Mumbai- 400 012 v. U/s. 84 of the Multi State Co-0perative Societies Act

1. These group of Petitions raise a common issue involving a challenge to the action of Respondent Banks or Non-Banking Financial Companies, based on a Notification dated 29th May, 2015 issued under Section 9 of the Micro, Small and Medium Enterprises Development Act, 2006 (for short “MSMED Act”). This notification is hereinafter referred to as “the said Notification” for short.

2. It is specifically agreed between all the Petitioners and all the Respondent-Banks or Non-Banking Financial Companies (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 JANUARY 11, 2024 Shubham Talle 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, for identifying the incipient stress undergone by the Petitioners and its consequent due classification in the Special Mention Account categories SMA-0, SMA-1 and SMA-2 before classifying them as Non-Performing Assets. The argument, in essence is that, if the said procedure is not followed, then the very action of Respondent-Banks/NBFCs of classifying the Petitioners as NPAs is illegal, and if that be so, no notices under Section 13(2) of the SARFAESI Act, 2002, could have been issued. It is further argued that if notices under Section 13(2) could not have been issued to the Petitioners, then all the further actions, which are currently pending at various stages under the SARFAESI Act, 2002, against the Petitioners, are void ab initio, since their foundation itself is illegal.

4. For the purpose of clarity, the all encompassing prayers made by the Petitioner in the lead petition, which are stated to be more or less identical, in all the matters, are reproduced below: a) to declare that the MSME Act in so far as it has not created a special forum/tribunal to enforce the rights and obligations/remedies which it has created in addition to those rights/obligations/remedies recognized by the common law, the jurisdiction of the Tribunal/Civil Court is not ousted; b) to declare that the SARFAESI Act, 2002, is not applicable to the case of the Petitioner since the SARFAESI Act, 2002, is the earlier law qua the MSMED Act, 2006, which (MSMED Act) is a special Act to deal with the MSME and has exhaustively provides the mechanism to deal with stressed incipient account of MSME borrower in the view of objective of the MSMED Act i.e., to aim at providing nurture and care to MSME before initiating recovery; c) to declare that the Petitioners are entitled to be compensated from the Respondent No. 1 for the loss and injury which it has suffered on account of the gross breach of trust, culpable negligence, and malicious and tortious action at the hands of DHFL and their officers, which loss and injury far exceeds the very claim of the Respondents as against the Petitioner; d) to declare that the Respondent Nos. 1 & 2 are vested with no enforceable rights as against the Petitioner in as much as the loss, injury and damages suffered by the Petitioner on account of the gross breach of contract, malicious and tortious action of the DHFL, Respondent No. 1 & 2, far exceeds the claim of 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 JANUARY 11, 2024 Shubham Talle 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) Rules, so too of the applications and other proceedings instituted under Section 14 of the SARFAESI Act, 2002; i) grant cost of the above petition and/or any other consequential relief. Interim Reliefs Provided For: a. to grant an ad interim injunction restraining and prohibiting the Respondent NBFC from proceeding any further in furtherance of the notices and orders under Section 13(2), and 14 of SARFAESI Act, 2002, or any other law; b. to grant such other and further reliefs, Orders and directions which this Hon’ble Court may be pleased to ….

5. Perusal of the aforesaid prayers would show that the Petitioners are challenging almost all the actions permissible under the SARFAESI Act, 2002 by the Respondent Banks/NBFCs. When the above matters were taken up for hearing, learned Counsel Mr. Nedumpara, has categorically stated that de hors the facts of all the Petitions, which may vary on a case-to-case basis, he is restricting his present argument to the challenge as already set out hereinabove in Shubham Talle paragraph Nos. 2 and 3. Based on this categorical statement and understanding between the parties, we have heard the matter.

