Supreme Court Dismisses MSME’s Plea Against SARFAESI Proceedings | Says Framework For Revival Must Be Invoked Timely And Cannot Be Used To Stall Recovery After Default
Kiran Raj
The Supreme Court of India Division Bench of Justice Dipankar Datta and Justice Augustine George Masih held that a Micro, Small and Medium Enterprise (MSME) cannot seek protection under the SARFAESI Act without first complying with the procedural requirements prescribed in the Government’s 2015 Notification titled Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises.
The Court categorically dismissed a writ petition filed under Article 32 of the Constitution of India seeking to restrain further proceedings under the SARFAESI Act against an MSME entity, observing that there was “no merit in the writ petition.” The Bench clarified that the Framework does not bar a bank from classifying a loan account as a non-performing asset (NPA) unless the MSME voluntarily approaches the bank and invokes the benefits available under the said Framework.
The Court further observed that allowing otherwise would render the mandatory obligations imposed on MSMEs under the Framework meaningless. Consequently, the petition was dismissed, and the petitioner was granted liberty to pursue an alternative remedy under Section 17 of the SARFAESI Act.
The matter arose from a writ petition filed under Article 32 of the Constitution of India by an enterprise registered under the Micro, Small and Medium Enterprises Development Act, 2006. The petitioning enterprise had executed a loan agreement with NKGSB Co-operative Bank (referred to as respondent no.2). After the enterprise failed to meet its repayment obligations, the loan account was classified as a non-performing asset (NPA) by the respondent bank.
On 13 May 2024, the authorised officer of the bank issued a demand notice under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), calling upon the petitioner to repay the outstanding dues within a period of 60 days. The writ petition, filed much later on 14 July 2025, did not disclose any objection raised by the petitioner against the classification of its loan account as NPA or against the demand notice. Notably, the petitioner did not claim any relief under the Government Notification dated 29 May 2015 titled Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises, issued by the Ministry of Micro, Small and Medium Enterprises.
Following the issuance of the demand notice, the respondent bank moved an application before the Magistrate under Section 14 of the SARFAESI Act. By an order dated 3 April 2025, the Magistrate appointed a Court Commissioner to assist in taking possession of the secured assets. This appointment and its communication to the petitioner occurred by 18 June 2025.
The petitioner, represented by Mr. Nedumpara, urged the Supreme Court to grant ad-interim relief and admit the petition. It was argued that the respondent bank had failed in its duty to identify "incipient stress" in the loan account of the MSME borrower before declaring it an NPA. Relying on the 2015 Framework, it was submitted that the Framework is binding on all banks and secured creditors and that any steps taken under the SARFAESI Act without adhering to it would be ultra vires.
Counsel further asserted that the Framework does not place a mandatory initial burden on MSMEs to approach the bank for relief, and hence, it was the duty of the bank to proactively assess the financial stress in the borrower’s account. The decision in Pro Knits v. Canara Bank was cited to support the argument that lending institutions must follow the Framework before proceeding under SARFAESI against MSMEs.
However, the respondents were not issued notice by the Supreme Court as the Bench found no merit in the petitioner’s contentions.
The Division Bench began by stating that the relevant Notification detailing the Framework must be read in its entirety to ascertain the intent and obligations it places on both lenders and borrowers. The Court observed, "Although, in the sequence of the FRAMEWORK 'Identification by Banks or Creditors' comes first, it is immediately followed by 'Identification by the Enterprise'."
Referring to sub-paragraph 2 of paragraph 1 of the Framework, the Court stated, "Any MSME may choose to voluntarily initiate proceedings under the FRAMEWORK if it 'reasonably apprehends failure of its business or its inability or likely inability to pay debts and before the accumulated losses of the enterprise equals to half or more of its entire net worth'." Further, the petitioning MSME was required to file a verified application supported by an affidavit to trigger the obligations of the lending institution.
The Court recorded, "The way Mr. Nedumpara urges us to read the Notification and the terms of the FRAMEWORK, if accepted, would lead to the conclusion that every lending bank/secured creditor under the SARFAESI Act would be obliged to find out in every event of continuing default… whether the borrower is an MSME…" Such an interpretation, it noted, would render redundant the specific duties placed on MSMEs within the Framework.
The Court also stated, "In our reading, the terms of the FRAMEWORK do not prohibit the lending bank/secured creditor… to classify the account of the defaulting MSME as NPA and to even issue the demand notice under Section 13(2) of the SARFAESI Act without such identification of incipient stress…" However, it held that if the borrower were to respond to the demand notice with a specific claim under the Framework supported by affidavit, the lending bank would then be required to pause proceedings under SARFAESI and comply with the Framework’s processes.
The Bench was particularly critical of the petitioner’s delay. It observed, "As has been noted above, the petitioning enterprise does not seem to have ever claimed the benefit of the terms of the FRAMEWORK after the demand notice under Section 13(2) of the SARFAESI Act was issued." Instead, the petitioner approached the Court only after the Magistrate's order under Section 14 was passed, raising doubts about its bona fides.
Referring to Pro Knits, the Court reiterated that while the Notification is indeed binding on secured creditors, MSMEs too have a reciprocal obligation to act in a timely and proactive manner. It quoted, "It would be equally incumbent on the part of the MSMEs concerned to be vigilant enough to follow the process laid down under the said Framework…"
It further recorded, "If such an Enterprise allows the entire process for enforcement of security interest under the SARFAESI Act to be over… such an Enterprise could not be permitted to misuse the process of law for thwarting the actions taken…" The Court stated the need for harmonious interpretation to prevent one central legislation from nullifying the other.
The Supreme Court concluded that the petitioner failed to establish any constitutional violation or legal infirmity justifying invocation of Article 32. Accordingly, it issued the following directive: “No case for interference under Article 32 of the Constitution has been set up. There being no merit in the writ petition, the same is accordingly ordered to be dismissed. Pending applications, if any, stand closed.”
The Court clarified that the remedy under Section 17 of the SARFAESI Act remains open to the petitioner. It stated, “Needless to observe, the petitioning enterprise will be at liberty to pursue its remedy under Section 17 of the SARFAESI Act, in accordance with law.”
Case Title: Shri Shri Swami Samarth Construction & Finance Solution & Anr. v. The Board of Directors of NKGSB Co-op. Bank Ltd. & Ors.
Neutral Citation: 2025 INSC 908
Case Number: Writ Petition (Civil) No. 684 of 2025
Bench: Justice Dipankar Datta, Justice Augustine George Masih
