2024 (8) TMI 196 - SC - Indian Laws

Notification dated 29.05.2015 issued by the Central Government in exercise of the powers conferred by Section 9 of the MSMED Act - whether Banks/ Non-Banking Financial Companies (NBFCs) are not obliged to adopt the restructuring process as contemplated in the Notification dated 29th May, 2015 issued by the Ministry of Micro, Small and Medium Enterprises, on its own without there being any application by the Petitioners/ MSMEs? HELD THAT - The RBI in order to make the said Framework contained in the Notification dated 29.05.2015 compatible with the existing regulatory guidelines on Income Recognition, Asset Classification and provisioning pertaining to Advances issued to the banks by the RBI, had made certain changes in the said Framework, in consultation with the Central Government and issued revised Framework along with the operating Instructions vide the Communication dated 17th March, 2016, addressed to all the Scheduled Commercial Banks. It cannot be gainsaid that the Banking Regulation Act 1949 basically seeks to regulate banking business and mandates a statutory comprehensive and formal structure of banking regulation and supervision in India. Section 21 and Section 35A of the said Act empower the Reserve Bank of India to frame the policy and give directions to the banking companies in relation to the advances to be followed by the banking companies. Such directions have got to be read as supplement to the provisions of the Banking Regulation Act and accordingly are required to be construed as having statutory force and mandatory. What is contemplated in the Framework for Revival and Rehabilitation of MSMEs contained in the Instructions/ Directions stated hereinabove, is required to be followed prior to the classification of the borrower s account, (in the instant case MSMEs loan account), as Non-Performing Assets. The said Instructions contained in the Notification dated 29.05.2015 as part of measures taken for facilitating the promotion and development of MSMEs issued by the Central Government in exercise of powers conferred under Section 9 of the MSMED Act, followed by the Directions issued by the RBI in exercise of the powers conferred under Section 21 and 35A of the Banking Regulation Act, the Banking companies though may be secured creditors as per the definition contained in Section 2 (zd) of the SARFAESI Act, are bound to follow the same, before classifying the loan account of MSME as NPA. When it is mandatory or obligatory on the part of the Banks to follow the Instructions/Directions issued by the Central Government and the Reserve Bank of India with regard to the Framework for Revival and Rehabilitation of MSMEs, it would be equally incumbent on the part of the concerned MSMEs to be vigilant enough to follow the process laid down under the said Framework, and bring to the notice of the concerned Banks, by producing authenticated and verifiable documents/material to show its eligibility to get the benefit of the said Framework. The findings recorded by the High Court in the impugned order that the Banks are not obliged to adopt the restructuring process on its own or that the Framework contained in the Notification dated 29.05.2015, as revised from time to time could not be said to be mandatory in nature, are highly erroneous and cannot be countenanced - the impugned order therefore is set aside - appeal allowed.

Summary

Issues Involved:
1. Whether the Banks/NBFCs are obliged to adopt the restructuring process as per the Notification dated 29th May, 2015, without any application by the MSMEs.
2. Whether the classification of MSME loan accounts as Non-Performing Assets (NPAs) without following the said Notification is valid.
3. Whether the Instructions/Directions issued by the Central Government and the Reserve Bank of India (RBI) regarding the Framework for Revival and Rehabilitation of MSMEs have statutory force and are mandatory.

Issue-Wise Detailed Analysis:

1. Obligation of Banks/NBFCs to Adopt Restructuring Process:
The appellants, who are MSMEs, challenged the High Court's decision which held that Banks/NBFCs are not obliged to adopt the restructuring process as per the Notification dated 29th May, 2015, without an application by the MSMEs. The High Court's decision was based on the premise that the restructuring process is not mandatory unless initiated by the MSMEs themselves.

2. Classification of MSME Loan Accounts as NPAs:
The appellants contended that the respondents (Banks/NBFCs) could not classify their loan accounts as NPAs without following the procedure laid down in the Notification dated 29th May, 2015. This Notification, issued by the Ministry of MSME, mandates the identification of incipient stress in the account and the exploration of various options to resolve the stress before classifying the accounts as NPAs. The appellants argued that non-observance of these mandatory instructions rendered the subsequent actions under the SARFAESI Act illegal and void ab initio.

3. Statutory Force and Mandatoriness of Instructions/Directions:
The Supreme Court examined whether the Notification and subsequent Instructions/Directions issued by the Central Government and the RBI have statutory force and are mandatory. The court noted that the MSMED Act aims to facilitate the promotion, development, and enhancement of MSMEs' competitiveness. Section 9 of the MSMED Act empowers the Central Government to issue necessary instructions, while Sections 21 and 35A of the Banking Regulation Act empower the RBI to issue binding directions to banking companies.

The court observed that the Notification dated 29th May, 2015, and the subsequent RBI Directions, which include the "Framework for Revival and Rehabilitation of MSMEs," are binding on all Scheduled Commercial Banks. These directives must be followed before classifying MSME loan accounts as NPAs. The court emphasized that the entire exercise under the Framework is to be carried out before the accounts turn into NPAs.

The court further clarified that while the SARFAESI Act allows the enforcement of security interests, the process can only be initiated after the borrower's account is classified as an NPA. The Framework for Revival and Rehabilitation of MSMEs must be followed prior to this classification. The court held that the Instructions/Directions issued under the MSMED Act and the Banking Regulation Act have statutory force and are mandatory for all banking companies.

Conclusion:
The Supreme Court set aside the High Court's order, holding that the Banks/NBFCs are obliged to adopt the restructuring process as per the Notification dated 29th May, 2015. The Instructions/Directions issued by the Central Government and the RBI regarding the Framework for Revival and Rehabilitation of MSMEs are mandatory and have statutory force. The court allowed the appeals to the extent of setting aside the High Court's erroneous findings but did not remand the matters for fresh consideration due to the conclusion of proceedings under the SARFAESI Act. The appellants were granted the liberty to pursue any other legal remedies available to them.