Case Note & Summary
The petitioners, M/s. Metro Steel Section (Firm) and its partners, are MSME borrowers who availed credit facilities from the State Bank of India. The Bank issued notices under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) on 14.12.2023, 12.03.2024, and 18.03.2024, classifying the account as a Non-Performing Asset (NPA) and threatening enforcement of security interest. The petitioners challenged these notices before the High Court of Karnataka under Articles 226 and 227 of the Constitution, contending that the Bank failed to comply with the mandatory pre-action protocol prescribed by the Reserve Bank of India (RBI) Circular dated 29.05.2015. This circular requires that for MSME borrowers, the account must be classified as NPA only after 90 days of default, and the Bank must issue a 60-day notice to the borrower before initiating any action under the SARFAESI Act. The petitioners argued that the Bank did not adhere to this procedure, making the notices invalid. The Bank, represented by Smt. Sadhana S. Desai, contended that the writ petition was not maintainable as the petitioners had an alternative remedy under Section 17 of the SARFAESI Act before the Debt Recovery Tribunal. The court, after hearing both sides, held that the RBI Circular is binding on banks and its non-compliance renders the SARFAESI proceedings void. The court further held that where the action is without jurisdiction or in violation of mandatory procedure, the writ jurisdiction can be invoked despite the availability of an alternative remedy. Consequently, the court quashed the impugned notices and directed the Bank to follow the mandatory procedure before taking any further action.
Headnote
A) SARFAESI Act - MSME Borrowers - Pre-action Protocol - RBI Circular dated 29.05.2015 - The court examined whether the Bank's failure to follow the mandatory procedure under the RBI Circular, which requires classification of the account as NPA only after 90 days and issuance of a 60-day notice before invoking SARFAESI, vitiates the proceedings. Held that the circular is binding and non-compliance renders the notices invalid (Paras 1-10). B) Constitutional Law - Writ Jurisdiction - Alternative Remedy - Availability of remedy under Section 17 of SARFAESI Act - The court considered whether the writ petition is maintainable despite the availability of an alternative remedy. Held that where the action is without jurisdiction or in violation of mandatory procedure, writ jurisdiction can be invoked (Paras 11-15).
Issue of Consideration
Whether the SARFAESI notices issued by the respondent Bank against the petitioners, who are MSME borrowers, are liable to be quashed for non-compliance with the mandatory pre-action protocol stipulated in the RBI Circular dated 29.05.2015?
Final Decision
The court quashed the impugned SARFAESI notices dated 14.12.2023, 12.03.2024, and 18.03.2024 issued by the respondent Bank, and directed the Bank to follow the mandatory procedure under the RBI Circular dated 29.05.2015 before taking any further action.
Law Points
- SARFAESI Act
- 2002
- MSME
- RBI Circular
- Pre-action protocol
- Mandatory procedure
- Natural justice
- Writ jurisdiction
- Alternative remedy
