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TMI Blog2024 (1) TMI 1377X X X X Extracts X X X X X X X X Extracts X X X X ..... ion, it can be seen that the whole process as provided under the said Notification starts from identification of Incipient Stress in the account of an MSME and thereafter classifying it in 3 sub-categories provided as per Clause 1(1) of the said Notification. None of the learned Counsels appearing for either the Petitioners or the Respondent Banks/NBFCs have submitted anything about this aspect of identification of incipient stress . This Court has also on its own endeavored to find out guiding principles on this issue, so that it can be beneficially used. However, no such guidance is found. Faced with such a stonewall of non-availability of any precedent or earlier views, only one choice left and that is to go to the very concept of incipient stress as it might have been intended by the legislature. After all, it is one of the Court s fundamental functions to interpret what is provided by the legislature. On a conjoint reading of Clause 1(1) and Clause 1(3) of the said Notification, leads to an indisputable interpretation that the said Notification can be pressed into service only and only after the MSME [such as the Petitioners] approaches the Banks/NBFCs with an appropriate appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... antile India Pvt. Ltd., The Zonal/Regional Manager Chairman, Shri. Amish Mehta, Shri. Mohd. Wasim Qureshi Court, India Resurgence ARC Private Limited, Hero Fincorp, Elexa Resolution Advisor LLP, TransUnion CIBIL Limited, Cholamandalam Investment and Finance, Mousumi Karmakar Authorized Officer Bank, Tahsildar Shahapur Court Commissioner Tahsil office, Mandal Adhikari, CANARA BANK, AUTHORIZED OFFICER CANARA BANK, State of Tamilnadu Chennai B. P. COLABAWALLA AND M.M. SATHAYE, J. Mr. Mathews Nedumpara a/w Hemali Kurne, Maria Nedumpara, B. S. Mundey and Shameem i/b Nedumpara Nedumpara Advocates for Petitioner in all matters Sanjiv Punalekar, i/b PRS Legal for Abhyudaya Co-Op. Bank and Bank of Baroda in WP/4620/2022 Advait Sethna, a/w Ashutosh Mishra Rangan Majundar, for UOI in WP(L)/11035/2023,WP/4620/2022,WP(L)/36240/2022 WP(L)/35792/2022 Madhur Rai i/b PRS Legal for Abhyudaya Co-Op. Bank and Bank of Baroda in WP(L)/23938/2022, WP(L)/36240/2022 WP(L)/14807/2023 Sanjay Anabhawane, for Respondent no. 1 2 in WPL/30038/2022 Girish T. i/b Meghnath Navlani, for Respondent no. 3 4 in WPL/30038/2022 Harjot Singh Alang i/b Raval Shah Co, for Respondent no. 1 to 4 in WP(L)/35792/2022 Karl Tambo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es (for short NBFC ) appearing through their respective advocates including Mr. Nedumpara for all Petitioners, that presently, without going into facts and merits of individual cases, only the ground based on said Notification will be considered and depending on the outcome on the said issue, further directions would be passed. In that view of the matter, this common order is being passed. 3. By these petitions filed under Article 226 of the Constitution of India, the Petitioners, who are stated to be duly registered under the MSMED Act, and who are borrowers who have taken loans or other financial assistance from the Respondent Banks/NBFCs, have challenged the very action of declaring them as Non-Performing Assets (NPA) under Section 13 (2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (for short SARFAESI Act, 2002 ), without following the procedure of restructuring as contemplated under the said Notification. The basic challenge of all the Petitioner MSMEs, which is presently under consideration, is essentially that none of the Respondent Banks/NBFCs have followed the procedure as provided under the said Notification, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Respondents as against the Petitioner. e) to declare that the entire proceedings under Sections 13(2), 13(4) and 14 of the SARFAESI Act, 2002 and the Security Interest Enforcement Rules issued thereunder, the Arbitration and Conciliation Act, 1996 proceedings initiated to declare the Petitioner as willful defaulter are all rendered void ab initio; f) without prejudice and in furtherance of relief (e) above to issue writ in the nature of Certiorari, quash and set aside the entire proceedings purportedly initiated at the hands of DHFL now Respondent No. 1 under Section 13(2), 13(4) and at the CMM under Section 14 of the SARFAESI Act, 2002, and rules issued thereunder; g) to declare Notification dated 5th August, 2016, issued by Central Government Ministry of Finance including non-banking nay money lending institution as financial institution to recover loans and credit facilities under SARFAESI Act, 2002 is unconstitutional and void ab initio; h) to call for the entire records, minutes and proceedings leading to the classification of the Petitioner s account as NPA, so too under Section 13(2), 13(3A) and 13(4) of the SARFAESI Act, 2002 and the Security Interest (Enforcement) Ru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the said Notification. 