MSME Borrower Can't Raise Revival Framework Defence In Subsequent SARFAESI Case: Kerala High Court

The Kerala High Court on 1 September held that an MSME borrower cannot invoke the MSME revival and rehabilitation framework for the first time in subsequent litigation to challenge SARFAESI proceedings when the borrower failed to raise the issue in the first round of litigation.

A Division Bench of Chief Justice Soumen Sen and Justice Syam Kumar V.M. upheld the dismissal of a writ petition filed by Soubhagye Road Builders and its proprietors against recovery proceedings initiated by Canara Bank under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). It observed:

“They cannot, therefore, be heard to contend that they are entitled to the benefit of the MSME Notification, which appears to have been abandoned at the first stage of the litigation.”

Soubhagye Road Builders, claiming to be an MSME, had sought protection under the MSME Notification dated 29 May 2015 and the Reserve Bank of India (RBI) Circular dated 17 March 2016. It contended that Canara Bank had initiated SARFAESI proceedings without following the prescribed revival and rehabilitation mechanism for stressed MSME accounts.

The bank submitted that the borrowers had availed an overdraft facility of Rs. 2 crore, sanctioned on 14 August 2023 for one year. Despite a reminder dated 9 August 2024, the borrowers allegedly failed to seek renewal of the facility or furnish the required documents.

The account was subsequently classified as a non-performing asset on 8 February 2025, following which the bank issued a demand notice under Section 13(2) of the SARFAESI Act (which permits a secured creditor to demand repayment of the outstanding dues before taking enforcement measures).

The borrowers initially challenged the recovery proceedings before the High Court. The writ petition was dismissed with liberty to challenge the SARFAESI measures before the appropriate forum.

They subsequently filed another writ petition challenging the further recovery and auction proceedings and, for the first time, relied on their claimed MSME status and the protection available under the MSME framework.

A Single Judge dismissed the second writ petition, holding that the borrowers had not invoked the MSME framework after receipt of the Section 13(2) demand notice and could not raise the claim belatedly in subsequent proceedings.

The Division Bench, while examining the MSME framework and the precedents governing it, observed:

“….there was an obligation on the enterprise to voluntarily initiate proceedings under the Framework if the enterprise apprehends failure of its business or its inability to pay its debts and before the accumulated losses of the enterprise equals to half or more of its entire net worth.”

The Court held that although the bank had an obligation to identify incipient stress in the loan account, the enterprise was also required to apply for the benefit of the revival and rehabilitation framework. It noted that the borrowers had not approached the bank with any rehabilitation package.

It rejected the argument that the subsequent auction notice created a fresh cause of action, holding that the auction proceedings were a continuation of the SARFAESI action that had commenced with the Section 13(2) demand notice.

Further, the Bench held that the borrowers ought to have raised their MSME status during the first round of litigation. It held:

“The writ appellants were not under disability at the relevant point of time to challenge the classification of the account as NPA on the grounds on which now the action taken by the secured creditor for sale of the secured assets have been assailed. The writ appellants cannot be selective about their claims and reliefs.”

Referring to the Henderson principle and the Supreme Court's decision in CELIR LLP v. Mr. Sumati Prasad Bafna, the Bench held that a subsequent writ petition cannot be used to raise a ground that was available to the petitioner in an earlier proceeding concerning the same cause of action. It concluded:

“No independent ground exists for challenging the auction sale other than the ground of protection under the MSME Act and the notification dated 29th May, 2015.”

Accordingly, the High Court dismissed the appeal, finding no reason to interfere with the Single Judge's decision. It, however, granted the appellants three weeks' time to approach the Debts Recovery Tribunal.

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

For Respondents: Advocates Millu Dandapani, V Geetha Potti, CGC, Aneesh K.M and K. Santhosh Kumar