SUBMISSIONS OF THE PARTIES

6. Learned Counsel Mr. Nedumpara appearing for the Petitioners, has made following submissions: 6.a) It is submitted that MSMED Act is an Act of Parliament and the said Notification has received assent of both Houses of Parliament and is therefore an Act of Parliament for all the purposes. It casts a duty on the Board of Directors of the Bank or NBFC, as the case may be, to adopt a certain procedure as provided in the said Notification. 6.b) It is submitted that the said Notification covers not only banks but NBFCs also. It is submitted that the said Notification casts a duty to constitute a committee, primarily consisting of Bank officers and independent experts on MSME. 6.c) It is further submitted that the Banks/NBFCs are duty bound to make an application for effecting a corrective action plan and if such corrective action plan is not successful, only then it can adopt the recovery steps. 6.d) It is further submitted that the decision of the committee is binding on all concerned and the committee can review its decision for initiating recovery. 6.e) It is submitted that till date none of the Respondent Banks/ NBFCs have ever constituted any such committee and therefore no recovery could have been initiated in violation 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 Shubham Talle 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 arguments of the Petitioners, submitted as follows: 7.a) It is submitted that the said Notification is issued under Section 9 of the MSMED Act, 2006 which provides for programs, guidelines and instructions to facilitate the promotion and development and enhancing competitiveness of MSMEs, as more particularly provided in Section 9 thereof. He submitted that it is in this context that the said Notification has to be interpreted and applied. 7.b) Mr. Sethna stressed on the word “Instructions” appearing in the opening paragraph of the said Notification and submitted that the very nature of the said Notification is either instructions or guidelines and therefore it cannot be interpreted to have a force of Law. He submitted that under Clause 1(2) of the said Notification, an option is given to the MSME to initiate proceedings under the framework provided. He further submitted that for such initiation, an application is required to be made which is mandated to be verified by an affidavit of Shubham Talle the authorized person and only on such specific initiation, it is submitted, that the account is supposed to be processed as SMA-0 and the Committee is supposed to be formed immediately. 7.c) It is vehemently submitted that nothing of this kind, viz., application duly verified by an affidavit of the authorized person is ever made by any of the Petitioners for initiation of proceedings under the said Notification and therefore the Banks and NBFCs or Financial Institutions, as the case may be, are not under any obligation under Law to form a Committee and make an effort for restructuring the Petitioner MSMEs. In support of this submission, learned Counsel Mr. Sethna, relied upon the Judgment of this Court in the matter of M/s. Alexis Business Solutions Pvt. Ltd. Vs. The Board of Directors. (Writ Petition (L) No. 34253 of 2022, Judgment dated 2nd December, 2022.) 7.d) Drawing our attention to paragraphs 14, 15 & 16 of the said Judgment, it is submitted that the very same argument as canvassed before us was considered by this Court. It is submitted that in that case also the very same Notification dated 29th May, 2015 was relied upon. The very same argument that said Notification has a force of law, having binding effect on the Banks and Financial Institutions, was advanced. It is submitted that in that Judgment, it is already categorically held by a Shubham Talle co-ordinate Bench of this Court that it was 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, before its account is termed as NPA. For this reason also, the present Petitioners are not entitled to any relief Shubham Talle because they all have been already classified as a NPA. In support of these submissions, Mr. Sethna, relied upon the chart as provided in clause 1 of the said Notification which contemplates three categories of Special Mention Accounts based on its dues, falling within either first 30 days or between 31st to 60th day and 61st to 90th day. 7.g) It is further submitted that if the said Notification prescribes a thing to be done in particular way, then it has to be done in that way alone or not at all. In support of this submission Mr. Sethna has relied upon, Supertech Limited Vs. Emerald Court Owner Resident Welfare Association and Ors, [2021] 10 SCR 569 which specifically states that “It is that where a power is given to do a certain thing in a certain way, the thing must be done in that way or not at all and that other methods of performance are necessarily forbidden.” 7.h) Mr. Sethna, lastly relied upon the Judgment of Himachal Pradesh High Court in the matter of M/S Neelkanth Yarn vs. Punjab National Bank and Ors. (Civil Writ Petition No. 4538 of 2023, decided on 02.08.2023) in support of his submissions that when an alternate remedy is available to the Petitioners, writ under Constitutional jurisdiction should not be entertained. He submitted that all the Petitioners have alternate remedy available under Section 17 and 18 of the SARFAESI Act, 2002, and therefore, this is not a fit case for exercise of extra ordinary Writ Jurisdiction by this Court.

8. Learned Counsel Mr. Bamne, appearing for Respondent Bank in Writ Petition (L) No. 12079 of 2023 and Writ Petition (L) NO. 17488 of 2023 made following submissions opposing the case of the Petitioners: 8.a) Drawing our attention to clause 14 of the said Notification, it is submitted that the very same Notification provides that while a restructuring proposal is under consideration by the Committee or Enterprise Debt Restructuring Cell, as the case may be, the usual asset classification norm shall continue to apply. It is submitted that clause 14(2) of the said Notification also provides that the process of classification of an asset shall not stop merely because restructuring proposal is under consideration. It is further submitted that clause 14 (3) of the said Notification provides that the special 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 Shubham Talle 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 said Notification, the Petitioners cannot be heard to find fault with the Banks in adopting legal process under the SARFAESI Act,

2002.

