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2025 DIGILAW 393 (KER)

OJIN BAKES v. UNION OF INDIA

2025-02-27

GOPINATH P.

body2025
JUDGMENT : The petitioners are before this Court challenging the proceedings initiated under the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) for recovery of amounts due under credit facilities availed by the petitioners from the respondent bank. It is their specific case before this Court that they are registered as Micro, Small or Medium Enterprises (MSME) and therefore the proceedings under the SARFAESI Act could not be taken without following the guidelines issued by the Reserve Bank of India (RBI) read along with the notification issued by the Government of India in the Ministry of Micro, Small and Medium Enterprises in terms of the power conferred under Section 9 of the Micro, Small and Medium Enterprises Development Act, 2006 (hereinafter referred to as the ‘MSMED Act’) laying down the framework for revival and rehabilitation of MSMEs. 2. The learned counsel appearing for the respondent bank submits that the issue raised in these writ petitions is squarely covered against the petitioners by a Division Bench judgment of this Court in Krishnakumar P.K. v. IndusInd Bank ; 2024 (6) KLT 606, where this Court, after referring to the judgment of the Supreme Court in M/s. Pro Knits v. The Board of Directors of Canara Bank and Others , 2024 SCC OnLine SC 1864 , has taken the view that where the claim for revival in terms of the guidelines referred to above and the instructions of the RBI is not taken by the borrower at the earliest stage, ie, before the classification of the account as a Non-Performing Asset (NPA), they cannot thereafter be permitted to turn around and claim the benefits. It is submitted that in Krishnakumar P.K. (supra), this Court took the view that, in the earlier rounds of litigations conducted by the borrowers in that case, they had not raised any claim for the benefits of the notification and the instructions/guidelines of the RBI. It is submitted that in the facts of the present case, the petitioners in W.P(C)No.41069 of 2024 had earlier approached this Court by filing O.P(DRT)No.298 of 2024 which was later dismissed by judgment dated 04-10-2024. It is submitted that, thereafter, the petitioner No.5 in W.P(C)No.41069 of 2024 approached this Court by filing W.P(C)No.36482 of 2024 and had obtained an order for payment of the outstanding amount in instalments. It is submitted that, thereafter, the petitioner No.5 in W.P(C)No.41069 of 2024 approached this Court by filing W.P(C)No.36482 of 2024 and had obtained an order for payment of the outstanding amount in instalments. It is submitted that the judgment in W.P(C)No.36482/2024 (Ext.P8) was challenged by the respondent bank by filing W.A.No.1761/2024, and this Court, by Ext.P9 judgment, allowed the appeal and set aside the judgment in W.P(C)No.36482/2024 reserving the right of the petitioner No.5 in W.P(C)No.41069/2024 to approach the Debts Recovery Appellate Tribunal. It is submitted that, the petitioners in W.P.(C) No. 41103 of 2024 had also filed OP(DRT) No.276 of 2024, which was disposed of by the judgment marked as Exhibit P8 (in that writ petition), directing that if the petitioners in that writ petition were to make payment of Rs.20 lakhs on or before 23.09.2024, the bank shall not proceed to take possession till the consideration of the interim application for stay by the Tribunal. It is submitted that, though the petitioners in W.P.(C) No.41103 of 2024 paid the amount of Rs.20 lakhs, the interim application is still pending consideration of the Tribunal. It is submitted that, on account of the directions contained in the judgment in OP(DRT) No.276 of 2024, the bank has not proceeded further to take physical possession of the secured asset. It is submitted that no contention similar to the contention (regarding rehabilitation of MSME’s) was taken in the earlier rounds of litigation. 3. Learned counsel appearing for the petitioners would submit, in reply, that Exhibit P1 request [marked as such in W.P.(C) No.41103 of 2024] would indicate that the petitioners in that writ petition had actually addressed the bank at the very outset (even prior to the issuance of notice under Section 13(2) of the SARFAESI Act) to consider the restructuring of the account though there was no specific reference to the MSME guidelines. 4. Having heard the learned counsel appearing for the petitioners and the learned counsel appearing for the respondent bank, I am of the view that, in the light of the facts noticed above, the issue raised in these writ petitions stand squarely covered against the petitioners by the Division Bench Judgment of this Court in Krishnakumar P.K. (supra). The Division Bench held as follows:- "14. The Division Bench held as follows:- "14. The Hon’ble Supreme Court in the case of M/s. Pro Knits had examined the scheme of MSMED Act in conjunction with the SARFAESI Act and had accepted the contention of the MSMEs that they could have a special status as regards recovery of loans. However, after concluding so, the Hon'ble Supreme Court observed thus: “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 nonperforming 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 authorised person. Therefore, the stage of identification of incipient stress in the loan account of MSMEs and categorisation 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 the recourse to Chapter III of the SARFAESI Act for the enforcement of the security interest. 17. It is also pertinent to note that sufficient safeguards have been provided under the said Chapter for safeguarding the interest of the Defaulters-Borrowers for giving them opportunities to discharge their debt. 17. It is also pertinent to note that sufficient safeguards have been provided under the said Chapter for safeguarding the interest of the Defaulters-Borrowers for giving them opportunities to discharge their debt. However, if at the stage of classification of the loan account of the borrower as NPA, the borrower does not bring to the notice of the concerned bank/creditor that it is a Micro, Small or Medium Enterprise under the MSMED Act and if such an Enterprise allows the entire process for enforcement of security interest under the SARFAESI Act to be over, or it having challenged such action of the concerned bank/creditor in the court of law/tribunal and having failed, such an Enterprise could not be permitted to misuse the process of law for thwarting the actions taken under the SARFAESI Act by raising the plea of being an MSME at a belated stage. Suffice it to say, when it is mandatory or obligatory on the part of the Banks to follow the Instructions/ Directions issued by the Central Government and the Reserve Bank of India with regard to the Framework for Revival and Rehabilitation of MSMEs, it would be equally incumbent on the part of the concerned MSMEs to be vigilant enough to follow the process laid down under the said Framework, and bring to the notice of the concerned Banks, by producing authenticated and verifiable documents/material to show its eligibility to get the benefit of the said Framework.” (emphasis supplied) The Hon'ble Supreme Court, therefore, has laid down the position of law that if, at the stage of classification of the loan account, the borrower does not bring to the notice of the Bank that it is an MSME and allow the entire process to go through, then it will be precluded from raising it at the belated stage. This dicta is very clear and is binding. 