Personal Loans Cannot Be Treated As MSME Borrowings Merely Due To MSME Link: Karnataka High Court
The Karnataka High Court has ruled that personal loans taken by borrowers cannot be treated as MSME borrowings merely because they are connected with an MSME.
“The benefit available to an MSME must be considered in relation to the enterprise and the credit facility covered by the framework. Independent personal borrowings do not acquire the character of MSME borrowings merely because the borrowers are also connected with an MSME,” Justice Lalitha Kanneganti observed.
The court was dealing with a plea by Additive 3D, a registered micro enterprise, and its partner Prakasam Anand against recovery action by ICICI Bank under the SARFAESI Act.
According to the bank, only one account was an MSME account. The other facilities included two personal loans, three home loans, three auto loans, a credit-card account and an Insta OD.
The court held that the MSME revival framework applies to the enterprise and the particular credit facility covered by it. It cannot be extended to separate personal borrowings merely because the borrowers are connected with an MSME.
The petitioners had also sought constitution of a stressed MSME committee to consider revival of their business. They argued that the bank could not proceed with recovery without first considering their case under the MSME revival framework.
The bank told the court that it had sought information needed to assess whether the business could be revived. This included a roadmap for business revival, financial details and business projections.
The court noted that the MSME unit was not functioning. It held that this did not by itself rule out revival, but the borrowers had to show a genuine possibility of restarting the business.
“There must be a proposal, financial particulars, business projections, or other material that would enable the bank to consider whether revival is commercially possible and viable,” the court observed.
The petitioners had not shown what their revival proposal was, when they intended to restart the unit, what funds would be available or how the outstanding liability would be dealt with, the court noted.
The court also found that the bank had not refused to consider the petitioners' request for a committee. Instead, it had asked them to provide information necessary to examine the unit's financial position and prospects of revival.
“Having failed to provide the material required by the bank for considering revival, the petitioner cannot now contend that the subsequent proceedings are illegal merely because the Committee was not constituted,” the court observed.
Referring to the Supreme Court's ruling in Pro Knits v. Board of Directors of Canara Bank, reported at (2024), the court observed that an MSME seeking the benefit of the revival framework also has a role to play. It cannot remain passive and later complain that the bank did not initiate or complete the process.
“The constitution of a committee cannot be treated as an empty formality,” the court observed. The purpose of the process is to determine whether the enterprise can be revived and what corrective steps can reasonably be taken.
“The petitioners are essentially seeking to use the alleged non-compliance with the MSME framework to invalidate the proceedings already initiated under the SARFAESI Act,” the court observed.
The court ultimately found no ground to hold that the SARFAESI proceedings were invalid merely because the MSME committee had not been constituted in the circumstances of the case. It dismissed the writ petition.