DRT Can Decide Legality Of SARFAESI Action Against MSME Companies: Calcutta High Court

The Calcutta High Court recently observed that the Debts Recovery Tribunal (DRT) can examine whether Indian Bank rightly initiated SARFAESI proceedings against two MSME companies.

The Division Bench of Justice Shampa Sarkar and Justice Arjun Ray Mukherjee observed,

"Thus, the question whether the SARFAESI proceeding had been rightly initiated by the Bank and whether the steps taken under the SARFAESI Act were legally permissible in view of the Framework of the RBI, in our, prima facie, view can be decided by the Debts Recovery Tribunal."

The ruling came in appeals filed by Merchant Monger Agrotech Pvt Ltd and Merchant Monger Hospitality Pvt Ltd against orders dismissing their writ petitions.

The companies had challenged Indian Bank's measures under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). They also challenged the classification of their accounts as non-performing assets (NPAs) and sought restructuring under the Reserve Bank of India's framework for revival and rehabilitation of MSMEs.

The Division Bench did not finally decide that the companies were entitled to restructuring under the RBI framework. It set aside the Single Judge's dismissal orders and the finding that the framework would not apply.

The Bench directed the Single Judge to hear the writ petitions on affidavits. It also clarified that its own observations were tentative.

The dispute arose from credit facilities extended by Indian Bank to the two companies in connection with various tea gardens. The properties of the companies had been mortgaged to the bank as collateral security.

The court noted that more than ₹19 crore in credit facilities sanctioned to Merchant Monger Hospitality were subject to a condition. The existing loan account of Merchant Monger Agrotech had to be closed.

The companies had furnished an undertaking to close the Agrotech account. The account was not closed, and the bank marked a debit freeze on it.

The freeze was later removed after the undertaking was furnished. The bank altered its position and permitted the account to operate on that basis.

Merchant Monger Agrotech wrote to the bank on April 16, 2026, proposing to repay the overdue amounts. It sought regularisation of the accounts so that normal transactions could continue.

The company also stated that once its account was regularised, it would take steps to regularise the Hospitality company's accounts.

The bank had issued notices to both companies under Section 13(2) of the SARFAESI Act. The companies replied to the notices and asked the bank to withdraw them and provide detailed account information.

They wanted to make payments after verification of the accounts. The companies also sought to regularise the accounts and continue normal operations of the tea gardens.

The bank subsequently published a notice calling upon the companies to repay the entire outstanding dues within 60 days.

The bank had already taken symbolic possession of the secured assets on May 27, 2026. The companies then made a representation dated June 11, 2026, seeking consideration under the RBI framework.

The companies argued that the RBI framework applied because their credit facilities had been sanctioned under an MSME scheme. They relied on Supreme Court decisions concerning the framework.

Their case was that the bank was required to follow the prescribed process before classifying their accounts as NPAs.

The companies also contended that the bank was aware that they were MSMEs. They relied, among other things, on the sanction of a credit facility under the MSME-IND SME Secure Scheme.

Indian Bank opposed the plea. The bank relied on the undertaking given by the companies to close the Agrotech loan account.

The bank argued that the companies could not retract from the undertaking after the bank had acted on it. It also pointed out that the companies had already challenged the SARFAESI proceedings before the DRT.

The Division Bench observed that the DRT could examine whether the SARFAESI proceedings had been rightly initiated. It could also consider whether the steps taken under the SARFAESI Act were legally permissible in light of the RBI framework.

The Bench was not inclined to grant interim protection to the companies. It noted that they had failed to comply with the undertaking to close the Agrotech loan account.

The Bench also noted that the bank had already taken the necessary steps under the SARFAESI Act.

On the RBI framework, the Bench observed that the companies had continued to negotiate with the bank and had sought repayment of the outstanding amounts at various stages. However, none of their communications indicated that they wanted to come within the Framework.

The Bench referred to the Supreme Court's decision in Pro Knits. It noted that the decision recognised the obligation of banks to follow the RBI framework before an MSME account is classified as an NPA.

At the same time, the MSME must also be vigilant and follow the process under the framework. It must bring authenticated and verifiable documents or material before the bank to establish its eligibility.

The Bench also considered the Supreme Court's decision in Shri Shri Swami Samarth. It noted the Supreme Court's observation that an MSME cannot raise its status at a belated stage to thwart SARFAESI action.

In the present case, the Division Bench observed that the companies had not taken steps to seek consideration under the RBI framework before the SARFAESI action progressed.

It therefore declined to stay the SARFAESI proceedings as an interim measure.

The Bench held that the Single Judge could not have dismissed the writ petitions on merits after concluding the hearing only on interim relief. The factual issues raised by the bank had not been tested through affidavits.

The Division Bench held that proceeding in this manner amounted to a procedural irregularity and violated principles of natural justice.

It therefore set aside the dismissal orders. It also set aside the finding that the RBI framework would not apply.

The Single Judge will now hear the writ petitions on affidavits and proceed independently. The Division Bench's observations will be treated as interim findings justifying the refusal of interim relief.

The bench noted that the companies had already approached the DRT over the SARFAESI proceedings. It observed that parallel proceedings should not be allowed.

The appeals and connected applications were accordingly disposed of. The Division Bench clarified that its observations were tentative.

For Appellant: Debashis Kundu, Jishnu Saha, Krishnaraj Thaker, Sr. Advocates, Debabrata Basu Ray, Aditya Kanodia, Rajendra Nath Barik, Chayan Gupta, Shreya Trivedi

For Respondent Bank: Advocates Shiv Mangal Singh, Madhu Shaw, Anjali Mishra