Writ Petition No. 10305 of 2024 · The High Court
Case Details
1 Reserved on : 02.04.2025 Pronounced on : 29.04.2025 R IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 29TH DAY OF APRIL, 2025 BEFORE THE HON'BLE MR. JUSTICE M. NAGAPRASANNA WRIT PETITION No.10305 OF 2024 (GM-RES) BETWEEN: 1 . M/S. METRO STEEL SECTION (FIRM) REP. BY MR. TOUSEEF AHMED NO.1, VINOBHA NAGAR SIDDAIAH ROAD CROSS BENGALURU – 560 027. 2 . TOUSEEF AHMED S/O FAREED AHMED AGED ABOUT 37 YEARS R/AT NO.38/53 SRI RAMA MANDIR ROAD BASAVANAGUDI NEAR TO TRINITY HOSPITAL BENGALURU – 560 004. 3 . MRS. UROOJ SOUBIA AGED ABOUT 29 YEARS W/O TOUSEEF AHMED NO.38/53, SRIRAM MANDIR RAOD NEAR TRINITY HOSPITAL BASAVANAGUDI BENGALURU SOUTH – 560 004. 2 4 . MRS. ZAREENA BEGUM AGED ABOUT 69 YEARS W/O FAREED AHMED NO.38/53, SRIRAM MANDIR ROAD NEAR TRINITY HOSPITAL BASAVANAGUDI BENGALURU – 560 004. (BY SRI R.S.RAJESH, ADVOCATE) AND: THE DEPUTY GENERAL MANAGER STATE BANK OF INDIA STRESSED ASSETS MANAGEMENT BRANCH 2ND FLOOR, OFFICE COMPLEX BUILDING LHO CAMPUS, NO.65, ST. MARKS ROAD BENGALURU – 560 001. (BY SMT. SADHANA S. DESAI, ADVOCATE) ... PETITIONERS ... RESPONDENT THIS WRIT PETITION IS FILED UNDER ARTICLES 226 AND 227 OF THE CONSTITUTION OF INDIA PRAYING TO SET ASIDE/QUASH ALL THE SARFAESI PROCEEDINGS, NOTICES DTD 14.12.2023 ANNEXURE-E, 12.03.2024 ANNEXURE-F AND 18.03.2024 ANNEXURE-G ISSUED UNDER THE SARFAESI ACT
Legal Reasoning
WITHOUT FIRST FOLLOWING THE MANDATORY PROCEDURES AS PER THE NOTIFICATION DTD 29.05.2015 ANNEXURE-D APPLICABLE FOR THE MSME SEGMENTS. 3 THIS WRIT PETITION HAVING BEEN HEARD AND RESERVED FOR ORDERS ON 02.04.2025, COMING ON FOR PRONOUNCEMENT THIS DAY, THE COURT MADE THE FOLLOWING:- CORAM: THE HON'BLE MR JUSTICE M.NAGAPRASANNA CAV ORDER The petitioners are before this Court seeking quashing of notices issued on 14-12-2023, 12-03-2024 and 18-03-2024 by respondent invoking the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter referred to as ‘the Act’ for short).
Legal Reasoning
2. Heard Sri R.S.Rajesh, learned counsel appearing for the petitioners and Smt. Sadhana Desai, learned counsel appearing for the respondent. 4 3. Facts, in brief, germane are as follows:- The 1st petitioner is a partnership firm constituted by the 2nd petitioner along with his wife and mother, petitioners 3 and 4. For the sake of convenience in this order all the petitioners would be referred to as the petitioner/firm/unit. The office of the petitioner was in Bangalore. The firm was said to have been registered under the Micro, Small and Medium Enterprises Development Act, 2006 (‘MSMED Act’ for short) and the firm was eligible for all Government schemes in terms of notifications issued from time to time by the Ministry of Finance concerning benefits, obligations and liability. The firm on 05-10-2022 approaches the respondent/State Bank of India (‘the Bank’ for short) requesting to sanction fund-based cash credit facilities and submits an application to that effect. The Bank sanctioned fund-based cash credit facility of ₹15.50 crores under Advance-2 SME segment in terms of sanction communication dated 05-10-2022. The credit facility that was availed was utilized by the petitioner for the purpose of business and working capital requirements. The trading of the petitioner was said to be well and became a little problematic when the firm went into losses and 5 showed signs of sickness from the month of August 2023. It is then, the repayment into the account became irregular. 4. On the account becoming irregular, it was classified as Non-Performing Asset (‘NPA’) on 03-11-2023 and the account was transferred to stress assets management branch of the Bank. Once it was transferred to stress assets management branch coercive action of recovery began invoking the provisions of the Act. In furtherance whereof, the impugned notices under Section 13 of the Act were issued against the firm by the Bank. Notices being issued is what has driven the petitioner to this Court in the subject petition. 5. The learned counsel appearing for the petitioner Sri R. S. Rajesh submits that the petitioner is a MSME. Guidelines stipulated for all MSME schemes for revival, rehabilitation and restructuring of the unit should have been the first step taken by the Bank against the petitioner/MSME. No such decision was taken and the Bank straight away invoked the provisions of the Act, not once but twice. One-time settlement offer was sought for, but it 6 went unheeded and, therefore, left with no choice the petitioner is before this Court in the subject petition. This Court protected the interest of the petitioner by grant of interim order a year ago. 6. The learned counsel Smt. Sadhana S.Desai, appearing for the respondent/Bank who has filed an application seeking vacation of interim order and statement of objections, would vehemently contend that there can be no condition which the petitioner wanting to project with regard to Reserve Bank of India circulars of restructuring or breathing life into a unit whose account has become a NPA. She would contend that when the unit of the petitioner itself is closed where is the question of restructuring or reviving the unit. The firm itself has communicated that the unit has been closed. This matter has been completely suppressed while filing the petition and securing the interim order from the hands of this Court. The learned counsel would submit that as on today ₹18.50 crores are in due and for the last one year the interim order has stopped the Bank from initiating any steps seeking recovery of the amount. She would, therefore, contend that the petition be dismissed with exemplary costs for such suppression. 