Introduction:
In a detailed and significant ruling concerning the intersection of MSME revival mechanisms and the SARFAESI Act, the Bombay High Court, comprising Justice Suman Shyam and Justice Manjusha Deshpande, has held that a lending bank’s obligation to consider the MSME revival or restructuring scheme arises only when the borrower, classified as a Micro, Small, or Medium Enterprise (MSME), claims such benefit in response to a demand notice issued under Section 13(3A) of the SARFAESI Act. The judgment came in a writ petition filed by Mrs. Manisha Nimesh Mehta, who had challenged the classification of her MSME unit’s loan account as a Non-Performing Asset (NPA) by ICICI Bank and the subsequent initiation of recovery proceedings under the SARFAESI Act. The Court’s decision reinforces the legal clarity provided by the Supreme Court in Pro Knits v. Board of Directors of Canara Bank & Ors., 2024 SCC OnLine SC 1864 and Shri Shri Swami Samarth Construction & Finance Solution & Anr. v. Board of Directors of NKGSB Coop Bank Ltd. & Ors., 2025 SCC OnLine SC 1566, which collectively emphasize that while banks must respect MSME rights, such protections are conditional upon timely invocation by the borrower.
Arguments by the Petitioner:
The petitioner, represented by Advocate Mr. Mathews Nedumpara, argued that her MSME unit had been unfairly treated by the lending institution, ICICI Bank, which classified her account as NPA with retrospective effect from February 29, 2020, without complying with the procedural safeguards mandated under the Reserve Bank of India’s 2015 MSME notification. The petitioner contended that this notification, issued on May 29, 2015, specifically required banks to proactively identify “incipient stress” in MSME accounts and establish a Committee for Corrective Action Plans before any loan account could be downgraded to NPA status.
It was asserted that ICICI Bank’s failure to implement such a corrective framework rendered the entire NPA classification and subsequent SARFAESI proceedings illegal. The petitioner maintained that under the 2015 framework, banks were obligated to take preventive and revival measures rather than jumping straight to coercive recovery. The petitioner further submitted that this regulatory safeguard was reaffirmed by the Supreme Court in Pro Knits (supra), which underscored that financial institutions must follow the MSME restructuring process before taking harsh steps against such enterprises.
The petitioner accused the respondent bank of acting in violation of natural justice and the RBI circular by not issuing a show-cause notice or giving her any opportunity to represent her case prior to classifying her account as NPA. It was argued that the retrospective classification amounted to arbitrary and mala fide action, particularly since the petitioner’s enterprise had been adversely affected by the pandemic and deserved regulatory relief under MSME guidelines.
Furthermore, the petitioner claimed that her unit’s financial stress was not the result of mismanagement but an industry-wide slowdown, which the government and the RBI had acknowledged through various MSME revival measures. By ignoring these, the respondent had violated her statutory and constitutional rights under Articles 14 and 19(1)(g) of the Constitution of India, which protect equality and the right to trade, respectively.
Arguments by the Respondents:
In response, the counsel representing ICICI Bank and the Technology Development Board (TDB) contended that the petitioner’s writ petition was not maintainable due to multiple procedural lapses and suppression of material facts. The respondents argued that the petitioner had failed to invoke the 2015 MSME notification or assert any claim for revival when the first notice under Section 13(2) of the SARFAESI Act was issued in 2020. Instead, she chose to challenge the recovery proceedings through several legal forums, including Debt Recovery Tribunals (DRTs) and appellate authorities, without ever mentioning the MSME protection framework.
The respondents pointed out that under Section 13(3A) of the SARFAESI Act, the borrower is required to submit objections or representations within 15 days of receiving the demand notice. Only when such objections are raised can the bank be compelled to examine the issue of MSME revival. The petitioner, however, remained silent for over three years and invoked the MSME notification only in September 2023, when recovery and insolvency proceedings were already at an advanced stage.
