Bombay High Court: MSME Revival Scheme Must Be Considered Only if Claimed in Response to SARFAESI Notice

The Bombay High Court has held that a lending bank is obligated to consider the MSME Revival Scheme for classification of an account as a Non-Performing Asset (NPA) only if the MSME borrower claims such benefit in response to a demand notice issued under Section 13(3A) of the SARFAESI Act.

In this case, the petitioner’s MSME unit had availed loans from ICICI Bank and the Technology Development Board (TDB). ICICI Bank classified the petitioner’s account as an NPA with retrospective effect on February 29, 2020, and subsequently issued notices under the SARFAESI Act.

The Writ Petitioner herein is the promoter and guarantor of M/s. Perfect Infraengineers Ltd, which is a company registered under section 8 of the Micro , Small and Medium Enterprises Act (“MSME Act”). The MSME unit of the Petitioner had availed credit facility from the ICICI Bank. However, on account of its failure to repay the amount, the loan account was declared as a Non Performing Asset (“NPA”) on 29th February 2020. Consequently, the Loan Recall Letter, along with Guarantee Invocation Notice, was issued to the Petitioner. Bank took over possession of the secured assets belonging to the Petitioner.

The petitioner has filed petition to declare that the M/s. Perfect Infraengineers Ltd being an MSME within the meaning of Section 8 of the MSMED Act is entitled to the benefit of the notification dated 29.5.2015 and that its account could not have been classified as NPA without identification of the incipient stress by the ICICI Bank.

The petitioner contended that, under the MSME Notification dated May 29, 2015, banks are required to identify incipient stress in MSME accounts and constitute a committee to implement a Corrective Action Plan (CAP) before classifying such accounts as NPAs or initiating recovery proceedings. Having failed to secure relief before multiple forums, the petitioner approached the High Court through the present writ petition.

The respondents, however, argued that the petitioner had not invoked the MSME scheme or raised the issue of incipient stress at the earliest opportunity, and by now, the recovery proceedings were already at an advanced stage.

The bench, after hearing the case, observed that the matter involved a significant question of law deserving judicial determination. However, it noted that a coordinate bench of the High Court had already conclusively decided a similar issue in July 2024, a fact that the petitioner failed to disclose. The counsel nonetheless submitted that the previous judgment did not reflect the correct legal position.

The Court referred to the Supreme Court judgment in Pro Knits vs The Board of Directors of Canara Bank & Ors., 2024 SCC OnLine SC 1864, which emphasized adherence to the MSME notification for restructuring MSME loans.

It also relied on the subsequent ruling in Shri Shri Swami Samarth Construction & Finance Solution & Anr vs The Board of Directors of NKGSB Co-op Bank Ltd & Ors., 2025 SCC OnLine SC 1566, which clarified that while the MSME framework does not prohibit classification of an MSME account as NPA or issuance of a Section 13(2) SARFAESI notice without prior identification of stress, the bank must examine the revival scheme if the borrower claims MSME status in response to the Section 13(3A) notice.

In the present case, the petitioner received the Section 13(2) SARFAESI notice in 2020, but invoked the MSME Notification only in September 2023—by which time proceedings under the SARFAESI Act and the IBC were either in advanced stages or already concluded.

The Court also found the petitioner guilty of contempt, noting that they had failed to withdraw all pending proceedings despite prior court directions, and had also engaged in suppression of material facts. Accordingly, the bench dismissed the writ petition, while granting the petitioner liberty to pursue appropriate legal remedies in accordance with the Pro Knits (Supra) judgment.

Download Court Order PDF (This PDF is available for Premium Users Only. Click here to join premium)