7 7. By way of rejoinder, the learned counsel for the petitioner contends that even after the account becoming NPA, in a staggered manner ₹79/- lakhs is said to have been paid by the petitioner. Therefore, the intention of the petitioner is to restart the unit, but would admit the fact that the unit is closed and such closure was not divulged in the petition. He would seek to place reliance upon a judgment of the Apex Court in the case of PRO KNITS v. BOARD OF DIRECTORS OF CANARA BANK1 which according to him would cover the issue in the lis. 8. I have given my anxious consideration to the submissions made by the respective learned counsel and have perused the material on record. 9. The petitioner being a Micro, Small and Medium Enterprise unit under the MSMED Act is a matter of record. The petitioner approached the respondent/Bank in the year 2022 seeking cash credit limit. This was, after verification, comes to be granted. The averment in the petition is that the business was fine and 1 (2024) 10 SCC 292 8 somewhere in the month of August 2023 the repayment schedule was disturbed. The account naturally slipped into becoming non- performing asset. The repayment schedule is disturbed for three consecutive months. Pursuant to this, a communication is issued to the petitioner by the Bank informing the petitioner that the account has slipped into becoming a NPA and the account is being transferred to stress assets management branch. The gist of the communication reads as follows: “SBI/SAMB/BLR/CLO2/MSS/306 Date: 18.11.2023 Dear Sir, STRESSED ASSETS MANAGEMENT MIGRATION OF ACCOUNT M/s Metro Steel Section We have to advise that your loan account(s) which was/ were maintained at Bangalore city Branch (00814), Bangalore have been migrated to Stressed Assets Management Branch, Bengaluru on 16-11-2023 for recovery of Bank’s dues. Henceforth, this Branch will monitor/control your account and initiate all steps needed to recover the loan immediately. In this connection, we also advise as under: 1. in payment of The account was migrated due to default, on your part, interest/installment(s)/non- adherence to the financial discipline stipulated by the bank and accepted by you at the time of sanction. We may further advise that the account has been 9 classified as NPA on 03-11-2023 in terms of guidelines issued by RBI. … … …’ Therefore, the account had slipped into becoming NPA and was declared as such from 03-11-2023. After the account slipping into NPA, as a matter of course, demand notice was issued against the petitioner invoking sub-section (2) of Section 13 of the Act. This was followed by a possession notice and admittedly as on today the due by the petitioner is ₹18.56 crores. The petitioner then approaches this Court and in the averment there is not even a whisper about the unit being closed. Throughout it is the case of the petitioner that he is entitled to restructuring or revival in terms of RBI guidelines. The respondent has filed its statement of objections in which two documents would assume significance. One dated 18-07-2023. It reads as follows: “Date: 18-07-2023 To AGM STATE BANK OF INDIA J.C.ROAD BRANCH BANGALORE. SUB: CLOSER OF ACCOUNT (OD:41348481423) Dear Sir, As you are aware that we are facing some issues with our Business from the last 6 months as discussed 10 with your goodself. We started the company in 2012 and have grown well every year from the last 3 – 4 years sir, out total Employee Strength was 100+ Employees and supplies to the entire South India, we have a state of the art warehousing facility in Hosur with stocking capacity of over 3000 MT, we are also registered under MSME, Udayam and also authorized distributors of APL Apollo, JSW, Hitech Tubes. Our annual turn over is more than 100 Cr and was growing at 30% every year from the last 3 years. We would like to inform you that we have incurred continues losses in the business for ever the period of 6 months, because of price war/rate fluctuation/detection and other uncontrollable factors therefore we all the partners have decided to shut down the business and close all our liabilities outstanding with your bank. Sir we would like to take a smooth exit by way off disposing our properties at the earliest. Therefore, we request you to kindly please grant us 4 months time clearing of all the debts/liabilities. We hope that you will support us in the difficulty time and give us requested time meantime we will their service interest applied in account and make our account standard. Kindly do the needful in the matter and oblige. Thanking you.” (Emphasis added) A subsequent communication by the petitioner emerges closing the unit. It reads as follows: To, The Deputy General Manager, “18-12-2024 11 State Bank of India Stresses Asset Branch St. Marks Road, Bangalore. Dear Sir, CLOSURE OF CASH CREDIT ACCOUNT – UNDER COMPROMISE As you are aware that I was running business under the style name M/s. Metro Steel Sections and has availed Cash Credit facility of ₹15.50 Cr. (Rupees Fifteen Crore Fifty Lakh Only) at your bank. Due to heavy loss incurred in the