The bank’s counsel further emphasized that the legal position had been conclusively settled by the Supreme Court in Shri Shri Swami Samarth Construction & Finance Solution (supra), where it was held that while the 2015 MSME framework encourages rehabilitation, it does not prohibit classification of an MSME account as NPA or initiation of SARFAESI proceedings. The only caveat, as clarified by the apex court, was that if the borrower raises a claim under the MSME scheme in response to the Section 13(3A) notice, the bank must then evaluate such claim before proceeding further. Since the petitioner failed to do so, her later reliance on the MSME framework was a mere afterthought intended to stall recovery.
Additionally, the respondents alleged that the petitioner had deliberately suppressed the fact that a coordinate bench of the Bombay High Court had already decided an identical issue against her in July 2024. By concealing this information, she had attempted to mislead the court and reopen a settled question of law, thereby amounting to an abuse of the judicial process. They argued that the petition should be dismissed with exemplary costs for concealment and for continuing parallel proceedings despite court directions to withdraw them.
Court’s Observations and Findings:
After hearing both sides, the division bench observed that the core legal issue was narrow but significant — whether the 2015 MSME notification imposed a proactive duty on the bank to consider revival measures suo motu, or whether such duty arose only upon the MSME’s invocation of the scheme in response to a demand notice.
The Court referred extensively to the Supreme Court’s authoritative pronouncements in Pro Knits (supra) and Shri Shri Swami Samarth Construction (supra). In Pro Knits, the Supreme Court had observed that MSME borrowers enjoy special protection aimed at ensuring the continuity of small-scale enterprises and preventing their premature liquidation. However, the Court also clarified in Shri Shri Swami Samarth Construction that these protections are not automatic; they must be invoked by the borrower during the recovery process.
Applying this reasoning, the Bombay High Court held that the obligation of a bank to consider MSME revival measures arises only when the borrower explicitly claims the benefits of such a scheme in response to a notice under Section 13(3A) of the SARFAESI Act. If no such claim is made, the bank is free to proceed with classification of the account as NPA and initiate recovery.
The Court further noted that in the present case, the petitioner received the Section 13(2) demand notice in 2020 but invoked the MSME notification only in September 2023—three years later—when the SARFAESI and Insolvency and Bankruptcy Code (IBC) proceedings were either substantially advanced or concluded. Thus, the petitioner could not retroactively claim that the bank failed to apply the MSME framework.
The bench also expressed strong disapproval of the petitioner’s conduct in concealing the existence of the 2024 judgment by a coordinate bench that had already rejected an identical claim. The Court observed that suppression of material facts and multiplicity of proceedings amounted to contempt of court and constituted a gross abuse of judicial process. Justice Suman Shyam emphasized that litigants must come to court with clean hands, and deliberate omission of material information undermines the integrity of the judicial system.
Additionally, the Court observed that the petitioner’s actions reflected an attempt to misuse legal protections intended for genuine MSMEs in distress. It noted that while the judiciary remains committed to protecting MSMEs from arbitrary banking actions, such protection cannot extend to cases where the borrower fails to act diligently or attempts to manipulate procedural safeguards for delaying recovery.
Judgment and Directions:
In its final judgment, the Bombay High Court dismissed the writ petition filed by the petitioner. The bench categorically held that the petitioner was not entitled to relief since she had invoked the MSME revival notification belatedly and after the conclusion of recovery proceedings. It affirmed that the bank was under no obligation to consider MSME restructuring suo motu unless the borrower had claimed such relief in response to the Section 13(3A) notice.
The Court also recorded its displeasure regarding the petitioner’s failure to comply with prior court directions requiring withdrawal of multiple pending proceedings and her suppression of material facts. Finding her in contempt of court, the bench observed that such behavior erodes public faith in the judicial process.
However, displaying judicial restraint, the Court granted the petitioner limited liberty to avail remedies consistent with the Supreme Court’s Pro Knits ruling, provided she complies with procedural prerequisites. The judgment thus reaffirmed both the sanctity of the SARFAESI process and the conditional applicability of MSME protections, emphasizing that revival rights must be timely asserted, not retroactively claimed.
In conclusion, the Bombay High Court’s decision draws a clear boundary between the legitimate rights of MSMEs to seek restructuring and their obligations to act diligently within statutory timelines. The verdict stands as a vital precedent ensuring that MSME protection frameworks do not become tools for evasion but remain true to their purpose of promoting genuine enterprise survival and economic fairness.