMEs, it cannot override the statutory recovery mechanism under SARFAESI, which is a special legislation intended for swift enforcement of secured debts.
The Court noted that the revival framework applies only at the incipient stage of financial stress, i.e., when the account is still performing or sub-standard. Once the account is classified as NPA, the bank’s statutory right to enforce security cannot be diluted.
Quoting Pro Knits, the Bench reiterated that:
“The obligation to produce proof of MSME registration and seek assistance under the revival framework lies squarely upon the borrower. The bank is not bound to act suo motu.”
The Court found that the petitioner had failed to approach the bank or produce authenticated records before NPA classification. Consequently, the benefit of the MSME framework could not be extended.
Precedent Analysis
- Pro Knits v. Canara Bank (2024 SCC Online SC 560) — Held that MSME borrowers must invoke the revival process before NPA classification; post-NPA, SARFAESI proceedings cannot be halted.
- Shri Shri Swami Samarth Construction v. NKGSB Co-op Bank (2025 SC) — Affirmed that belated MSME claims cannot impede statutory recovery once auction proceedings have commenced.
- Perfect Infraengineers Ltd. v. ICICI Bank (2024 Bom HC) — Clarified that banks have no obligation to identify MSME stress unless borrowers request assistance with documentation.
- A. Navinchandra Steels Pvt. Ltd. v. Union of India (2024 Bom HC) — Reiterated that MSME revival is a voluntary, pre-NPA process, not an automatic right.
- A. K. Karthikeyan v. Authorized Officer (2025 Mad HC) and PDMC Industries v. Union of India (2025 Ker HC) — Distinguished; both involved borrowers who had sought assistance before their accounts turned NPA.
Court’s Reasoning
The Court found that the petitioner’s account had already been declared NPA prior to the filing of the writ petition and that no documentary proof of MSME revival proceedings existed. The borrower had slept over its rights and approached the High Court only after the auction sale notice, which was impermissible.
The Bench emphasized that the writ jurisdiction under Article 226 cannot be used to bypass the alternative remedy before the DRT. It also noted the growing trend of repetitive petitions filed by the same counsel on identical grounds, terming it a misuse of judicial time.
Concluding that the MSME framework does not confer retrospective protection, the Court upheld the bank’s right to recover dues under SARFAESI and dismissed the petition.
Conclusion
The Bombay High Court dismissed the writ petition with the following findings:
- The MSME revival framework must be invoked before NPA classification.
- Banks are not obliged to form MSME committees unless the borrower proactively applies with authenticated documents.
- SARFAESI proceedings cannot be stayed once statutory timelines are triggered.
- The writ petition was an abuse of process and an attempt to delay lawful recovery.
The Court concluded:
“Law favours diligence, not delay. MSME borrowers cannot seek sympathy after default; they must act within the framework before the account slips into NPA.”
Implications
This ruling is significant for both banks and MSMEs. It clarifies that:
- MSME borrowers cannot rely on the 2015 framework after default or NPA classification.
- The SARFAESI Act prevails over administrative notifications once recovery has commenced.
- Borrowers must maintain proactive communication with lenders to preserve MSME protection.
- The decision strengthens banking discipline and discourages misuse of constitutional writs to stall recovery.
The judgment harmonizes financial prudence with statutory recovery, reinforcing the need for early intervention rather than post-default litigation.
