2024 INSC 565 1

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO …. OF 2024

(@ SPECIAL LEAVE PETITION (C) NO. 7898 OF 2024)

M/S. PRO KNITS .....APPELLANT(S)

VERSUS

THE BOARD OF DIRECTORS OF CANARA

BANK & ORS. ....RESPONDENT(S)

WITH

CIVIL APPEAL NO …. OF 2024

(@ SPECIAL LEAVE PETITION (C) NO. 3801 OF 2024)

MR. ZUHAIR MOHAMEDALI MERCHANT .....APPELLANT(S)

VERSUS

IDFC BANK & ORS. ....RESPONDENT(S)

WITH

CIVIL APPEAL NO …. OF 2024

(SPECIAL LEAVE PETITION (C) NO. ….. OF 2024 (@

DIARY NO. 16667 OF 2024

NILESH SHAH .....APPELLANT(S)

VERSUS

BANK OF BARODA & ORS. ....RESPONDENT(S)

WITH

2

CIVIL APPEAL NO …. OF 2024

(@ SPECIAL LEAVE PETITION (C) NO. 9594 OF 2024)

SADHANA BHARAT RAI .....APPELLANT(S)

VERSUS

THE BOARD OF DIRECTORS OF KOTAK

MAHINDRA BANK & ORS. ....RESPONDENT(S)

CIVIL APPEAL NO …. OF 2024

(SPECIAL LEAVE PETITION (C) NO. ………OF 2024 (@

DIARY NO. 19108 OF 2024)

M/S. A. NAVINCHANDRA STEELS PVT.

LTD. & ANR. .....APPELLANT(S)

VERSUS

UNION OF INDIA & ORS. ....RESPONDENT(S)

AND

CIVIL APPEAL NO …. OF 2024

(SPECIAL LEAVE PETITION (C) NO. ………OF 2024 ( @

DIARY NO. 19341 OF 2024)

M/S. SHREE SHANTINATH STEELS & ANR. .....APPELLANT(S)

VERSUS

UNION OF INDIA & ORS. ....RESPONDENT(S)

J U D G M E N T

BELA M. TRIVEDI, J.

1. Leave granted.

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2. The Appellants in this batch of Appeals, who claim themselves to be

the Micro, Small and Medium Enterprises (MSMEs) registered under

the Micro, Small and Medium Enterprises Development Act, 2006

(hereinafter referred to as the “MSMED Act”), have challenged the

impugned common order dated 11.01.2024 passed by the High Court

of Judicature at Bombay in Writ Petition (L) No. 20100 of 2023 and

Others, whereby the High Court has dismissed the said Writ Petitions

by holding that the Banks/ Non-Banking Financial Companies

(NBFCs) are not obliged to adopt the restructuring process as

contemplated in the Notification dated 29

th

May, 2015 issued by the

Ministry of Micro, Small and Medium Enterprises, on its own without

there being any application by the Petitioners/ MSMEs. The High

Court without expressing any opinion on the merits or the factual

aspects of the writ petitions granted leave to the Appellants – Writ

Petitioners to agitate the other issues by adopting alternative

remedies as may be available to them under the law.

3. The learned Counsels for the parties in the instant Appeals have also

restricted their submissions only to the said issue decided by the High

Court, without addressing other issues on the facts and merits

involved in the writ petitions.

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4. The Appellants who were the Writ Petitioners before the High Court

had basically challenged the actions of the Respondents Banks/

NBFCs taken by them against the appellants under the provisions

contained in The Securitisation and Reconstruction of Financial

Assets and Enforcement of Security Interest Act, 2002 (hereinafter

referred to as the “SARFAESI Act”). The bone of contention raised by

the learned Counsel Mr. Mathews Nedumpara appearing for the

Appellants in all the Appeals is that the respondents-Banks could not

have classified the loan accounts of the appellants who were the

MSMEs, as Non-Performing Assets (NPA), without following the

procedure laid down in the Instructions for Framework for Revival and

Rehabilitation of MSMEs issued vide the Notification dated 29

th

May,

2015 by the Ministry of MSME, in exercise of the powers conferred

under Section 9 of the MSMED Act. According to him, it was

incumbent on the part of the Respondents Banks/ NBFCs to identify

incipient stress in the account by creating three sub categories as

mentioned in the said Notification and to explore various options to

resolve the stress in the account as contemplated in the said

Notification. He further submitted that the said Notification and the

subsequent Instructions/Directions issued by the Central Government

and the Reserve Bank of India are for the purpose of facilitating the

promotion and development and enhancing the competitiveness of

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MSMEs and therefore it was mandatory on the part of the

respondents to follow the same. Non-observance of the mandatory

Instructions contained in the said Notification has rendered all the

subsequent actions taken by the respondents under the SARFAESI

Act, illegal and void ab initio.