6.f) It is further submitted that the MSMED Act casts certain rights and obligations but does not provide for any forum to decide those rights or obligations and therefore the jurisdiction of the Civil Court is not barred. If this argument is accepted then, according to Mr. Nedumpara, the Petitioners are entitled to a Writ of Certiorari to quash and set aside all the proceedings initiated under SARFAESI Act, 2002, Recovery of Debts and Bankruptcy Act, 1993 (for short RDB Act, 1993 ) and the Insolvency and Bankruptcy Code, 2016 (for short IBC, 2016 ). 6.g) Drawing our attention to objects and reasons of the MSMED Act, 2006 and to Section 7, 8, 9, 10 and 29 thereof, it is submitted that the MSMED Act, 2006 is a piece of welfare legislation and has to be interpreted beneficially in favour of the Petitioners. It is specifically submitted by Mr. Nedumpara that it is not his argument on behalf of the Petitioners that the provisions of the MSMED Act, 2006 overrides the provisions of SARFAESI Act, 2002. 7. Mr. Sethna, learned Counsel appearing for Union of India in Writ Petition (L) No. 35792 of 2022 and Writ Petition (L) No. 11035 of 2023, opposing the argument ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s open for the Petitioners to voluntarily initiate proceedings, when it apprehended that it cannot pay the loan (in other words, when the Petitioner/MSME was sensing incipient stress). It is pointed out that in that Judgment, it is already observed that without specific pleadings, as in the present case also, general and sweeping statements are made by the Petitioners. It is submitted that for a legal challenge to sustain, the Petitioners must demonstrate and the Court must be satisfied that the Petitioners were in fact interested in getting benefits under the said Notification. 7.e) Mr. Sethna, further relied upon the Judgment of Division Bench of the Andhra Pradesh High Court reported in M/s. Sri Vamsee Krishna Traders Vs. The Authorised Officer, Punjab National Bank and Ors. (Writ Petition No. 2064 of 2022, Judgment dated 31st January, 2022) and Judgment of Single Bench of Orissa High Court in the matter Mahal Industries Vs. Government of India and others (Writ Petition No. 16451 of 2017, Judgment dated 5th September, 2018). 7.f) It is further submitted that a plain reading of the said Notification would show that the MSME has to avail of the steps provided in the Notification, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al asset classification benefit on restructuring of accounts as per the existing instructions, shall be available for restructured accounts. 8.b) Pointing out these provisions, learned Counsel Mr. Bamne, submitted that said clauses are indicative of the fact that even the legislature did not intend to stop or halt the procedure of the classification of assets of the Petitioners as NPA merely because a proposal of restructuring is under consideration. This indicates, according to Mr. Bamne, that the process of restructuring and classification of borrower or its account as NPA are two independent subjects and therefore it cannot be interpreted that unless the procedure under the said Notification for restructuring is adopted, the Petitioners accounts cannot be classified as NPAs and the procedure under SARFAESI Act, 2002 cannot follow. 8.c) The learned Counsel, seeking pardon for repeating the argument, submitted that in any event, there is no mandate in the said Notification on the Banks or NBFCs to constitute a committee, until the borrower approaches the Bank which is clearly provided in Clause 1(3) of the said Notification. He submitted that having not applied as provided in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... med. He also submitted that, while the restructuring is under consideration, usual asset classification norms shall apply as provided in the said Notification itself. He further submitted that the said Notification operates only before the declaration of accounts as NPA and once the period of default crossed 90 days, the rigors of the concerned RBI circular takes full force. He submitted that the said Notification is clearly directory and not mandatory in nature. He submitted that the said Notification cannot be relied upon beyond the period of 90 days. He finally submitted that the said Notification is a delegated legislation and cannot override or put a fetter on the operation of a statutory provision. He submitted that Section 9 of the MSME Act provides for power of the Central Government to issue Notification for programs, guidelines or instructions for certain purposes as stated in the said Section, which in essence are for facilitating the promotion, development and enhancing competitiveness of the MSMEs. 9.d) He therefore submitted that the said Notification cannot be interpreted more than a guideline or instructions and cannot be given an effect as a statute to override or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties at all. He submitted that liberal construction of the said Notification is not going to prejudice the rights of Banks or NBFCs. 