Court’s Decision
The Bombay High Court, in a division bench comprising Justice R.I. Chagla and Justice Farhan P. Dubash, dismissed a writ petition filed by an MSME unit challenging the recovery action by Canara Bank under the SARFAESI Act, holding that MSME borrowers cannot invoke the 2015 MSME Notification after their account has already turned into a Non-Performing Asset (NPA).
The Court ruled that the borrower’s failure to submit authenticated and verifiable documents before NPA classification disentitles it from seeking the benefit of the MSME rehabilitation framework. The bench held:
“When an MSME allows its account to become an NPA without producing authenticated documents to substantiate its claim, it cannot later misuse the process of law to thwart legitimate recovery under the SARFAESI Act.”
Accordingly, the Court dismissed the writ petition and upheld the bank’s auction proceedings initiated under Section 13 of the SARFAESI Act.
Facts
The petitioners, a private limited manufacturing company registered as a Micro, Small and Medium Enterprise (MSME), sought directions to the Central Government and the Reserve Bank of India to enforce the MSME Notification dated 29 May 2015, which prescribes a framework for revival and rehabilitation of stressed MSMEs.
The petitioner company had been availing banking facilities from Canara Bank for over 14 years. Its loan account had been classified as NPA multiple times — in 2015, 2022, and 2024 — but was later regularized on each occasion. In March 2024, the bank renewed its Overdraft Cash Credit facility of ₹1.76 crore, subject to the condition that the borrower start a recurring deposit of ₹5 lakh per month. The borrower failed to meet this condition, and the account was again declared NPA on 20 October 2024.
A demand notice under Section 13(2) of the SARFAESI Act was issued on 21 October 2024, followed by a possession notice under Section 13(4) on 8 January 2025. The bank also issued an auction sale notice on 26 August 2025 to sell the mortgaged property.
Instead of filing a securitization application before the Debt Recovery Tribunal (DRT) as provided under Section 17 of the SARFAESI Act, the petitioners filed a writ petition in the Bombay High Court on 22 February 2025, contending that the bank had violated the mandatory MSME rehabilitation framework.
Issues
- Whether a bank can proceed under the SARFAESI Act without first complying with the MSME Notification dated 29 May 2015.
- Whether the MSME borrower’s failure to produce documents before NPA classification precludes it from claiming the benefits of the MSME framework.
- Whether the MSME framework overrides the SARFAESI Act in recovery proceedings.
Petitioners’ Arguments
Counsel for the petitioners argued that the MSME Notification dated 29 May 2015 provides a mandatory framework requiring banks to detect incipient financial stress in MSME accounts and refer such cases to a Committee for Stressed MSMEs before classifying them as NPAs.
He submitted that the framework requires the bank to explore three sequential stages — Rectification, Restructuring, and Recovery — and that recovery action can be taken only if the first two options fail. The bank’s decision to proceed directly under SARFAESI without first considering rectification or restructuring was thus unlawful.
The petitioners contended that the SARFAESI Act cannot override the MSME framework, which has statutory force under the MSMED Act, 2006. It was further submitted that the borrower’s MSME registration certificates, including the Udyog Aadhaar and Udyam Certificates, clearly established its eligibility.
Relying on Pro Knits v. Canara Bank (2024) 8 SCR 140, the petitioners argued that the Supreme Court had affirmed the mandatory nature of the MSME framework and held that banks are obligated to comply with it. They also cited A.K. Karthikeyan v. Authorized Officer (Madras High Court, 2025) and PDMC Industries v. Ministry of MSME (Kerala High Court, 2025), where courts had restrained banks from taking SARFAESI action without following the MSME Notification.
Respondents’ Arguments
The bank opposed the petition, contending that the MSME framework applies only before NPA classification and that the petitioners had failed to provide authenticated documents or seek assistance under the framework at that stage.
Counsel for the bank submitted that the petitioner had defaulted repeatedly and failed to meet sanction conditions. The account was classified as SMA-1 on 4 September 2024, SMA-2 on 23 September 2024, and finally NPA on 20 October 2024. Yet, at no point did the petitioner invoke the MSME revival mechanism.