5. However, the learned Counsels appearing for the Respondents

Banks/ NBFCs contended that the High Court has rightly not

considered the process or procedure laid down in the Notification

dated 29.05.2015 as mandatory, in as much as the provisions

contained in the SARFAESI Act override the provisions of the other

Acts including the MSME Act as per Section 35 of the said Act. In the

instant cases, the concerned appellants had not applied to the

Respondents Banks to avail the benefit of the said Notification at the

relevant time and the Respondents Banks have already initiated and

in certain cases concluded the proceedings undertaken under the

SARFAESI Act after following the due process of law. They further

submitted that the process of restructuring as contemplated in the

said Notification and classification of borrower’s account as NPA are

two independent subjects and therefore it can not be interpreted that

unless the procedure under the said Notification for restructuring is

adopted, the appellants accounts could not have been classified as

NPAs. According to them, the Instructions issued under Section 9 of

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the MSMED Act are mere directory and not mandatory nor do they

have any statutory force.

6. Before delving into the issue involved in the instant appeals as to

whether the Notification dated 29.05.2015 issued by the Central

Government in exercise of the powers conferred under Section 9 of

the MSMED Act, as revised from time to time, is mandatory or

directory, let us have a glance over the relevant provisions of the

MSMED Act. It may be noted that the very object and purpose of the

MSMED Act is to provide for facilitating the promotion and

development and enhancing the competitiveness of Micro, Small and

Medium Enterprises and for matters connected therewith and

incidental thereto. Section 9 thereof empowers the Central

Government to take measures for the purpose of facilitating such

promotion and development and enhancing competitiveness of

MSMEs by specifying the programmes, guidelines or instructions as

it may deem fit, by issuing Notifications.

7. Section 10 of the MSMED Act states that the policies and practices in

respect of the credit to the Micro, Small and Medium Enterprises shall

be progressive and such as may be specified in the guidelines or

instructions issued by the Reserve Bank, from time to time, to ensure

timely and smooth flow of credit to such enterprises, minimize the

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incidence of sickness among and enhance the competitiveness of

such enterprises.

8. At this juncture, it would also be apt to refer to the relevant provisions

contained in the Banking Regulation Act, 1949. Section 21 of the said

Act empowers the Reserve Bank of India to control advances by

Banking companies. The said section inter alia provides that where

the Reserve Bank is satisfied that it is necessary or expedient in the

public interest or in the interest of the depositors or banking policy so

to do, it may determine the policy in relation to advances to be

followed by banking companies generally or by any company in

particular and when the policy has been so determined, all banking

companies or the banking company concerned, as the case may be,

shall be bound to follow the policy as so determined. Sub-section (3)

of Section 21 states that every banking company shall be bound to

comply with any directions given to it under the said Section. Further,

Section 35A of the said Banking Regulation Act reads as under: -

“35A. Power of the Reserve Bank to give directions. —

(1) Where the Reserve Bank is satisfied that-

(a) in the public interest; or

(aa) in the interest of banking policy; or

(b) to prevent the affairs of any banking company being

conducted in a manner detrimental to the interests of the

depositors or in a manner prejudicial to the interests of the

banking company; or

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(c) to secure the proper management of any banking company

generally,

it is necessary to issue directions to banking companies generally

or to any banking company in particular, it may, from time to time,

issue such directions as it deems fit, and the banking companies

or the banking company, as the case may be, shall be bound to

comply with such directions.

(2) The Reserve Bank may, on representation made to it or on its

own motion, modify or cancel any direction issued under sub-

section (1), and in so modifying or cancelling any direction may

impose such conditions as it thinks fit, subject to which the

modification or cancellation shall have effect.”

