Illegal NPA Classification For MSME Borrower Vitiates SARFAESI Proceedings: DRT Chandigarh

The Debts Recovery Tribunal at Chandigarh has held that proceedings under the SARFAESI Act cannot be sustained where the loan account was classified as a Non-Performing Asset without following the mandatory procedure applicable to MSME borrowers, rendering the NPA declaration illegal.

The tribunal held that once the classification itself is contrary to law, all subsequent enforcement measures taken under the Act are liable to be quashed.

Presiding Officer Mridulesh Kumar Singh made the observation while allowing a securitisation application challenging SARFAESI action initiated by the lending bank.

“In the considered opinion of this Tribunal, when it was found that classification of loan accounts as NPA was illegal then rest proceeding initiated under the Act cannot be sustained and liable to be quashed," the tribunal observed.

The dispute arose out of financial facilities granted by the bank to the borrower, including a term loan of Rs. 8.8 crore sanctioned on August 29, 2014 and a cash credit facility of Rs. 75 lakh sanctioned on August 31, 2015.

The borrower claimed to be a registered MSME and asserted that it was entitled to protection under the Reserve Bank of India's circular dated February 7, 2018 granting relief to GST-registered MSME borrowers.

Despite this, the bank classified the loan account as NPA on July 1, 2018. It thereafter issued a demand notice on November 14, 2018, followed by a possession notice on April 22, 2019 and auction notices for sale of the secured assets.

The tribunal noted that before classifying the account as NPA, the bank was required to refer the matter to the designated committee in terms of the RBI framework applicable to MSME borrowers. Since no such step was taken, and the bank also failed to file any reply contesting the borrower's assertions, the tribunal held that the declaration of the account as NPA was not in accordance with law.

The tribunal said:

“In light of above, it was mandatory on the part of respondent No.1 to refer the matter of applicants to Designated Committee before classification of loan accounts as NPA. Non-filing of reply by respondent No.1 appears that respondent No.1 has admitted the facts of the applicants mentioned in the SA. Therefore, classification of loan accounts as NPA is not legal as per law.”

Holding that the very basis of the SARFAESI action had failed, the tribunal quashed the proceedings initiated by the bank, directed it to take back physical possession of the mortgaged property from the auction purchasers and restore it to the borrowers, and ordered that the auction amount be refunded to the purchasers with interest at the rate applicable to fixed deposits.