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M/S. Pro Knits vs. The Board of Directors of Canara Bank & Ors.

Not available · 2024 INSC 565Decided 1 Aug 2024
Not available
Justice Bela M. Trivedi · Justice R. Mahadevan

Background

A batch of appellants who claimed to be registered Micro, Small and Medium Enterprises (MSMEs) had their loan accounts classified as Non-Performing Assets (NPA) by various banks/NBFCs, which then proceeded to enforce security interests under the SARFAESI Act. The appellants argued the banks should first have followed a 2015 Government of India "Framework for Revival and Rehabilitation of MSMEs" notification meant to help stressed MSMEs before declaring their loans NPA. The Bombay High Court had dismissed their writ petitions, holding banks were not bound to apply this framework on their own.

Decision Breakdown

The Supreme Court held that the 2015 Framework, issued under Section 9 of the MSMED Act and reinforced by RBI directions under the Banking Regulation Act, has statutory force and is mandatory: banks must identify "incipient stress" in an MSME's account and offer it a chance at revival before classifying it as NPA. The High Court's view that this was merely optional was held to be erroneous and was set aside. However, since the SARFAESI proceedings in these particular cases had already concluded and possession of the properties had already been taken, the Court did not send the cases back for retrial, but left it open to the appellants to pursue other available legal remedies.

Lesson Learnt

MSME borrowers are entitled to a structured revival process before their loan is declared NPA, but they must proactively and promptly furnish authenticated proof of their MSME registration to the bank, raising this claim belatedly, after enforcement action is already complete, will not help.

Official source (sci.gov.in)View Judgment (PDF)

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