By Adv. R. S. Agrawal 

 

 

 

IN THESE group of petitions filed by several petitioners led by M/s A. Navinchandra Steels Pvt. Ltd and several others duly registered under the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act), and who are borrowers, who have taken loans or other financial assistance from the respondent Banks / Non Banking Finance Companies (NBFCs), have challenged the respondents’ action based on a Notification on May 29, 2015, issued under section 9 of the Act, declaring the petitioners as Non-Performing Assets (NPAs) under section 13(2) of the Securitisation (SARFAESI) Act, 2002, without following the procedure of restructuring as contemplated under the said Notification. The basic challenge of all the petitioners - MSMEs, is essentially that none of the respondent-Banks / NBFCs have followed the procedure as provided under the said notification, for identifying the incipient stress undergone by the petitioners and its consequent due qualification in the Special Mention Account categories SMA-o, SMA-1 and SMA-2 before classifying them as Non-Performing Assets. The argument in essence is that, if the said procedure ids not followed, then the very action of classifying these petitioners as NPAs is illegal, and if that be so, no notices under section 13(2)of the SARFAESI Act could have been issued and then all the further actions against the petitioners are void ab initio, since their foundation itself is illegal.

 

The judgement in the case was delivered by the Bombay High Court division bench consisting of Justice B.P. Colabawalla and Justice M.M. Sathaye on January 11, 2024, after hearing and reserving it in August, 2023. In conclusion the High Court has stated that since its finding is that the Banks / NBFCs are not obliged to adopt the restructuring process on its own without there being any application by the petitioners/MSMEs, it is not necessary to deal with the arguments of the respondent Banks/NBFCs about the effects of the subsequent Notifications and Circulars. For the same reason, it is not necessary to consider the judgements relied upon by them about interpretation of interplay between the SARFAESI Act, 2002, RDB act, 1993, IBC, 2016 and the MSME Act, 2006. The High Court has pointed out that it is left with only one choice and that is to go to the very concept of “incipient stress” as it might have been intended by the legislature. After all, it is one of the Court’s fundamental functions to interpret what is provided by the legislature. Keeping in mind the various dictionary meanings assigned to the word ‘incipient’ and coupling the same with the word ‘stress’, it is obvious that Clause 1(1) of the said Notification provides that Banks or Creditors are required to identify the beginning of the stress felt by The MSME in their financial capacity to repay.

 

Considering the fact that there are thousands and thousands of MSMEs, who have raised loans from the Banks or NBFCs, such identification is impossible unless the same is brought to the notice of the Bank by the MSME itself. After all, how a particular borrower is performing in its business and whether any such business is undergoing or beginning to feel stress on its financial capacity, is within the knowledge of the said borrower running its business. Unless such knowledge of incipient stress on the financial condition of MSME is brought to the notice of the Bank, it is next to impossible, in the HC’s opinion to be identified on its own by the Banks/NBFCs. The persons in charge of the MSMEs are most likely to sense or understand the beginning of the stress on their financial capacity, simply because they are at the helm of the things so far as a MSME is concerned. It is perhaps for the same reason that the legislature has provided for clause 1(3), whereunder an application for initiation of the proceedings under the framework is contemplated by an affidavit of an authorised person. This affidavit should be by the person in charge of the MSME because he/she has to state on oath about fact necessitating an action to initiate the restructuring process. Therefore, on a conjoint reading of Clause 1(1) and Clause 1(3) of the said notification, leads to an indisputable interpretation that the said Notification can be pressed into service only and only after the MSME (such as the petitioners) approaches the Banks/NBFCs with an appropriate application supported by an affidavit of the authorised person placing on record the bundle of facts which lead to the conclusion of incipient stress and only after that , the Banks or NBFCs are required to categorise them as SMA-o, SMA-1 and SMA-2. In this view of the matter the limited argument by the petitioner was under consideration by the HC. The Court did not find any merit in these petitions and dismissed the same.

 

However, the HC has granted leave to the petitioners to agitate the other issues in their petitions, which may vary on facts, on a case-to-case basis by adopting alternate remedies, as available under law. The Court has clarified that it has not expressed any opinion on the other issues arising in the facts of each case. Contentions of both the sides on merits of such other issues have been expressly kept open, to be decided on case-to-case basis. The High Court has noted that in some petitions, the petitioners have pleaded ignorance about the beneficial provisions of the said, notification and based on such ignorance it is pleaded that certain representation or application for restructuring is made recently, after action under SARFAESI Act, 2002, has reached various stages. The High Court has clarified that these institutions are free to decide such pending representation/ application and to inform the concerned MSME about this decision as expeditiously as possible. Since, according to the petitioners’ counsel Nedumpara, the issues involved in these petitions are important issues, the High Court granted his request and directed that any Interim Orders passed in any Interim applications in these writ petitions shall continue to operate for two weeks from the date of this judgement and after that, those will be automatically vacated.