MSME Must Seek Rehabilitation Under 2015 Framework Despite Bank's Duty To Identify Stress: Kerala High Court

The Kerala High Court has held that an MSME must itself initiate proceedings under the 2015 Framework for Revival and Rehabilitation when it apprehends failure of its business or an inability to repay its debts.

A division bench of Chief Justice Soumen Sen and Justice Syam Kumar V.M. made the observation while dismissing Sree Matha Cosmetic Industries' writ appeal against SARFAESI proceedings initiated by UCO Bank.

“While the Framework casts an obligation for the Bank to identify the incipient stress in the loan account by creating sub categories, the obligation on the part of the enterprise to make such application remains,” the court observed.

Sree Matha had availed an MSE cash credit facility from UCO Bank's Kollam branch. The account was classified as an NPA on July 31, 2024. The bank issued a demand notice under Section 13(2) of the SARFAESI Act on August 17, 2024, followed by a possession notice on November 16, 2024. Sree Matha did not reply to the notice.

The Chief Judicial Magistrate subsequently appointed an Advocate Commissioner to take physical possession of the mortgaged properties. A sale notice was later issued, scheduling the sale for November 28, 2025.

Sree Matha challenged the bank's action, alleging non-compliance with the Framework notified on May 29, 2015. It argued that the bank was required to identify incipient stress in the account and constitute a committee to consider a corrective action plan before taking recovery steps.

The company relied on the Supreme Court's decision in Pro Knits v. Board of Directors of Canara Bank and the decision in Shri Shri Swami Samarth Construction & Finance Solution v. Board of Directors of NKGSB Co-operative Bank, arguing that the bank had failed to discharge its obligations under the Framework.

UCO Bank pointed out that challenging the SARFAESI measures was already pending before the Debts Recovery Tribunal. The court also took note of another application under Section 17 concerning the same issue.

The division bench examined the Framework alongside the SARFAESI Act and referred to its earlier decision in Irine Agro Spices v. Board of Directors of Axis Bank. It noted that the Framework places an obligation on an enterprise to voluntarily initiate proceedings when it apprehends failure of its business or an inability to pay its debts, and before its accumulated losses reach half or more of its net worth.

In Sree Matha's case, the court found that the enterprise had not approached the bank with any rehabilitation package or replied to the Section 13(2) notice. There was also nothing on record to show that it had filed an application for rehabilitation.

“Nothing prevented the petitioner from making an application for rehabilitation as it was quite clear to the enterprise that there has been a failure of the business and its inability or likely inability to pay debts, as well as the resultant accumulated losses which might equal to half or more of its entire net worth,” the bench observed.

“The corrective measures can only be undertaken provided a proper application is filed before the Committee for a corrective action plan,” it added.

The bench also referred to its decision in Irine Agro Spices, which had observed that even where a secured creditor issues a Section 13(2) notice without knowing that the borrower is an MSME, the borrower can assert its MSME status and claim the Framework's benefit in its response under Section 13(3A).

The court noted that Sree Matha had not approached its financial creditors to avail itself of the Framework even after the demand notice was issued. It also noted that SARFAESI measures were already under challenge before the Debts Recovery Tribunal.

Finding no reason to interfere with the single judge's order, the bench dismissed the writ appeal.

For Appellant: Advocates Mathew Nedumpara, Maria Nedumpara, Shameem Fayiz V.P and Roy Pallikoodam

For Respondents: Advocates M. Gopikrishnan Nambiar, K. John Mathai, Joson Manavalan, Kuryan Thomas, Paulose C Abraham, Raja Kannan and Akhila Nambiar