9. Mr. Charalwar, appearing for Respondent Banks in Writ Petition (L) No. 13410 of 2023 made following submissions, opposing the case of the Petitioners. 9.a) It is submitted that the table given in clause 1(1) of the said Notification provides for a sunset period of 90 days before an MSME Shubham Talle enters the darkness of NPA. He submitted that during this sunset period of 90 days, which is split into 3 parts (SMA-0, SMA-1 and SMA-2) the MSME is supposed to identify the stress on its financial conditions / its repayment capacity and must apply for constitution of committee for the restructuring efforts. He submitted that once the sunset period is over and an account has been classified as NPA, then from that darkness, there is no escape under the said Notification and the action under SARFAESI Act, 2002, post NPA classification, must follow. 9.b) It is submitted that the Petitioners cannot rely on the said Notification or any other Notification for restructuring, to thwart the entire process initiated under SARFAESI Act, 2002. He submitted that in the case of Oriental Bank of Commerce Vs. Sunder Lal Jain and Anr. (2008) 2 SCC 280, regarding guidelines issued by the RBI (about settlement), the Hon’ble Apex Court has already held that such guidelines are merely internal guidelines for the Banks which are executive instructions and have no statutory force. It is already held that these guidelines do not create any rights in favour of the borrowers. Based on this Judgment, learned Counsel submitted that the present case is also squarely covered by the said Judgment in as much as the said Notification is in the nature of guidelines or instructions. 9.c) It is submitted and being recorded at the cost of repetition, that in none of the matters the Petitioners/MSMEs have ever invoked any mechanism under the said Notification for restructuring of their loans. He submitted that on the contrary, in his case, the Petitioner/MSME has addressed letters admitting liability and requesting for more time to pay. He submitted that if the MSME apprehends failure of its business or inability to pay its debts, then it may voluntarily initiate the process under the framework and only after a request is received by the Bank, a committee is supposed to be formed. 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, Shubham Talle 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 put fetters on the legal process followed by the Banks and NBFCs under SARFAESI Act, 2002.

10. Learned Counsel Mr. Dave, appearing for an NBFC in Writ Petition (L) No. 12079 of 2023 made following submissions, opposing the case of the Petitioners. 10.a) It is submitted that the said Notification or the circulars issued thereafter, do not apply to NBFCs especially about forming any committee for restructuring. He relied upon first and second Clause of the RBI Circular dated 17th March, 2016 and pointed out that by making specific reference to the said Notification under consideration (dated 29th May, 2015), it is provided that certain changes in the captioned framework have been carried in consultation with the Government of India, Ministry of MSME in order to make it compatible with the existing regulatory guidelines and accordingly a revised framework is furnished. 10.b) He submitted that the revised framework would apply to only such MSMEs which are having loan limits up to Rs. 25 Crores. Relying on Section 238 of the Insolvency and Bankruptcy Code, 2016, he submitted that the provisions of the IBC, 2016, overrides all other laws. He submitted that so far as his case is concerned, there is no requirement of classification of an account of borrower as NPA and under section 7 of the IBC, an NBFC can file an application for initiating Corporate Insolvency Resolution Process against corporate debtor when a default has occurred. In short, he submitted that the whole argument of the Petitioners at this stage, that without following process under the said Notification, an account of MSME cannot be classified as NPA, will not apply in his case because his action is under the IBC, 2016.

11. Mr. Nedumpara, learned Counsel appearing for the Petitioners in the rejoinder made following submissions. 11.a) He once again clarified that it is not his argument that SARFAESI Act, 2002 or other Acts (such as RDB Act or IBC) are not applicable. He further clarified that he is not arguing that recovery proceedings are not allowed against the Petitioners. He submitted that MSME Act being a piece of beneficial legislation or remedial legislation, the Notification issued under provisions of the said Act must be given a beneficial interpretation. 11.b) He submitted that the provisions in the said Notification must be given a liberal construction and it will not lead to any difficulties 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, Shubham Talle we would like to deal with the basic argument about interpretation of the said Notification. We would like to test first, whether the Banks or NBFCs are bound under the said Notification to adopt the process of restructuring ‘on its own’ without their being an application by the MSME in that regard. If we find that application of the MSME is a sine qua non for the process of restructuring to start before the committee, then it may not be necessary for us to deal with the arguments of the Banks and NBFCs about the effect of subsequent Notifications or circulars of the RBI on the subject matter dispute.

13. This brings us to the consideration of the core issue about application of the said Notification. From the perusal of the said Notification, 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, we have not found any such guidance. Faced with such a stonewall of non-availability of any precedent or earlier Shubham Talle views, we are left with only one choice 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.