Case Note & Summary
The Supreme Court dismissed a batch of appeals filed by MSMEs challenging the Bombay High Court's order that Banks/NBFCs are not obliged to adopt the restructuring process under the Notification dated 29.05.2015 issued under Section 9 of the MSMED Act without an application by the MSME. The appellants argued that the Notification was mandatory and non-compliance rendered SARFAESI actions void. The respondents contended that the SARFAESI Act overrides the MSMED Act and the Notification is directory. The Court examined Sections 9 and 10 of the MSMED Act and Sections 21 and 35A of the Banking Regulation Act, 1949, and held that the Notification is directory, not mandatory. The Court noted that the classification of NPA and restructuring are independent, and Banks/NBFCs are not required to initiate restructuring suo moto. The appeals were dismissed, affirming the High Court's order.
Headnote
A) Banking Law - SARFAESI Act - Overriding Effect - Section 35 SARFAESI Act - The provisions of the SARFAESI Act override the MSMED Act, and Banks/NBFCs are not required to follow the restructuring process under the MSMED Notification before classifying accounts as NPAs or taking action under SARFAESI Act. (Para 6-8)
B) MSME Law - Notification under Section 9 MSMED Act - Directory vs Mandatory - The Notification dated 29.05.2015 issued under Section 9 of the MSMED Act is directory and not mandatory; Banks/NBFCs are not obliged to initiate restructuring suo moto without an application from the MSME borrower. (Para 4-6)
C) Banking Law - Classification of NPA - Independence from Restructuring - The process of restructuring under the MSMED Notification and classification of a borrower's account as NPA are independent subjects; non-adherence to the restructuring process does not bar classification as NPA. (Para 5)
Issue of Consideration
Whether the Notification dated 29.05.2015 issued under Section 9 of the MSMED Act is mandatory or directory, and whether Banks/NBFCs are obliged to adopt the restructuring process thereunder before classifying MSME accounts as NPAs or initiating SARFAESI proceedings.
Final Decision
Appeals dismissed. The High Court's order is affirmed. The Notification dated 29.05.2015 is directory, not mandatory. Banks/NBFCs are not obliged to adopt restructuring process suo moto without application by MSMEs.
Law Points
- Notification under Section 9 MSMED Act is directory
- not mandatory
- SARFAESI Act overrides MSMED Act via Section 35
- Classification of NPA and restructuring are independent
- Banks/NBFCs not obliged to restructure without application.
Case Details
CIVIL APPEAL NO …. OF 2024 (@ SPECIAL LEAVE PETITION (C) NO. 7898 OF 2024) WITH CIVIL APPEAL NO …. OF 2024 (@ SPECIAL LEAVE PETITION (C) NO. 3801 OF 2024) WITH CIVIL APPEAL NO …. OF 2024 (SPECIAL LEAVE PETITION (C) NO. ….. OF 2024 (@ DIARY NO. 16667 OF 2024 CIVIL APPEAL NO …. OF 2024 (@ SPECIAL LEAVE PETITION (C) NO. 9594 OF 2024) CIVIL APPEAL NO …. OF 2024 (SPECIAL LEAVE PETITION (C) NO. ………OF 2024 (@ DIARY NO. 19108 OF 2024) AND CIVIL APPEAL NO …. OF 2024 (SPECIAL LEAVE PETITION (C) NO. ………OF 2024 (@ DIARY NO. 19341 OF 2024)
Mathews Nedumpara (for appellants), Not mentioned (for respondents)
The Board of Directors of Canara Bank & Ors.
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Nature of Litigation
Civil appeals challenging High Court order dismissing writ petitions filed by MSMEs against Banks/NBFCs under SARFAESI Act.
Remedy Sought
Appellants sought declaration that Banks/NBFCs must follow restructuring process under MSMED Notification before classifying accounts as NPAs or taking SARFAESI action.
Filing Reason
Banks/NBFCs classified MSME accounts as NPAs and initiated SARFAESI proceedings without following the restructuring process under the Notification dated 29.05.2015.
Previous Decisions
Bombay High Court dismissed writ petitions holding that Banks/NBFCs are not obliged to adopt restructuring process without application by MSMEs.
Issues
Whether the Notification dated 29.05.2015 under Section 9 MSMED Act is mandatory or directory.
Whether Banks/NBFCs must follow restructuring process before classifying MSME accounts as NPAs or initiating SARFAESI proceedings.
Submissions/Arguments
Appellants: Notification is mandatory; non-compliance renders SARFAESI actions void ab initio.
Respondents: Notification is directory; SARFAESI Act overrides MSMED Act; classification of NPA and restructuring are independent.
Ratio Decidendi
The Notification under Section 9 MSMED Act is directory, not mandatory. Banks/NBFCs are not required to initiate restructuring suo moto. Classification of NPA and restructuring are independent. SARFAESI Act overrides MSMED Act.
Judgment Excerpts
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 29th May, 2015...
the process of restructuring as contemplated in the said Notification and classification of borrower's account as NPA are two independent subjects...
Procedural History
Writ petitions filed by MSMEs in Bombay High Court challenging SARFAESI actions. High Court dismissed petitions on 11.01.2024. Appeals filed in Supreme Court. Leave granted. Supreme Court heard appeals and dismissed them.
Acts & Sections
- Micro, Small and Medium Enterprises Development Act, 2006: Section 9, Section 10
- Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002: Section 35
- Banking Regulation Act, 1949: Section 21, Section 35A