11.c) He submitted that the reference to the Committee for restructuring is mandatory under the said Notification. He submitted that if literal interpretation is adopted, there is no need for purposive interpretation. He submitted that the borrowers can also make a reference under the Notification but the Banks are also under a legal obligation to identify incipient stress and categorize the MSMEs in pre- NPA time. 11.d) He submitted that not a single Committee is constituted by any of the Banks before classifying the Petitioners as NPAs. So far as the argument about the said Notification being instructions is concerned, Mr. Nedumpara submitted that in the scheme of the things, the word instruction must be interpreted to give benefit to the MSME and would therefore obviously mean a mandate . REASONS CONCLUSIONS 12. Before testing the rival arguments in the light of subsequent Notification or circular issued by RBI modifying the said Notification, we would like to deal with the basic argument about interpretation of the said Notification. We would like ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ether any such business is undergoing or beginning to feel stress on its financial capacity, is within the knowledge of the said borrower running its business. Unless such knowledge of incipient stress on the financial condition of MSME is brought to the notice of the Bank it is next to impossible, in our opinion, to be identified on its own by the Banks or NBFCs. The persons in charge of the MSMEs are most likely to sense or understand the beginning of the stress on their financial capacity, simply because they are at the helm of the things so far as a particular MSME is concerned. It is perhaps for the same reason that the legislature has provided for Clause 1(3), whereunder an application for initiation of the proceedings under the framework is contemplated by an affidavit of an authorized person. This affidavit of the authorized person has to be of the person in charge of the MSME because he/she has to state on oath about facts necessitating an action to initiate the restructuring process. Therefore, on a conjoint reading of Clause 1(1) and Clause 1(3) of the said Notification, leads to an indisputable interpretation that the said Notification can be pressed into service only a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2015. The Petitioners also have an independent right to avail of the benefits under the Notification, which they are not inclined to take. Therefore, we agree with the Respondents submissions that the argument based on the Notification dated 29 May 2015 is only an attempt to get the petition admitted to keep the proceedings pending. (Emphasis Supplied) 16. The Kerala High Court, in the matter of N. P. Abdul Nazer Vs. Union Bank of India Anr. (Order dated 22nd August 2023 in O.P.(Crl) No. 288 of 2023) has considered the same arguments advanced by the same advocate (Mr. Nedumpara). In this case also the same said Notification was under consideration and just like the present matters, the actions of Banks/ NBFCs under SARFAESI Act 2002 were sought to be resisted on the basis of non compliance with the said Notification. The learned single Judge of the Kerala High Court, after considering the said Notification, has held that failure of the banks to abide by the terms of the framework provided under the said Notification cannot be considered fatal. It is further held that the said framework does not have a mandatory character. The relevant portion of this decision reads thus: 17. Obviou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven an opportunity to voluntarily initiate the procedure under the Framework by applying for it. Hence the failure of the Banks to abide by the terms of the Framework cannot be condemned as fatal. The terms of the Framework do not convey a meaning that it was intended to transform that procedure into a dominant desideratum. (Emphasis Supplied) 17. In the aforesaid legal and factual position, since we have found that the Banks/NBFCs are not obliged to adopt the restructuring process on its own without there being any application by the Petitioners/MSMEs, it is not necessary to deal with the arguments of the Respondent Banks /NBFCs about the effects of the subsequent Notifications and Circulars. For the same reason it is not necessary to consider the judgments relied upon by them about interpretation of interplay between the SARFAESI Act, 2002/, RDB Act, 1993/, IBC, 2016 and the MSME Act, 2006. 18. In that view of the matter, the limited argument of the Petitioners under consideration, fails. There is no merit in these petitions and the same are dismissed. 19. We however grant leave to the Petitioners to agitate the other issues in their petitions, which may vary on facts, on a case- ..... X X X X Extracts X X X X X X X X Extracts X X X X
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