Case Title: Hemlata Vijaykumar Thakur vs Board Of Directors Of Kalyan Janta Co-Op
Case No: WRIT PETITION NO. 4620 OF 2022
Decided on:12th January, 2024
CORAM: Hon’ble B. P. Colabawalla J. & M.M. Sathaye, J.
Facts of the Case
The case involves multiple petitions filed by Micro, Small, and Medium Enterprises (MSMEs) under Article 226 of the Indian Constitution, challenging the designation of their accounts as Non-Performing Assets (NPAs) by Respondent Banks or Non-Banking Financial Companies (NBFCs) under Section 13(2) of the SARFAESI Act, 2002. The MSMEs assert that the Respondent Banks/NBFCs failed to adhere to the procedural requirements outlined in a May 29, 2015 Notification under Section 9 of the MSMED Act, specifically concerning the restructuring process, before classifying them as NPAs. The petitioners argue that such non-compliance renders the categorization unlawful and challenges the applicability of the SARFAESI Act, 2002, given the comprehensive provisions of the MSMED Act for handling stressed MSME accounts. The lead petition seeks declarations, including a challenge to the constitutionality of a government notification, a request for account classification records, and an injunction to halt further proceedings by Respondent NBFCs under the SARFAESI Act, 2002. Legal counsel Mr. Nedumpara emphasizes the overarching argument across all petitions regarding alleged procedural irregularities and illegalities in the NPA classification process.
Legal Provisions
The legislative provisions in issue are the Micro, Small, and Medium Enterprises Development Act, 2006 (MSMED Act) and the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act, 2002). The challenge stems from a Notification dated May 29, 2015, issued under Section 9 of the MSMED Act. The petitioners, who are lawfully registered under the MSMED Act and have received loans or financial assistance from Respondent Banks or Non-Banking Financial Companies (NBFCs), challenge the designation of their accounts as Non-Performing Assets (NPAs) under Section 13(2) of the SARFAESI Act, 2002. The essence of their claim is that the Respondent Banks/NBFCs failed to follow the restructuring procedure stated in the 2015 Notification before being classified as NPAs.
Issues
The legal issue concerns the correct use of the mechanism created by the MSMED Act, namely the Notification of 2015, prior to designating MSMEs as NPAs under the SARFAESI Act, 2002. The petitioners argue that failing to follow this established method makes the categorization as NPAs and subsequent proceedings, such as notifications under Section 13(2) of the SARFAESI Act, 2002, unconstitutional. The central issue is whether the Respondent Banks/NBFCs breached the statutory provisions of the MSMED Act and the related notification, resulting in the illegality of the NPA classification and subsequent actions under the SARFAESI Act, 2002.
The petitioners seek a variety of declarations, including a challenge to the application of the SARFAESI Act, 2002, and the validity of certain notices, with the goal of establishing that the measures taken against them are unlawful ab initio owing to claimed violations of legal processes.
Courts analysis and decision
The court examined a collection of petitions contesting Respondent Banks’ and Non-Banking Financial Companies’ (NBFCs) acts based on a Notification dated May 29, 2015, issued under Section 9 of the Micro, Small, and Medium Enterprises Development Act, 2006 (MSMED Act). The petitioners, who were lawfully registered under the MSMED Act, protested their accounts’ designation as Non-Performing Assets (NPAs) under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act, 2002). The fundamental issue was that the Respondent Banks/NBFCs did not follow the restructuring procedure stated in the 2015 Notification before being designated as NPAs.
After reviewing the arguments, the court determined that the Banks/NBFCs were not required to commence the restructuring process without an application from the petitioners/MSMEs. The court dismissed the narrow argument under consideration, noting that the petitions lacked merit. However, it allowed the petitioners to address other problems in their petitions on a case-by-case basis utilising alternative remedies provided under the law. The court noted that it had not issued a view on the other problems. Furthermore, the judgement emphasised that where petitions for restructuring were ongoing, the involved Respondent Banks or Financial Institutions were free to make a decision and quickly notify the MSMEs. The court denied all interim motions and vacated any granted stays until extended by the Supreme Court within two weeks, as requested by the petitioners’ lawyers.
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Written by- Aastha Ganesh Tiwari
