Belated invocation of MSME revival protections cannot defeat ongoing SARFAESI proceedings.

The appellants, an MSME operating a tea garden, maintained several credit facilities with the State Bank of India.

The accounts were treated as irregular and classified as NPA on 29 December 2023.

The bank informed the appellants on 2 January 2024 that the accounts had been running irregularly for over 90 days and required payment of approximately ₹1,08,96,500 for regularisation.

The bank thereafter issued a demand notice under Section 13(2) of the SARFAESI Act, followed by measures under Section 13(4) and a possession notice under Rule 8 of the Security Interest (Enforcement) Rules, 2002.

The appellants did not initially invoke the MSME Revival and Rehabilitation Framework. Instead, they sought additional financial assistance, discussed revival possibilities, and submitted several one-time settlement and restructuring proposals between July 2024 and March 2026.

They also instituted proceedings under Section 17 of the SARFAESI Act before the Debt Recovery Tribunal, Siliguri, challenging the bank’s SARFAESI measures.

Subsequently, they requested consideration under the MSME Framework and filed a writ petition seeking, inter alia, a declaration that the bank had violated the Framework before classifying the accounts as NPA and directions for compliance with it.

The learned Single Judge dismissed the writ petition on the grounds of delay, the appellants’ failure to invoke the Framework at the appropriate stage, and the pendency of the Section 17 SARFAESI proceedings.

Whether the bank was required to identify the appellants’ incipient financial stress, classify the accounts under the SMA categories, and take steps under the MSME Revival and Rehabilitation Framework before classifying the accounts as NPA.

Whether the appellants’ failure to expressly invoke the Framework at the relevant stage, followed by negotiations, one-time settlement proposals, and SARFAESI proceedings, disentitled them from seeking writ relief at a later stage.

Whether the pendency of proceedings under Section 17 of the SARFAESI Act barred the High Court from granting the reliefs sought in the writ petition.

The Court applied the Ministry of Micro, Small and Medium Enterprises notification dated 29 May 2015 and the Reserve Bank of India Framework for Revival and Rehabilitation of MSMEs dated 17 March 2016, under which lending institutions must identify incipient stress in MSME accounts, classify them into SMA-0, SMA-1 or SMA-2 categories, and consider appropriate corrective action, including restructuring or other revival measures, before NPA classification.

It also applied Sections 13(2), 13(4) and 17 of the SARFAESI Act and Rule 8 of the Security Interest (Enforcement) Rules, 2002.

Relying on Pro Knits v. Board of Directors of Canara Bank, (2024) 10 SCC 292, the Court held that the Framework is binding on lending banks but that MSME borrowers must also remain vigilant, produce authenticated material establishing eligibility, and invoke the Framework in a timely manner; a borrower cannot raise the MSME plea belatedly after allowing SARFAESI proceedings to substantially progress.

The Court further relied on Shri Shri Swami Samarth Construction and Finance Solution v. Board of Directors of NKGSB Co-operative Bank Ltd., 2025 SCC OnLine SC 1566, which clarified that the borrower’s conduct and bona fides are relevant and that the Framework cannot be invoked belatedly to frustrate recovery proceedings.

The Court accepted that the bank was required to identify and sub-categorise the stressed MSME account before NPA classification.

However, the record showed that the accounts had been identified as SMA-2, that meetings had taken place between the parties, and that the bank had specifically called upon the appellants to regularise the accounts before or around NPA classification.

The appellants did not seek consideration under the Framework at that stage. Their communications instead sought additional funds, time, reversal of charges, account upgradation, and negotiated settlement.

Their subsequent proposals were expressly framed as one-time settlements or alternative restructuring arrangements, and the formal request under the Framework was made only on 30 March 2026, after SARFAESI measures had been initiated and after settlement negotiations had failed.

Applying Pro Knits and Shri Shri Swami Samarth, the Court held that the appellants’ conduct demonstrated a belated attempt to invoke the Framework to obstruct recovery, undermining the bona fides of the writ petition.

The pending Section 17 proceedings also provided an independent statutory forum for challenging the SARFAESI measures, and the Court therefore declined to exercise writ jurisdiction for granting the reliefs claimed.

The Court held that, although the MSME Framework imposes obligations on banks before NPA classification, the appellants had not timely invoked the Framework and had instead pursued settlement proposals and SARFAESI litigation before seeking its benefit.

Their belated writ petition was therefore not maintainable as a means of frustrating the recovery process.

The proceedings under Section 17 of the SARFAESI Act were directed to continue independently, and the appellants were given liberty to raise all available questions of law before the Debt Recovery Tribunal.

The connected application was also dismissed.