9. Thus, Section 21 read with Section 35A makes it clear that the

directions issued by the Reserve Bank of India to the Banking

companies are binding on them and they are bound to comply with

such directions.

10. As stated earlier, the whole controversy in the instant appeals centers

around the Notification dated 29.05.2015 issued by the Central

Government in exercise of the powers conferred by Section 9 of the

MSMED Act. The said Notification contains the Instructions for the

“Framework for Revival and Rehabilitation of MSMEs”. The relevant

part thereof with regard to the identification of the incipient stress and

the committees for stressed MSMEs being relevant are reproduced

hereunder: -

“NOTIFICATION

S.O.(E). 1432 In exercise of the powers conferred in section 9 of the

Micro, Small and Medium Enterprises Development Act, 2006, the

Central Government, for the purpose of facilitating the promotion and

9

development of Micro, Small and Medium Enterprises, hereby notifies

the instructions for the Framework for Revival and Rehabilitation of

Micro, Small and Medium Enterprises (hereinafter referred to as the

"Framework"), which shall come into force on the date of its publication

in the official Gazette, namely the Framework for Revival and

Rehabilitation of Micro, Small and Medium Enterprises.

1. Identification of incipient stress

(1) Identification by Banks or creditors - Before a loan account of a

Micro, Small and Medium Enterprise turns into a Non-Performing

Asset (NPA), banks or creditors are required to identify incipient

stress in the account by creating three sub - categories under the

Special Mention Account (SMA) category as given in the Table

below:

Special Mention

Account

Sub-categories

Basis for

classification

(1)

(2)

SMA-0

Principal or interest payment

not overdue for more than 30

days but account showing

signs of incipient stress

SMA-1

Principal or interest payment

overdue between 31-60 days

SMA-2

Principal or interest payment

overdue between 61-90 days

2) Identification by the Enterprise - Any Micro, Small or Medium

Enterprise may voluntarily initiate proceedings under this Framework

if enterprise reasonably apprehends failure or 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.

(3) The application for initiation of the proceedings under this

Framework shall be verified by an affidavit of authorised person.

(4) When such a request is received by lender, the account should be

processed as SMA-0 and the Committee under this Framework should

be formed immediately.

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2. Committees for Stressed Micro, Small and Medium

Enterprises.

(1) Subject to any regulations prescribed by the Reserve Bank of India

for this Framework, all banks shall constitute one or more Committees

at such locations as may be considered necessary by the board of

directors of such bank to provide reasonable access, to all eligible

Micro, Small and Medium enterprises which have availed of credit

facilities from such bank.

(2) Subject to inclusion in categories referred to in paragraph 1,

stressed Micro, Small and Medium Enterprises shall have access to

the Committee for stressed Micro, Small and Medium Enterprises for

deciding on a corrective action plan and determining the terms thereof

in accordance with regulations prescribed in this Framework

Provided that where the Committee decides that recovery is to be

made as part of the corrective action plan, the manner and method of

recovery shall be in accordance with the existing policies approved by

the board of directors of the bank which has extended credit facilities

to the enterprise, subject to any regulations prescribed by the Reserve

Bank of India.

3-16 ...….”

11. The RBI in order to make the said Framework contained in the

Notification dated 29.05.2015 compatible with the existing regulatory

guidelines on “Income Recognition, Asset Classification and

provisioning pertaining to Advances” issued to the banks by the RBI,

had made certain changes in the said Framework, in consultation with

the Central Government and issued revised Framework along with

the operating Instructions vide the Communication dated 17

th

March,

2016, addressed to all the Scheduled Commercial Banks.

12. It is pertinent to note that in exercise of the powers conferred by

Section 21 and 35A of the Banking Regulation Act, 1949, the Reserve

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Bank of India, after having being satisfied that it was necessary and

expedient in the public interest to do so, had issued the Master

Direction, called the “Reserve Bank of India [Lending to Micro, Small

and Medium Enterprises (MSME) Sector] Directions, 2016,” vide the

Notification dated 21

st

July, 2016. The said Directions have been

made applicable to every Scheduled Commercial Bank excluding

Regional Rural Banks (RRBs) licensed to operate in India by the

Reserve Bank of India. Amongst the other Directions, the Direction 4

contained in Chapter IV thereof, pertained to the common

guidelines/instructions for lending to MSME Sector. While advising all

the Scheduled Commercial Banks to follow the guidelines/

instructions pertaining to MSMEs, it was directed in the Direction 4.8

as under: -

“4.8 Framework for Revival and Rehabilitation of MSMEs.

