Andhra Pradesh High Court - Amravati
Vardhan Marketing Company vs Union Of India on 23 August, 2024
Author: R Raghunandan Rao
Bench: R Raghunandan Rao
IN THE HIGH COURT OF Bench
APHC010338362024 Sr.No:-1
ANDHRA PRADESH [3446]
AT AMARAVATI
WRIT PETITION NO: 17213 of
2024
M/s Vardhan Marketing ...Petitioner(s)
Company and Others
Vs.
Union Of India and Others ...Respondent(s)
**********
P LAKSHMANA RAO, Advocate(s) for Petitioner(s) GP FOR INDUSTRIES COMMERCE, , Advocate(s) for Respondent(s) CORAM : THE CHIEF JUSTICE DHIRAJ SINGH THAKUR SRI JUSTICE R RAGHUNANDAN RAO DATE : 23rd August 2024 PER DHIRAJ SINGH THAKUR, CJ :
The petitioner claims that it is an MSME. The property of the petitioner was subjected to proceedings under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, (for short, "SARFAESI Act") and possession is stated to have been taken by from the petitioner on 11.07.2024. It is in that context that the petitioner challenges the action of respondent No.3 in issuing the impugned notice, dated 26.07.2024, which was a notice purportedly issued in terms of Rule 8 of the SARFAESI Act informing the petitioner that the secured asset, the possession of which was taken by the Authorized Officer, would be sold by holding a public e-auction on 14.08.2024.2
HCJ & RRR, J W.P. No:17213 of 2024 It is not out of place here to mention that the petitioner has already filed a petition earlier bearing W.P. No.5323 of 2024 in which, auction notice, dated 29.01.2024 issued by the respondent Bank was challenged. The said petition is still pending before this Court.
Notwithstanding the fact that the issue with regard to the maintainability of the present petition may arise in the light of the fact that there is an earlier petition pending, what was highlighted by the learned counsel for the petitioner inter alia was the fact that the property belonging to the petitioner could not have been made the subject matter of auction nor could its possession be taken over by the Union Bank of India (erstwhile Corporation Bank) inasmuch as it had not followed the mandate of notification bearing No. S.O.(E).1432, dated 29.05.2015, issued by the Central Government in exercise of the powers conferred in terms of Section 9 of the Micro, Small And Medium Enterprises Development Act, 2006 (for short, "MSMED Act"). The petitioner claims that it is entitled to be regulated in terms of the MSMED Act, as it is registered as an MSME under the said Act.
Reliance was placed upon the Apex Court judgment rendered in the case of Pro Knits v. Board of Directors of Canara Bank (2024 SCC OnLine SC 1864) which held that the instructions issued by the Central Government vide notification, dated 29.05.2015, in exercise of powers under Section 9 of the MSMED Act, had statutory force and were binding on all the Scheduled Commercial Banks licensed to operate by the Reserve Bank of India. It was held as follows:
"12. It is pertinent to note that in exercise of the powers conferred by Section 21 and 35A of the Banking Regulation Act, 1949, the Reserve Bank of India, after having being satisfied that it was necessary and expedient in the public interest to do so, had issued the Master Direction, 3 HCJ & RRR, J W.P. No:17213 of 2024 called the "Reserve Bank of India [Lending to Micro, Small and Medium Enterprises (MSME) Sector] Directions, 2016," vide the Notification dated 21st July, 2016. The said Directions have been made applicable to every Scheduled Commercial Bank excluding Regional Rural Banks (RRBs) licensed to operate in India by the Reserve Bank of India. Amongst the other Directions, the Direction 4 contained in Chapter IV thereof, pertained to the common guidelines/instructions for lending to MSME Sector. While advising all the Scheduled Commercial Banks to follow the guidelines/instructions pertaining to MSMEs, it was directed in the Direction 4.8 as under:--
"4.8 Framework for Revival and Rehabilitation of MSMEs.
The Ministry of Micro, Small and Medium Enterprises, Government of India, vide their Gazette Notification dated May 29, 2015 had notified a „Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises‟ to provide a simpler and faster mechanism to address the stress in the accounts of MSMEs and to facilitate the promotion and development of MSMEs. The Reserve Bank was advised to issue necessary instructions to banks for effective implementation and monitoring of the said Framework. After carrying out certain changes in the captioned Framework in consultation with the Government of India, Ministry of MSME so as to make it compatible with the existing regulatory guidelines on „Income Recognition, Asset Classification and provisioning pertaining to Advances‟ issued to banks by RBI, the guidelines on the captioned Framework along with operating instructions were issued to banks on March 17, 2016. The revival and rehabilitation of MSME units having loan limits up to Rs. 25 crore would be undertaken under this Framework. Banks were required to put in place their own Board approved policy to operationalize the Framework not later than June 30, 2016. The revised Framework supersedes our earlier Guidelines on Rehabilitation of Sick Micro and Small Enterprises issued vide our circular RPCD. CO. MSME & NFS.BC.40/06.02.31/2012-2013 dated 4 HCJ & RRR, J W.P. No:17213 of 2024 November 1, 2012, except those relating to Reliefs and Concessions for Rehabilitation of Potentially Viable Units and One Time Settlement, mentioned in the said circular.
