MSME Borrower Must Establish Status Before NPA To Avail RBI's Revival Framework: Kerala High Court

The Kerala High Court has reiterated that an MSME borrower seeking the benefit of the RBI's statutory framework for revival and rehabilitation must disclose its MSME status to the lending bank.

It must also produce authenticated documents establishing its eligibility at the time of availing credit facilities or, at the latest, before the loan account is classified as a non-performing asset (NPA).

A division bench of Chief Justice Soumen Sen and Justice Syam Kumar V.M., applying the Supreme Court's decisions in Pro Knits v. Board of Directors of Canara Bank and Shri Shri Swami Samarth Construction and Finance Solution v. Board of Directors of NKGSB Coop. Bank Ltd., observed that an MSME borrower cannot invoke the framework after allowing recovery proceedings under the SARFAESI Act to substantially progress.

“It is incumbent on the appellants to bring to the notice of the Bank at the time of availing the loan facility, or at least when the account of the appellant No.1 was classified as NPA, that it is an MSME unit. The appellant No.1 was obliged to bring it to the notice of the respondent-Bank by producing authenticated documents / materials to show its eligibility in order to avail the benefit of the said Framework.”, the court ruled.

The appeal arose from a challenge to recovery proceedings initiated by lenders after the borrower defaulted on its loan. The single judge had declined to interfere. It held that the borrower had an effective alternative remedy before the Debts Recovery Tribunal.

The borrower argued that the banks ought to have followed the MSME revival mechanism before initiating recovery proceedings. It also contended that it could not invoke the framework because the bank had neither constituted it nor intimated it about the Committee contemplated under the framework despite allegedly being aware of its MSME status.

The banks disputed this. They argued that the borrower had neither disclosed nor established its MSME status when the credit facilities were availed.

Relying on the Supreme Court's decisions, the bench held that while banks are required to comply with the MSME framework, borrowers are equally obliged to establish their eligibility. They must do so by producing authenticated and verifiable documents before their accounts are classified as NPAs.

The court noted that the borrower did not respond to the demand notice issued by the bank. It also did not apply to the Committee for a corrective action plan after receiving that notice. Instead, it invoked the MSME framework only after proceedings for taking possession of the secured assets had commenced.

Rejecting the contention that the absence or non-intimation of the Committee excused the borrower from invoking the framework, the bench held that the primary obligation to establish MSME status rested on the borrower.

It found that no authenticated documents establishing the borrower's MSME status were produced before the bank before the account became an NPA. Nor was any such material produced before the single judge or the division bench.

The bench also observed that the borrower had offered no explanation for failing to reply to the demand notice. Its continued silence regarding its MSME status cast serious doubt on its claim that it was an MSME when the credit facilities were availed.

“Having regard to the fact that the appellants have not responded to notice issued under Section 13(2) of the SARFAESI Act and also not even objected to the proceedings initiated under Section 14 of the said Act and their failure to demonstrate that at the time of availing the credit facilities the appellant No.1 was an MSME enterprise, the rationes decidendi of the decisions in Pro Knits... and Shri Shri Swami Samarth Construction and Finance Solution... squarely applies. Moreover, the appellants have also not, before the account was declared as NPA, approached the financial institutions for rehabilitation. We also seriously doubt the bona fides of the appellants, having regard to the fact that the appellants are not even prepared to approach for revival and rehabilitation.”, the court ruled. 

The bench also rejected the submission that the Supreme Court's rulings were per incuriam or sub silentio. It held that those decisions are binding precedents under Article 141 of the Constitution.

The court dismissed the appeal.

For Appellants: Advocates Mathews J Nedumpara, Maria Nedumpara, Shameem Fayiz V.P and Roy Pallikoodam

For Respondents: Advocates P. Paulochan Antony, T.A Prakash, Anntreesa Anil and Millu Dandapani