business I have winded my business and closed the operation since July 2023. The limit which was availed with your bank has subsequently became NPA during Nov 2023. I would like to inform you that I have made all the sincere efforts in closing the dues availed in your bank and so far has paid ₹1.68 cr. (Rupees One Crore Sixty Eight Lakh Only) from the date of NPA. In spite of all my effort I could not arrange the funds during last 1 year. I request you to consider my proposal and offer me One Time settlement of Rs.13,00,00,000/- (Rupees Thirteen Crore only) to be paid to the Bank at one tranche within two month of acceptance. I request you to consider my request and waive all the interest and penalty applied from the date of NPA. I have already paid a sum of Rs.1.68 Cr (Rupees One Crore Sixty Eight Lakh only) and which can be deducted from total principal outstanding of Rs.15.50 Cr (Rupees Fifteen Crore Fifty lakh only). Please consider my request considering my position and loss in business has already taken my livelihood. Sir, we hope you will understand our problem and support us in this difficult time. I will be ever so thankful for you support in this difficult time. 12 Please oblige.” (Emphasis added) The petitioner informs the Bank that due to heavy loss incurred in the business, the business is wound up and operations are closed since July 2023 and it was requested to waive all the interest and penalty from the date the account slipped into NPA. Prior to the aforesaid communication to the Bank, the petitioner was before this Court in the subject petition. This Court, on the score that the petitioner was a MSME and Apex Court was seized of an identical matter in the case of PRO KNITS supra, granted an interim order of stay. 10. The issue now would be, whether the unit of the petitioner which has now been wound up and closed could get the benefit of the circulars of RBI which the Apex Court considers in the case of PRO KNITS. I, therefore, deem it appropriate to notice the notification issued by Government of India under Section 9 of the MSMED Act with regard to restructuring of MSME accounts in the Banks. Certain clauses of the notification, that are germane, read as follows: 13 “1. Identification of incipient stress (1) Identification by Banks or creditors - Before a loan account of a Micro, Small and Medium Enterprise turns into a Non-Performing Asset (NPA), banks or creditors are required to identify incipient stress in the account by creating three sub-categories under the Special Mention Account (SMA) category as given in the Table below: Special Mention Account Sub-categories (1) SMA-0 SMA-1 SMA-2 Basis for classification (2) Principal or interest payment not overdue for more than 30 days but account showing signs of incipient stress Principal or between 31-60 days Principal or between 61-90 days interest payment overdue interest payment overdue (2) Identification by the Enterprise — Any Micro, Small or Medium Enterprise may voluntarily initiate proceedings under this Framework if enterprise reasonably apprehends failure of its business or its inability or likely inability to pay debts and before the accumulated losses of the enterprise equals to half or more of its entire net worth. (3) The application for initiation of the proceedings under this Framework shall be verified by an affidavit of authorised person. (4) When such a request is received by lender, the account should be processed as SMA-0 and the Committee under this Framework should be formed immediately. … … … 5. Corrective Action Plan by the Committee (1) The Committee may explore various options to resolve the stress in the account. 14 (2) The Committee shall not endeavour to encourage a particular resolution option for restructuring or recovery of the enterprise but shall endeavour to arrive at an early and feasible solution to preserve the economic value of the underlying assets as well as the lenders’ loans and also to allow the enterprise to continue with its business. (3) During the period of operation of Corrective Action Plan, the enterprise shall be allowed to avail both secured and unsecured credit for its business operations. (4) The options under Corrective Action Plan by the Committee may include: (i) Obtaining a specific Rectification – commitment from the borrower to regularise the account so that the account comes out of Special Mention Account status or does not slip into the Non-Performing Asset category and the commitment should be supported with identifiable cash flows within the required time period and without involving any loss or sacrifice on the part of the existing lenders. The Committee may also consider providing need based additional finance to the borrower, if considered necessary, as part of the rectification process. It shall be ensured by the bank that additional financing is not provided with a view to ever-greening the account. (ii) Restructuring – Consider the possibility of restructuring the account if it is prima facie viable and the borrower is not a willful defaulter, i.e., there is no diversion of funds, fraud or malfeasance, etc. Commitment from promoters for extending their personal guarantees along with their net worth statement supported by copies of legal titles to assets may be obtained along with a declaration that they would not undertake any transaction that would alienate assets without the permission of the Committee. 