MSME Revival Benefits Depend On Loan Limit, Not Outstanding Dues: Bombay High Court

The Bombay High Court recently held that eligibility for benefits under the Reserve Bank of India's framework for revival and rehabilitation of MSMEs depends on the sanctioned loan limit and not on the outstanding amount.

The court, thus, cleared the way for Union Bank of India to continue insolvency proceedings against Vardhan Agro Processing Limited.

A Division Bench of Justice Manish Pitale and Justice Shreeram V. Shirsat heard the case. While explaining the scope of the RBI framework, the court made it clear that the policy draws a firm line based on the size of borrowing.

"We find that an MSME, which has taken a loan of only upto Rs.25 crores, being a comparatively smaller enterprise, is sought to be given the protection or assistance of the Framework for Revival and Rehabilitation of MSMEs. The Framework is not meant for MSMEs that have taken loans above the threshold of Rs.25 crores as they would comparatively be larger enterprises. While advancing loans, the Banks would give loans only after ascertaining the capacity of the MSME to repay the loan, thereby indicating that loans exceeding Rs.25 crores would be advanced to comparatively larger MSMEs. "

Vardhan Agro Processing is a registered MSME. It had availed multiple credit facilities from Union Bank of India, including a Rs 30 crore term loan. After the Covid-19 pandemic affected its business, the company sought restructuring of its loan account in March 2022.

The bank did not approve the request. The account was classified as a non-performing asset in July 2023, and recovery action followed. When the bank later moved the National Company Law Tribunal to initiate insolvency proceedings, the company approached the High Court.

The company argued that it should still get MSME protection because its outstanding dues were about Rs 19.75 crore, below the Rs 25 crore mark. The bank opposed this. It said the RBI framework looks at the loan limit sanctioned, not the amount outstanding, and pointed out that the term loan itself exceeded Rs 25 crore.

The court accepted the bank's position. It examined the RBI's exposure norms and the MSME revival framework and held that the ₹25 crore threshold applies to loan limits.

Since the company had taken a Rs 30 crore term loan, it did not qualify as an eligible MSME under the framework. The petition was dismissed, and the bank was allowed to proceed with the insolvency case before the NCLT.

For Petitioners: Advocates Rohaan Cama, T. N. Tripathi, Kalyani Wagle and Somya

For Respondents: Advocates Ashutosh Mishra, Viraaj Bhate, Huzan Bhumgara, Pradeep Mane, Riddhi Badheka, Phiroze Colabawala, Pushpa Thapa and Naina Chheda