SHRI SHRI SWAMI SAMARTH CONSTRUCTION & FINANCE SOLUTION & ANR versus THE BOARD OF DIRECTORS OF NKGSB CO-OP. BANK LTD. & ORS.

This is a writ petition under Article 32 of the Constitution of India by an enterprise registered under the Micro, Small and Medium Enterprises Development Act, 2006 .

p. 1853

The petitioning enterprise had executed a loan agreement with the NKGSB Co-operative Bank but had failed in its obligation to repay the loan. In due course, the account of the petitioning enterprise was classified as a non-performing asset . The authorised officer of the respondent no.2 issued a demand notice dated 13th May, 2024 under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 , calling upon the petitioning enterprise to repay the dues of the respondent no.2 within 60 days. It does not appear from the writ petition, filed on 14th July, 2025, that the petitioning enterprise objected to classification of its account as NPA as well as issuance of the demand notice on the ground that the action of the respondent no.2 was in violation of Notification dated 29th May, 2015, containing the “F R R M , S M E ” issued by the Joint Secretary to the Government of India, Ministry of Micro, Small and Medium Enterprises. The respondent no.2 having moved an application before the relevant Magistrate under Section 14 of the SARFAESI Act, a Court Commissioner was appointed per order dated 3rd April, 2025. Such order was communicated by the Court Commissioner to the petitioning enterprise on 18th June, 2025.

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Mr. Nedumpara, learned counsel appearing for the petitioning enterprise, submits that it was the obligation of the respondent no.2 to identify “incipient stress” in the loan account of the petitioning enterprise but it did not so identify prior to classifying the loan account as NPA which, according to him, is wholly illegal. Mr. Nedumpara further submits that the Notification is binding on the lending banks/ secured creditors under the SARFAESI Act and, therefore, any measure taken under the SARFAESI Act without complying with the terms of the F against a micro, small or medium enterprise would amount to an act in excess of jurisdiction. The decision in Pro Knits v. Canara Bank , forming part of the writ petition and though not formally cited, was referred to by Mr. Nedumpara in course of his arguments in support of this submission. Also, Mr. Nedumpara submits that such Notification/F does not mandatorily require an MSME to notify the lending bank/secured creditor first that the MSME wishes to have incipient stress in its account identified; therefore, any defence that the MSME did not voluntarily initiate proceedings ought not to be allowed to be raised. He, thus, prayed for admission of the writ petition and grant of ad-interim relief against the respondents.

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The respondents are not required to be noticed since we are not persuaded to agree with any of the submissions advanced by Mr. Nedumpara.

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The Notification detailing the F , more particularly paragraph 1 and its sub-paragraphs, have to be read together to make its terms effective and meaningful. Although, in the sequence of the F “Identification by Banks or Creditors” comes first, it is immediately followed by “Identification by the Enterprise”. In terms of sub-paragraph 2, any MSME may choose to voluntarily initiate proceedings under the F if it “reasonably apprehends failure of its business or its inability or likely inability to pay debts and before the accumulated losses of the enterprise equals to half or more of its entire net worth” (emphasis ours). The obligation of the MSME does not end there. For initiation of proceedings under the F , the application has to be verified by an affidavit of an authorised person and upon receipt of a request, the lending bank/secured creditor is mandatorily bound to proceed in terms of the F and to constitute a committee to identify incipient stress in the account.

p. 1855

The way Mr. Nedumpara urges us to read the Notification and the terms of the F , if accepted, would lead to the conclusion that every lending bank/secured creditor under the SARFAESI Act would be obliged to find out in every event of continuing default, likely to give rise to classification of the relevant account as NPA, whether the borrower is an MSME to which the F applies, whether its business has failed or whether it is suffering from any disability to pay its debts; and upon receiving a response, to apply the terms thereof by, inter alia, including the account in the Special Mention Account for the claim for a corrective action plan to be considered by the Committee for stressed MSMEs. This could not have been the intention behind introduction of the F to aid the MSMEs which, for reasons personal to them, is unable to clear its debt and require revival and rehabilitation that the F envisages. If indeed it is only the obligation of the lending bank/secured creditor to identify incipient stress in the account, sub-paragraphs 2 and 3 of paragraph 1 would be rendered redundant. An MSME, despite finding that its business is failing or that it is unable to pay its debts or accumulation of losses equals to half or more of its entire net worth and classification of its account as NPA is imminent, it would rest on its oars believing that it has no responsibility and that its account will not be classified as NPA because it is the entire obligation of the lending bank/secured creditor to do what the F requires. We would read and interpret the seemingly confusing terms of the harmoniously to ensure that a right under the MSME Act is not destroyed by the SARFAESI Act or vice versa. In our reading, the terms of the F do not prohibit the lending bank/secured creditor (assuming that it has no conscious knowledge that the defaulting borrower is an MSME) to classify the account of the defaulting MSME as NPA and to even issue the demand notice under Section 13(2) of the SARFAESI Act without such identification of incipient stress in the account of the defaulting borrower (MSME); however, upon receipt of the demand notice, if such borrower in its response under Section 13(3-A) of the SARFAESI Act asserts that it an MSME and claims the benefit of the F citing reasons supported by an affidavit, the lending bank/secured creditor would then be mandatorily bound to look into such claim keeping further action under the SARFAESI Act in abeyance; and, should the claim be found to be worthy of acceptance within the framework of the F , to act in terms thereof for securing revival and rehabilitation of the defaulting borrower.

pp. 1855–1856

As has been noted above, the petitioning enterprise does not seem to have ever claimed the benefit of the terms of the F after the demand notice under Section 13(2) of the SARFAESI Act was issued. It is at the stage of compliance with an order passed by the relevant Magistrate under Section 14 of the SARFAESI Act that this writ petition has been presented before this Court claiming benefits of the F to restrain the respondent no.2 and its officers from proceeding further under the SARFAESI Act and other enactments except in the manner contemplated under the said Notification. We find the bona fides of the petitioning enterprise to be suspect.

p. 1856, margin F

Pro-Knits (supra) is a decision of a coordinate Bench of this Court holding, inter alia, that the Notification is binding on the lending banks/ secured creditors. Finding to the contrary by the High Court of Bombay in the judgment and order under challenge in the appeal was, thus, quashed. Though while stressing that the terms of the F need to be followed by the lending banks/secured creditors before the account of an MSME is classified as NPA, this decision also lays stress on the obligation of the MSMEs by holding that “it would be equally incumbent on the part of the MSMEs concerned to be vigilant enough to follow the process laid down under the said Framework, and bring to the notice of the Banks concerned, by producing authenticated and verifiable documents/material to show its eligibility to get the benefit of the said Framework”. It was cautioned that “if such an Enterprise allows the entire process for enforcement of security interest under the SARFAESI Act to be over, or it having challenged such action of the bank/creditor concerned in the court of law/tribunal and having failed, such an Enterprise could not be permitted to misuse the process of law for thwarting the actions taken under the SARFAESI Act by raising the plea of being an MSME at a belated stage”. This decision, however, left unsaid something which we have explained hereinabove while construing the terms consistently to prevent undermining of rights that one central enactment confers by another.

pp. 1856–1857, margin F

No case for interference under Article 32 of the Constitution has been set up. There being no merit in the writ petition, the same is accordingly ordered to be dismissed. Pending applications, if any, stand closed.

p. 1857

Needless to observe, the petitioning enterprise will be at liberty to pursue its remedy under Section 17 of the SARFAESI Act, in accordance with law. Result of the case: Writ petition dismissed. Headnotes prepared by: Divya Pandey

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