SARFAESI PROCEEDINGS CONTINUE UNLESS MSME TIMELY INVOKES PROTECTIVE FRAMEWORK: SUPREME COURT CLARIFIES
In a notable decision, the Supreme Court in Shri Shri Swami Samarth Construction & Finance Solution & Anr. v. The Board of Directors of NKGSB Co-op. Bank Ltd. & Ors. (Writ Petition (Civil) No. 684 of 2025), definitively addressed whether banks must proactively identify “incipient stress” in MSME loan accounts before classifying them as NPAs or initiating SARFAESI proceedings. The Bench, comprising Justices Dipankar Datta and Augustine George Masih, clarified the strict conditions under which the 2015, ‘Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises’ (Framework) issued by the Joint Secretary to the Government of India, Ministry of Micro, Small and Medium Enterprises, for MSME Revival and Rehabilitation, becomes binding on secured creditors, and reinforced the critical role of MSME vigilance.
Background of Dispute
The Petitioner enterprise, a registered MSME, defaulted on its loan from NKGSB Co-op. Bank, resulting in NPA classification. The bank proceeded under SARFAESI and issued a Section 13(2) demand notice. The MSME did not contest or claim benefit under the Framework at that stage but later challenged the proceedings after the Bank approached Magistrate under Section 14 of SARFAESI Act, which empowers secured creditors to seek assistance from the Chief Metropolitan Magistrate (CMM) or District Magistrate (DM) in taking possession of secured assets, when a borrower defaults on loan repayment.
Contention
The Counsel for MSME argued that under the 2015 Framework, the bank was required to first detect “incipient stress” in its account and could not proceed under SARFAESI without such identification. They claimed the Framework does not require MSMEs to alert the bank about business distress to trigger its protections.
Supreme Court’s Findings and Rationale
- No Inherent Duty on Banks to Detect Stress Pre-NPA
The Court categorically held that secured creditors and banks are not obligated to independently identify “incipient stress” in MSME accounts prior to NPA classification or SARFAESI action—unless the MSME has affirmatively invoked the Framework. The Framework does not, by itself, preclude banks from classifying accounts as NPAs and moving to enforce security:
“…the terms of the FRAMEWORK do not prohibit the lending bank/secured creditor…to classify the account of the defaulting MSME as NPA and to even issue the demand notice under Section 13(2) of the SARFAESI Act without such identification of incipient stress…” (Datta, J.)
- MSME’s Duty to Proactively Seek Protection
The Court emphasized it is incumbent upon the MSME to invoke the Framework by expressly responding to the lender’s demand notice under Section 13(3-A) of SARFAESI, asserting its MSME status and seeking protection with supporting affidavit. Only when the MSME proactively seeks benefit of the Framework after receiving a SARFAESI notice does a corresponding obligation arise for the lender to consider the request and temporarily suspend recovery under SARFAESI.
- Belated Invocation of Framework Prohibited
The judgment is unequivocal that MSMEs cannot claim the Framework’s protection belatedly—after SARFAESI proceedings have progressed or enforcement orders have been issued. The Court doubted the bona fides of MSMEs who refrain from asserting their rights until late in the process
- Analysis of Pro Knits Precedent
The Court addressed the petitioner’s reliance on Pro Knits v. Canara Bank (2024) 10 SCC 292, clarifying:
- No Shield for MSME Inaction: Pro Knits did not support the view that MSME borrowers are exempt from vigilance; rather, it similarly underscores that MSMEs must promptly notify the bank and provides authenticated documents to establish entitlement to the Framework’s relief.
- The Court cautioned against MSMEs invoking rights under Framework, belatedly, merely to stall creditor’s remedies.
- Harmonious Construction Upheld
The Court continued to champion the doctrine of harmonious construction, ensuring the MSME statute and the SARFAESI Act operate side-by-side—each maintaining vitality—but MSME protection is conditional and not automatic.
Dismissal and Procedural Implications
The Court declined interference under Article 32, citing the MSME’s failure to invoke protection at a timely stage and due to suspect bona fides. The Court however clarified that, alternative remedy remains for the petitioner to seek potential relief under Section 17 of the SARFAESI Act.
Key Takeaways
- No automatic duty on banks/creditors to identify incipient stress in MSME accounts; their duty arises solely upon express invocation by the MSME.
- MSME vigilance is essential: The borrower must be proactive and timely in seeking rehabilitation under the RBI Framework.
- SARFAESI proceedings not suspended automatically due to MSME registration or distress—only formal, timely invocation of the Framework by the MSME can trigger abeyance.
- Late claims are viewed with skepticism and are generally not entertained to dilute the statutory rights of creditors.
- The Supreme Court clarified the Pro Knits decision does not excuse MSME delay or inaction.
Conclusion
This Judgment brings much-needed clarity for both lending institutions and MSMEs: Protections under the MSME Framework are robust but not unconditional. Vigilant and timely invocation by the MSME is an essential condition to compel the bank to pause SARFAESI recovery. The decision strikes a clear balance, upholding creditor rights while ensuring fair process for MSMEs, and guards against exploitation by either side seeking to misuse procedural safeguards.
Yash Hari Dixit
Associate
The Indian Lawyer and Allied Services
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