Court Affirms Borrower's Duty to Notify MSME Status Before NPA Classification to Claim Benefits
In a significant ruling, the Kerala High Court has dismissed an appeal by M/s. Irine Agro Spices, an MSME, challenging the classification of its loan account as a Non-Performing Asset (NPA) by Axis Bank Ltd. The Division Bench, comprising Chief Justice Soumen Sen and Justice Syam Kumar V.M., upheld the decision of the learned Single Judge, emphasizing the importance of notifying MSME status to financial institutions prior to NPA classification to avail benefits under the MSMED Act.
The appeal stemmed from the writ petition filed by Irine Agro Spices, which contested the recovery proceedings initiated by Axis Bank under the SARFAESI Act. The bank had classified the loan account as NPA due to defaults in repayment, prompting the appellant to seek immunity under the MSMED Act.
The court reiterated that borrowers must assert their MSME status before their loan accounts are classified as NPAs. Failure to do so bars subsequent claims for immunity or rehabilitation benefits under the MSMED Act. The judgment highlighted the interplay between the SARFAESI Act and the MSMED Act, emphasizing that MSME status must be established before the account is classified as NPA or during initial proceedings.
The court referenced several Supreme Court decisions, including Pro Knits v. Board of Directors of Canara Bank and Shri Shri Swami Samarth Construction and Finance Solution v. Board of Directors of NKGSB Coop. Bank Ltd., which laid down the principle that MSMEs must notify their status at the appropriate stages to avail statutory protections.
Despite arguments from the appellants, the court found no evidence that Irine Agro Spices had informed Axis Bank of its MSME status at the time of availing credit facilities or before the account was declared as NPA. The court emphasized that the appellants' failure to notify their MSME status barred them from challenging the recovery proceedings.
The judgment also addressed the appellants' challenge to the constitutionality of the RBI's notification on the Framework for Revival and Rehabilitation of MSMEs, dismissing it as a desperate attempt to thwart recovery proceedings.
Ultimately, the Kerala High Court upheld the bank's actions under the SARFAESI Act, affirming the need for borrowers to be vigilant in asserting their MSME status to claim statutory benefits.
Bottom line:-
MSME status must be notified to financial institutions before classification of a loan account as NPA to avail benefits under the MSMED Act. Failure to assert MSME status at appropriate stages bars subsequent claims for immunity under the Framework for Revival and Rehabilitation of MSMEs.
Statutory provision(s): SARFAESI Act, 2002 Sections 13(2), 13(3A), 14; MSMED Act Framework for Revival and Rehabilitation of MSMEs