15. Furthermore, the Appellants are mixing up several issues which have different connotations, such as res judicata, estoppel, waiver and acquiescence. The waiver and acquiescence will stand on a completely different footing than an estoppel. If a party knowingly permits a certain state of affairs to go through, the concept of waiver and acquiescence also comes into play. 16. 15. Furthermore, the Appellants are mixing up several issues which have different connotations, such as res judicata, estoppel, waiver and acquiescence. The waiver and acquiescence will stand on a completely different footing than an estoppel. If a party knowingly permits a certain state of affairs to go through, the concept of waiver and acquiescence also comes into play. 16. In this case, the Appellants permitted the state of affairs to prevail, including that of seeking repayment by installments, and therefore, clearly benefited from the delay, which has enured to their benefit, whereby the Appellants have been able to retain the amount instead of repaying the same. 17. The observations of the Hon’ble Supreme Court in paragraph (17) in the case of M/s. Pro Knits lays down the principle that the borrowers have to be diligent, and if they knowingly permit the state of affairs to continue, they will be precluded from raising the challenge. The case is not only of estoppel as argued but acquiescence and waiver as well. The Appellants have sidestepped this aspect of the matter and have focused entirely on the principle of estoppel. Even otherwise, the clear dicta of the Hon'ble Supreme Court in the case of M/s. Pro Knits leaves no room to accept the contention raised by the Appellants. 18. In the earlier two writ petitions, there is not even a whisper of the Appellant Enterprise being MSME. The argument that the Appellants were not aware of the status of the Enterprise as MSME is too far-fetched to believe when they had filed two writ petitions through legal counsels. In this case, a lame explanation is given that the Appellants were unaware of their rights, which we find entirely unacceptable. It is nowhere stated that the Appellants are illiterate. Therefore, all we see before us is an attempt to raise repeated challenges in the Court to stall the repayment. The learned counsel for the Respondent Bank submitted that the Appellants paid not a single paisa, and the entire loan amount has been defalcated. 19. The Appellants’ argument that the High Court must intervene, no matter how they conducted themselves, proceeds on a complete misunderstanding of the nature of writ jurisdiction. There are two separate issues. One, whether the Bank lacked the authority to proceed. Second, whether the Appellants’ conduct disqualifies or disentitles them from invoking equity jurisdiction. 19. The Appellants’ argument that the High Court must intervene, no matter how they conducted themselves, proceeds on a complete misunderstanding of the nature of writ jurisdiction. There are two separate issues. One, whether the Bank lacked the authority to proceed. Second, whether the Appellants’ conduct disqualifies or disentitles them from invoking equity jurisdiction. In cases where a borrower who qualifies as MSME does not initially raise its status to challenge a bank's recovery proceedings under the SARFAESI Act but instead participates fully in the process without objection, cannot later use their MSME status to argue that the proceedings were without jurisdiction. The power of the High Court under Article 226 of the Constitution of India is discretionary based on the principles of fairness and justice, which include examining the conduct of the parties involved. When the Appellants, by their actions, accepted the Bank's authority without objection, the High Court will refuse to exercise its writ jurisdiction to assist such Appellants, even if there are questions about the jurisdiction of the Bank. This is because the Appellants’ own conduct disqualifies them from claiming such relief. When the High Court declines to interfere in such circumstances, it does not mean that the Appellants’ waiver vested the Bank with jurisdiction, assuming it is inherently lacking; it means that the borrower is not entitled to invoke writ jurisdiction irrespective of whether the Bank's actions are without jurisdiction or not. These two concepts are distinct, and the distinction is emphasized by the Hon'ble Supreme Court in the case of M/s. Pro Knit.’’ Therefore, no reliefs can be granted to the petitioners in the present writ petitions. 5. Faced with this situation, learned counsel appearing for the petitioners would submit that the respondent bank may be directed to consider a proposal for One Time Settlement . 6. Learned counsel appearing for the respondent bank submits that the bank has no objection in considering any proposal for One Time Settlement and if such proposal is submitted within a period of one week from today, the proposal shall be considered by the competent authority of the respondent bank. 6. Learned counsel appearing for the respondent bank submits that the bank has no objection in considering any proposal for One Time Settlement and if such proposal is submitted within a period of one week from today, the proposal shall be considered by the competent authority of the respondent bank. In the light of the aforesaid submission, the writ petition will stand disposed of, holding that the petitioners cannot now claim that they are entitled to be considered under the framework for revival of MSME’s in terms of the guidelines referred to above and the corresponding circulars issued by the RBI. However, the petitioners are permitted to approach the bank by filing a proposal for One Time Settlement within a period of one week from today (27-02-2025). If such proposal is filed within a period of one week from today, the competent authority of the respondent bank shall take decision on the proposal and communicate its decision to the petitioners. Till such time the proposal is considered and the decision is communicated to the petitioners, further proceedings under the SARFAESI Act shall remain suspended.