In a pivotal ruling on the interplay between protections for Micro, Small and Medium Enterprises (MSMEs) and lender rights under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), the Supreme Court has held that banks and secured creditors are not required to identify “incipient stress” in an MSME’s account before classifying it as a Non-Performing Asset (NPA), unless the borrower has proactively invoked the RBI’s 2015 Framework for Revival and Rehabilitation of MSMEs.
A Bench of Justice Dipankar Datta and Justice Augustine George Masih, dismissing a writ petition under Article 32 of the Constitution, ruled that MSMEs cannot belatedly rely on the 2015 Framework during ongoing SARFAESI proceedings to stall recovery measures.
The petitioner, an MSME registered under the MSME Development Act, 2006, had taken a loan from NKGSB Co-operative Bank but defaulted on repayment. The account was classified as an NPA, and a demand notice under Section 13(2) of the SARFAESI Act was issued in May 2024. The petitioner neither asserted its MSME status nor sought recourse under the 2015 Framework. Proceedings under Section 14 followed, leading to the appointment of a Court Commissioner. It was only at this stage that the petitioner approached the Supreme Court, alleging that the bank had breached its obligation to identify incipient stress before initiating recovery action.
The Court rejected the contention that lenders have an unconditional duty to detect financial stress in MSME accounts prior to classifying them as NPAs. It held that the Framework imposes reciprocal obligations, noting that an MSME anticipating distress “may choose to voluntarily initiate proceedings under the FRAMEWORK 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,” with such a request supported by an affidavit from an authorised person.
Clarifying the legal position, the Bench observed, “the terms of the FRAMEWORK 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 FRAMEWORK 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.”
The Court questioned the petitioner’s bona fides, emphasising that no claim for the benefit of the Framework was made after the Section 13(2) notice and that the writ petition was filed only after orders were passed under Section 14.
Referring to the case Pro Knits v. Canara Bank, the Court noted that the decision did not endorse passivity on the part of MSMEs. On the contrary, Pro Knits underscored that MSMEs must be “vigilant enough to follow the process” and cannot raise MSME status belatedly to frustrate recovery. The Court reiterated that the Framework and SARFAESI Act must be harmoniously construed “to prevent undermining of rights that one central enactment confers by another.”
Finding no ground for interference, the Court dismissed the petition but granted liberty to pursue remedies under Section 17 of the SARFAESI Act, while sending a clear message that MSMEs must act promptly and proactively to claim benefits under the 2015 Framework.
Case Title: Shri Shri Swami Samarth Construction & Finance Solution & Anr. Vs. The Board of Directors of Nkgsb Co-Op. Bank Ltd. & Ors.
Case No.: Writ Petition (Civil) No. 684 of 2025
Coram: Justice Dipankar Datta and Justice Augustine George Masih
Advocate for Petitioner: AOR Chand Qureshi, Advs. Mathews J Nedumpara, Maria Nedumpara, Hemali Suresh Kurne, Shameem Fayiz, Dewashish Vishwakarma