The Ministry of Micro, Small and Medium Enterprises,

Government of India, vide their Gazette Notification dated May

29, 2015 had notified a ‘Framework for Revival and Rehabilitation

of Micro, Small and Medium Enterprises’ to provide a simpler and

faster mechanism to address the stress in the accounts of

MSMEs and to facilitate the promotion and development of

MSMEs. The Reserve Bank was advised to issue necessary

instructions to banks for effective implementation and monitoring

of the said Framework. After carrying out certain changes in the

captioned Framework in consultation with the Government of

India, Ministry of MSME so as to make it compatible with the

existing regulatory guidelines on ‘Income Recognition, Asset

Classification and provisioning pertaining to Advances’ issued to

banks by RBI, the guidelines on the captioned Framework along

with operating instructions were issued to banks on March 17,

12

2016. The revival and rehabilitation of MSME units having loan

limits up to Rs.25 crore would be undertaken under this

Framework. Banks were required to put in place their own Board

approved policy to operationalize the Framework not later than

June 30, 2016. The revised Framework supersedes our earlier

Guidelines on Rehabilitation of Sick Micro and Small Enterprises

issued vide our circular RPCD. CO. MSME &

NFS.BC.40/06.02.31/2012-2013 dated November 1, 2012,

except those relating to Reliefs and Concession s for

Rehabilitation of Potentially Viable Units and One Time

Settlement, mentioned in the said circular.

The salient features of the Framework are as under:

i) Before a loan account of an MSME turns into a Non-

Performing Asset (NPA), banks or creditors should identify

incipient stress in the account by creating three sub-

categories under the Special Mention Account (SMA)

category as given in the Framework.

ii) Any MSME borrower may also voluntarily initiate

proceedings under this Framework.

iii) Committee approach to be adopted for deciding corrective

action plan.

iv) Time lines have been fixed for taking various decisions under

the Framework.”

13. In view of the above, it is absolutely clear that the Instructions for the

Framework for Revival and Rehabilitation of Micro, Small and Medium

Enterprises as notified by the Central Government vide the

Notification dated 29

th

May, 2015 in exercise of the powers conferred

under Section 9 of the MSMED Act, as revised by the RBI Notification

dated 17

th

March, 2016, and the Master Directions i.e. the Reserve

Bank of India (Lending to Micro, Small and Medium Enterprises

Sector) Directions, 2016, issued by the Reserve Bank of India in

exercise of the powers conferred by Section 21 and 35(A) of the

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Banking Regulation Act, having statutory force, are binding to all

Scheduled Commercial Banks, licensed to operate in India by the

Reserve Bank of India, as stated in the said Directions. It cannot be

gainsaid that the Banking Regulation Act 1949 basically seeks to

regulate banking business and mandates a statutory comprehensive

and formal structure of banking regulation and supervision in India.

Section 21 and Section 35A of the said Act empower the Reserve

Bank of India to frame the policy and give directions to the banking

companies in relation to the advances to be followed by the banking

companies. Such directions have got to be read as supplement to the

provisions of the Banking Regulation Act and accordingly are required

to be construed as having statutory force and mandatory.

14. As transpiring from the said Instructions/Directions, the entire

exercise as contained in the “Framework for Revival and

Rehabilitation of MSMEs” is required to be carried out by the banking

companies before the accounts of MSMEs turn into Non-Performing

Asset. It is true that the security interest created in favour of any Bank

or secured creditor may be enforced by such creditor in accordance

with the provisions contained in Chapter-III of the SARFAESI Act, and

that as per Section 35 of the SARFAESI Act, the provisions of the said

Act have the effect, notwithstanding anything inconsistent therewith

contained in any other law for the time being in force or any instrument

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having effect by virtue of any such law. However, pertinently the whole

process of enforcement of security interest as contained in Chapter

III of the SARFAESI Act, could be initiated only when the borrower

makes any default in repayment of secured debt or any instalment

thereof, and his account in respect of such debt is classified by the

secured creditor as non-performing asset, in view of Section 13(2) of

the said Act.

