Supreme Court set aside the High Court order and affirmed mandatory compliance with the MSME restructuring framework before NPA classification.
Supreme Court ruled that the Notification dated May 29, 2015, issued under Section 9 of the MSMED Act, mandating the restructuring of stressed MSME accounts, is mandatory and binding on banks and NBFCs, and must be adhered to before classifying an MSME account as a Non-Performing Asset (NPA), overriding the SARFAESI Act’s provisions only at the stage of enforcement. The Bench noted that the restructuring process outlined in the Notification is mandatory and binding on banks and NBFCs.
In a landmark judgment, the Supreme Court has granted leave to the appellants, who are Micro, Small, and Medium Enterprises (MSMEs) registered under the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act), challenging the common order dated January 11, 2024, passed by the High Court of Judicature at Bombay. The High Court's order dismissed the writ petitions filed by the MSMEs, ruling that banks and non-banking financial companies (NBFCs) were not required to adhere to the restructuring process outlined in the Notification dated May 29, 2015, issued by the Ministry of Micro, Small and Medium Enterprises. This Notification was intended to facilitate the revival and rehabilitation of stressed MSME accounts. The High Court, while not addressing the merits or factual details of the writ petitions, permitted the appellants to explore other available legal remedies.
The appellants contended that banks could not classify their loan accounts as Non-Performing Assets (NPA) without following the restructuring process mandated by the May 29, 2015, Notification. They argued that the Notification, issued under Section 9 of the MSMED Act, required banks to identify and address incipient stress in MSME accounts before classifying them as NPAs. They claimed that non-compliance with these procedures rendered the subsequent actions under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), illegal.
In response, the banks and NBFCs argued that the High Court correctly deemed the restructuring process outlined in the Notification as non-mandatory. They contended that the SARFAESI Act's provisions, which govern the enforcement of security interests, take precedence over the MSME Notification's guidelines. They further argued that the MSMEs did not apply for the restructuring benefits in a timely manner and that the Notification's instructions were directory rather than mandatory.
Supreme Court examined the relevant statutory provisions, including Section 9 of the MSMED Act, which empowers the Central Government to issue guidelines for MSME promotion and development. The Court noted that Section 10 of the MSMED Act emphasizes progressive credit policies for MSMEs. It also reviewed Sections 21 and 35A of the Banking Regulation Act, 1949, which mandate compliance with Reserve Bank of India (RBI) directions concerning advances and banking practices.
The Court highlighted that the Notification dated May 29, 2015, and the revised framework issued by the RBI on March 17, 2016, have statutory force and are binding on banks. The Notification requires banks to identify stress in MSME accounts before classifying them as NPAs and provides a framework for restructuring these accounts. The Court clarified that this framework must be adhered to prior to the NPA classification.
The Supreme Court found the High Court's ruling erroneous, holding that the restructuring process outlined in the Notification is mandatory and binding on banks and NBFCs. The Court overturned the High Court's order and set aside the impugned judgment. Given that the SARFAESI Act proceedings have concluded, the Court did not remand the cases for a fresh review but allowed the appellants to pursue other legal remedies for unresolved issues. This judgment reinforces the mandatory nature of the MSME restructuring framework and emphasizes the need for compliance by financial institutions.
This judgment underscores the binding nature of the MSME restructuring guidelines and highlights the importance of adhering to statutory procedures before taking enforcement actions under the SARFAESI Act. It provides clarity on the mandatory compliance required by banks and NBFCs concerning the revival and rehabilitation of stressed MSME accounts.
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The judgement is to be welcomed in the context of the problems currently being faced by MSMES. MSMES which form the backbone of the economy needs to be supported with these kind of interpretations. Banks and NBFCS also need to look at the revival of the MSMEs rather than pursuing the rigorous SRFA Act provisions,Legal options to be explored only when other measure do not yield the results. MSMES will heave a sigh of relief