Bombay High Court Dismisses MSMEs' Petitions Challenging NPA Declarations By Banks & NBFCs

Bombay High Court Dismisses MSMEs' Petitions Challenging NPA Declarations By Banks & NBFCs

“The Banks/NBFCs are not obliged to adopt the restructuring process on its own without there being any application by the MSMEs."

Urvi MahajaniUpdated: Saturday, January 13, 2024, 07:23 PM IST
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Bombay High Court | File

The Bombay high court has dismissed a batch of petitions filed by MSMEs (Micro, small, medium enterprises) challenging decisions of banks and non banking financial companies (NBFCs) declaring them as Non-Performing Assets (NPAs) without following provisions of a 2015 notification.

Court's observations

A division bench of Justices BP Colabawalla and MM Sathaye, on January 11, held that “the Banks/NBFCs are not obliged to adopt the restructuring process on its own without there being any application by the MSMEs." Hence, it is not necessary to deal with the arguments of Banks /NBFCs about the effects of the subsequent Notifications and Circulars, the court added. It said that "the limited argument of the Petitioners”"on ground bases on the notification, fails.

The bench has, however, granted leave to the petitioner MSMEs "to agitate the other issues in their petitions, which may vary on facts, on a case-to-case basis by adopting alternate remedies, as available under law." 

Advocate Mathews Nedumpara, appearing for several petitioners, requested the court to stay the order to permit them to approach the same.  The court has extended the stay granted earlier against any action for a period of two weeks. It has however clarified that the stay shall be “automatically vacated, unless extended by the SC”. 

The case under hearing

The HC was hearing petitions by  M/s. A. Navinchandra Steels Pvt. Ltd and 18 other MSMEs, which are registered under the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act). They had challenged the decision of various banks and NBFCs declaring them as NPA under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. 

They contended that none of the banks or NBFCs followed the procedure of restructuring as contemplated under the 2015 notification for identifying the ‘incipient stress’ undergone by theseMSMEs. 

The bench said that unless such stress was brought to the notice of the banks/ NBFCs, it is impossible for them to identify the same on its own. “... such identification is impossible unless the same is brought to the notice of the Bank by the MSME itself…. 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 added. 

Nedumpara's arguments

Nedumpara argued that the Banks/ NBFCs have to make an application for effecting a correction action plan, and only if the same are unsuccessful, it can adopt recovery steps. Also, as per the notification, the banks/ NBFCs have to constitute a committee, comprising bank officers and independent MSME experts. In absence of a committee no recovery could have been initiated.

However, Central government’s advocate Advait Sethna said that the notification is issued under the MSMED Act and it gives an option to the MSMEs to initiate proceedings under the framework provided.

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