15. What is contemplated in the “Framework for Revival and

Rehabilitation of MSMEs” contained in the Instructions/ Directions

stated hereinabove, is required to be followed prior to the

classification of the borrower’s account, (in the instant case MSMEs

loan account), as Non-Performing Assets. The said Instructions

contained in the Notification dated 29.05.2015 as part of measures

taken for facilitating the promotion and development of MSMEs

issued by the Central Government in exercise of powers conferred

under Section 9 of the MSMED Act, followed by the Directions issued

by the RBI in exercise of the powers conferred under Section 21 and

35A of the Banking Regulation Act, the Banking companies though

may be ‘secured creditors’ as per the definition contained in Section

2 (zd) of the SARFAESI Act, are bound to follow the same, before

classifying the loan account of MSME as NPA.

15

16. We may hasten to add that under the “Framework for Revival and

Rehabilitation of MSMEs”, the banks or creditors are required to

identify the incipient stress in the account of the Micro, Small and

Medium Enterprises, before their accounts turn into non-performing

assets, by creating three sub-categories under the “Special Mention

Account” Category, however, while creating such sub-categories, the

Banks must have some authenticated and verifiable material with

them as produced by the concerned MSME to show that loan account

is of a Micro, Small and Medium Enterprise, classified and registered

as such under the MSMED Act. The said Framework also enables the

Micro, Small or Medium Enterprise to voluntarily initiate the

proceedings under the said Framework, by filing an application along

with the affidavit of an authorized person. Therefore, the stage of

identification of incipient stress in the loan account of MSMEs and

categorization under the Special Mention Account category, before

the loan account of MSME turns into NPA is a very crucial stage, and

therefore it would be incumbent on the part of the concerned MSME

also to produce authenticated and verifiable doucments/material for

substantiating its claim of being MSME, before its account is classified

as NPA. If that is not done, and once the account is classified as NPA,

the banks i.e. secured creditors would be entitled to take the recourse

16

to Chapter III of the SARFAESI Act for the enforcement of the security

interest.

17. It is also pertinent to note that sufficient safeguards have been

provided under the said Chapter for safeguarding the interest of the

Defaulters-Borrowers for giving them opportunities to discharge their

debt. However, if at the stage of classification of the loan account of

the borrower as NPA, the borrower does not bring to the notice of the

concerned bank/creditor that it is a Micro, Small or Medium Enterprise

under the MSMED Act and 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 concerned

bank/creditor 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. Suffice it to say, when it is

mandatory or obligatory on the part of the Banks to follow the

Instructions/Directions issued by the Central Government and the

Reserve Bank of India with regard to the Framework for Revival and

Rehabilitation of MSMEs, it would be equally incumbent on the part

of the concerned MSMEs to be vigilant enough to follow the process

laid down under the said Framework, and bring to the notice of the

concerned Banks, by producing authenticated and verifiable

17

documents/material to show its eligibility to get the benefit of the said

Framework.

18. In that view of the matter, we are of the opinion that the findings

recorded by the High Court in the impugned order that the Banks are

not obliged to adopt the restructuring process on its own or that the

Framework contained in the Notification dated 29.05.2015, as revised

from time to time could not be said to be mandatory in nature, are

highly erroneous and cannot be countenanc ed. The

Instructions/Directions issued by the Central Government under

Section 9 of the MSMED Act and by the RBI under Section 21 and

Section 35A have statutory force and are binding to all the Banking

companies.

19. The impugned order therefore is set aside. Since, it has been

submitted by the Learned Counsels for the Respondents-banks that

in all the cases, the proceedings under the SARFAESI Act have

already been concluded and the possession of the respective

premises of the petitioners has already been taken over, we do not

propose to remand the matters to the High Court for deciding the Writ

Petitions afresh. However, since the High Court has not dealt with the

other issues based on the factual aspects of the writ petitions, we

clarify that it would be open for the appellants to take recourse to any

18

remedy as may be legally available to them for agitating the issues

not decided by the High Court in the impugned order. All the appeals

stand allowed to the aforesaid extent.

…..................................J.

[BELA M. TRIVEDI]

.…..................................J.

[R. MAHADEVAN]

NEW DELHI;

AUGUST, 01

ST

2024.