The salient features of the Framework are as under:
i) Before a loan account of an MSME turns into a Non-Performing Asset (NPA), banks or creditors should identify incipient stress in the account by creating three sub-categories under the Special Mention Account (SMA) category as given in the Framework.
ii) Any MSME borrower may also voluntarily initiate proceedings under this Framework.
iii) Committee approach to be adopted for deciding corrective action plan.
iv) Time lines have been fixed for taking various decisions under the Framework."
Learned counsel for the petitioner would urge that the proceedings under the SARFAESI Act initiated in regard to the property of the petitioner were unsustainable in law inasmuch as they were violative of the mandate of the notification, dated 29.05.2015, issued by the Central Government in exercise of powers under Section 9 of the MSMED Act, the directions issued by the Reserve Bank of India namely "Lending to Micro, Small and Medium Enterprises (MSME) Sector] Directions, 2016" vide Reserve Bank of India notification, dated 21.07.2016, which, according to the petitioner, were made applicable to every Scheduled Commercial Bank excluding Regional Rural Banks licensed to operate by the Reserve Bank of India. Reliance was placed upon the case of Pro Knits to show that the aforementioned guidelines have been held to be statutory and enforceable in character. What was held by the Apex Court in para Nos.15 and 16 is reproduced hereunder:
5HCJ & RRR, J W.P. No:17213 of 2024 "15. What is contemplated in the "Framework for Revival and Rehabilitation of MSMEs" contained in the Instructions/Directions stated hereinabove, is required to be followed prior to the classification of the borrower's account, (in the instant case MSMEs loan account), as Non- Performing Assets. The said Instructions contained in the Notification dated 29.05.2015 as part of measures taken for facilitating the promotion and development of MSMEs issued by the Central Government in exercise of powers conferred under Section 9 of the MSMED Act, followed by the Directions issued by the RBI in exercise of the powers conferred under Section 21 and 35A of the Banking Regulation Act, the Banking companies though may be „secured creditors‟ as per the definition contained in Section 2(zd) of the SARFAESI Act, are bound to follow the same, before classifying the loan account of MSME as NPA.
16. We may hasten to add that under the "Framework for Revival and Rehabilitation of MSMEs", the banks or creditors are required to identify the incipient stress in the account of the Micro, Small and Medium Enterprises, before their accounts turn into non-performing assets, by creating three sub-
categories under the "Special Mention Account" Category, however, while creating such sub-categories, the Banks must have some authenticated and verifiable material with them as produced by the concerned MSME to show that loan account is of a Micro, Small and Medium Enterprise, classified and registered as such under the MSMED Act. The said Framework also enables the Micro, Small or Medium Enterprise to voluntarily initiate the proceedings under the said Framework, by filing an application along with the affidavit of an authorized person. Therefore, the stage of identification of incipient stress in the loan account of MSMEs and categorization under the Special Mention Account category, before the loan account of MSME turns into NPA is a very crucial stage, and therefore it would be incumbent on the part of the concerned MSME also to produce authenticated and verifiable documents/material for substantiating its claim of being MSME, before its account is classified as NPA. If that is not done, and once the account is classified as NPA, the banks i.e. secured creditors would be entitled to take 6 HCJ & RRR, J W.P. No:17213 of 2024 the recourse to Chapter III of the SARFAESI Act for the enforcement of the security interest."
It was in that context stated that before classifying the loan account of MSME as NPA, the instructions/directions had to be followed and carried out in their letter and spirit.
On a perusal of the judgment rendered in the case of Pro Knits, it can be seen that while directions issued by the Reserve Bank of India in terms of Section 21 and 35A of the Banking Regulation Act, have been held to be binding, yet the judgment does emphasize the need for the petitioner to establish by placing authenticated and verifiable material/documents on record to substantiate its claim of being MSME before it could claim that the account is classified as NPA. In the present case, we have not found any authenticated verifiable material on record except for a communication, dated 17.08.2015, where the Bank claims that the petitioner Company was in possession of an SSI (MSME certificate). The certificate with the requisite registration number, however, appears not to have been placed on record. Assuming that the petitioner was an MSME duly registered in terms of the provisions of the MSMED Act, the respondent Bank would have to be given an opportunity to prove that it did follow the mandate of law as crystallized in the judgment rendered by the Apex Court in the case of Pro Knits.
Till the aforementioned two requirements are satisfied, we do not consider the present case as a fit case where possession should be restored to the petitioner, since admittedly, the possession of the premises in question was taken as far back as on 11.07.2024. We direct that in case the property has been sold to a third party, the property shall not be further encumbered upon till further orders of this court and the auction shall remain subject to the outcome of the present writ petition.
7HCJ & RRR, J W.P. No:17213 of 2024 Issue notice returnable in two weeks.
List on 05.09.2024.
DHIRAJ SINGH THAKUR, CJ R RAGHUNANDAN RAO, J akn