In a recent significant judgment, the Supreme Court of India upheld the binding nature of directions issued by the Central Government under the MSME Act and RBI under the Banking Regulation Act. The order further states that these directions are issued under the Statutory powers and, as such, shall be binding on all banking companies operating in India. The order provides important guidance for implementing the revival and rehabilitation framework concerning MSMEs, particularly as it spells out the obligations of banks/financial institutions while dealing with credit and financial health issues that an MSME may face.
The case concerned the validity and enforceability of a notification dated May 29, 2015, by the Central Government. This notification was to bring into force the "Framework for Revival and Rehabilitation of MSMEs," as provided under Section 9, MSMED Act. Appellants before the SC identified themselves as MSMEs under the MSMED Act and challenged the actions of the respondents (banks/NBFCs) invoking provisions of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI)Act,2002. They had said their loan accounts were wrongly declared NPA without being given notice within the mandatory time frame under the 2015 Notification.
According to the appellants, before declaring their accounts as NPA, banks had necessarily followed the restructuring scheme provided in the 2015 Notification for Revival. The aggrieved parties contended that the banks were dutybound to identify stress at a nascent stage in these accounts and have pursued various resolution plans, as directed under the notification.
Alternatively, the respondents counter-argued that when a dispute arises between provisions of this Act and any other enactments then those contained in SARFAESI will prevail over statutes like the MSMED act. The Bombay High Court was correct in ruling that restructuring under the 2015 Notification did not apply to MSMEs unless initiated by themselves, they said.
Whether the 2015 Notification issued under Section 9 of the MSMED Act was mandatory or only direction to adjudicating officer had come before Apex court. In its analysis, the Court looked at certain provisions of both the MSMED Act and the Banking Regulation Act.
The Court held that the 2015 Notification (as supplemented by subsequent revisions and directions of the RBI) constitutes a complete code in statutory force. The banks are mandated to follow this framework wherein the identification of stressed MSMEs and classification into respective accounts pertained forthrightly before they turn out as NPAs.
Statutory Force: Directions issued under the MSMED Act by the Central Government and Banking Regulation Act by RBI should have statutory force rather than being just advisories. Here are all banking companies that have to now follow these guidelines.
Obligations of Banks and MSMEs: The framework specifies mandatory obligations for both banks as well as the relevant MSMEs. Banks to classify MSMEs as ‘stressed’ right at the early stages of stress and provisioning Standards should be framed
SARFAESI Act vs MSMED Act: The Court observed that while the SARFAESI Act provides for a repossession mechanism, it does not operate to override the statutory entitlements under both the MSMED and Banking Regulation Acts in favor of MSME entities.
The judgment delivered by the Supreme Court gives a new discourse about section 32 and an understanding that An arbitrary proceeding for revival and rehabilitation pending before BIFR (or NCLT) means stay necessary to be granted against any further action under SARFAESI, outside the purview of its power. This observation underlines the importance of banks adhering to the prescribed protocol before classifying MSME accounts as NPAs, and offering a lot-needed helping hand by defaulting units in keeping their finances clean. The development of this decision advances the cause of protecting MSME interests and ensuring their continued growth and development in India.