The bank relied on the Supreme Court’s ruling in Pro Knits (supra), particularly paragraph 16, where it was held that once an MSME account is classified as NPA, banks are entitled to proceed under SARFAESI. It also cited Shri Shri Swami Samarth Construction & Finance Solution v. NKGSB Co-Op Bank (2025), where the Supreme Court dismissed a similar plea filed after SARFAESI proceedings had advanced to the auction stage.
Further reliance was placed on A. Navinchandra Steels Pvt. Ltd. v. Union of India (2024) and Perfect Infraengineers Ltd. v. ICICI Bank (2024), where the Bombay High Court held that banks are not obliged to initiate MSME revival processes unless the borrower first approaches them with supporting documents.
Analysis of the Law
The Court carefully analyzed the legal interplay between the MSME framework and the SARFAESI Act. It observed that the MSME Notification provides a rehabilitation mechanism, but its applicability is limited to the period before the account becomes an NPA.
Quoting extensively from Pro Knits, the bench reaffirmed that it is the borrower’s duty to bring its MSME status to the notice of the bank with proper documentation before default reaches the NPA stage. The Court held that if this is not done, the bank’s statutory right to enforce its security under the SARFAESI Act cannot be restrained.
The Court emphasized that SARFAESI is a special statute enacted to ensure swift recovery of non-performing loans and cannot be nullified by belated pleas of MSME protection.
Precedent Analysis
- Pro Knits v. Canara Bank (2024) 8 SCR 140 – Supreme Court held that MSME borrowers must act before NPA classification. Once an account becomes NPA, banks may proceed under SARFAESI.
- Shri Shri Swami Samarth Construction v. NKGSB Co-op Bank (2025) – Supreme Court dismissed a similar plea by an MSME borrower at a belated stage, finding lack of bona fides.
- Perfect Infraengineers Ltd. v. ICICI Bank (2024) – Bombay High Court held that in the absence of any request from the borrower, banks are not obligated to classify accounts under MSME stress categories.
- A. Navinchandra Steels Pvt. Ltd. v. Union of India (2024) – Reiterated that MSME stress identification is not automatic and requires proactive communication from the borrower.
- A.K. Karthikeyan (Madras High Court, 2025) and PDMC Industries (Kerala High Court, 2025) – Distinguished; both were found inapplicable as those cases involved borrowers who had applied before NPA classification.
Court’s Reasoning
The Court held that the petitioners failed to act within the required timeframe under the MSME Notification. The MSME framework mandates submission of authenticated documents and an application before the account is declared NPA — neither of which was done.
The Court noted that the petitioners deliberately concealed the SARFAESI demand notice of 21 October 2024 and had instead relied on an older, unexecuted notice from 2022. Such conduct, the Court said, “reeks of lack of bona fides.”
Observing a pattern of repeated filings by the same counsel on similar grounds, the Bench remarked that this was a habitual attempt to misuse Article 226 jurisdiction to delay lawful recovery by banks.
Accordingly, the Court held that the petition was an abuse of process and that no interference was warranted once SARFAESI proceedings had lawfully commenced.
Conclusion
The Bombay High Court dismissed the writ petition, affirming that:
- MSME borrowers must initiate the revival process before NPA classification.
- Banks are not required to suo motu form MSME Committees.
- Once SARFAESI proceedings begin, courts will not entertain belated MSME pleas.
The bench concluded:
“It is incumbent on MSMEs to be vigilant and follow the framework before their accounts turn NPA. Having failed to do so, they cannot later seek to stall legitimate recovery.”
The interim application seeking to halt the auction sale was also dismissed.
Implications
This ruling significantly strengthens the position of banks under the SARFAESI Act and clarifies that MSME protection is not absolute. It underscores that:
- MSME borrowers must act promptly and document their claim before default.
- Courts will not permit post-facto invocation of MSME benefits to obstruct recovery.
- The judgment harmonizes MSME rehabilitation mechanisms with the banking sector’s right to enforce security, ensuring regulatory clarity and commercial discipline.
It also reaffirms that the writ jurisdiction cannot be used to bypass specialized remedies such as appeals under Section 17 of the SARFAESI Act.