15 the security affecting Any deviation from the commitment by the borrowers or recoverability of the loan may be treated as a valid factor for initiating recovery process. The lenders in the Committee may sign an Inter Creditor Agreement and also require the borrower to sign the Debtor Creditor Agreement which would provide the legal basis for any restructuring process. The formats used by the Corporate Debt Restructuring mechanism for Inter Creditor Agreement and Debtor Creditor Agreement could be considered, if necessary with appropriate changes for Enterprise Debt Restructuring as may be prescribed by Reserve bank of India. Further, a stand-still clause may be stipulated in the Debtor Creditor Agreement to enable a smooth process of restructuring. The stand-still clause does not mean that the borrower is precluded from making payments to the lenders. The Inter Creditor Agreement may that both secured and also stipulate unsecured creditors need to agree to the final resolution. (iii) Recovery – Once the first two options at (a) and (b) above are seen as not feasible, due recovery process may be resorted to. The Committee may decide the best recovery process to be followed, among the various legal and other recovery options available, with a view to optimising the efforts and results.” (Emphasis supplied) Clause 1 of the said notification deals with identification of incipient stress. Three kinds of special mention account categories are found in Clause-1 supra and the corrective action plan is found in Clause- 16 5. Sub-clause (4) of Clause 5 deals with options under corrective action plan by the Committee which is in the hierarchy rectification, restructuring and recovery. Rectification and restructuring found in the clause itself, is available only to the units that are functioning but not to the accounts that have become non-performing assets. The third mode is recovery. When rectification and restructuring become a remote possibility, recovery is the only option. The Bank has now initiated steps to recover. The contention is, rectification and restructuring ought to have been considered and only then the Bank should have taken steps to recover. The submission is, on the face of it, unacceptable, as the nomenclature itself would indicate that restructuring or rectification can only be to the units that are breathing. Therefore, both the clauses of rectification and restructuring would not become applicable to the present petitioner, as the status of the unit is, it is no longer in existence. In that light the very notification becomes inapplicable to the case of the petitioner. 11. Heavy reliance is placed by the petitioner upon the judgment of the Apex court in the case of PRO KNITS supra. The 17 Apex Court considers the interplay between the Act and the MSMED Act with reference to directions issued by the Reserve Bank of India. The Apex Court reiterates that directions given by Reserve Bank of India have a statutory force and further holds that the Bank before taking recourse to proceedings under the Act should have looked into the frame work for revival and rehabilitation of MSME. The Apex Court considers certain salient features of the frame work. Those salient features are, before the MSME turns into a non- performing asset, the Bank or the creditor should identify incipient stress in the account by creating three categories. Those three categories are quoted supra as they are part of the notification. The frame work of revival and rehabilitation is considered by the Apex Court to be carried out before the accounts of MSME would turn into a NPA, which would mean that when the schedule of payment is breached even in the first instance, revival and rehabilitation frame work could be initiated on its own. The frame work permits MSME borrower to proceedings under the frame work. The Apex Court interprets and holds that the borrower therein ought to have been given an opportunity of revival and rehabilitation, as the account was a stress account when the unit 18 was in existence. This makes the marked difference between the facts obtaining before the Apex Court in PRO KNITS case, and the facts obtaining in the case at hand. 12. During the pendency of the petition, communication by the firm to the Bank assumes complete significance. The firm clearly indicated that it has wound up the business and closed the operation two years ago. If the firm has wound up the business and closed the operations two years ago, in the considered view of the Court, it cannot take the benefit of the firm being a MSME and the notifications issued under the MSMED Act or even the judgment of the Apex Court in PRO KNITS’s case supra. As observed, PRO KNITS would become applicable in a case where the account has slipped into NPA but the unit is functioning. Restructuring or revival or rehabilitation of the account is a permissible exercise is what the Apex Court holds. 13. In the case at hand, since the unit is closed, any direction for revival or restructuring the account would be asking the Bank to flog a dead horse. Therefore, no fault can be found with the Bank 19 initiating steps to recover the amount. It is not a crore or two as on today, but ₹18.56 crores, that is in due. As submitted by the learned counsel for the respondent/Bank public money is to be recovered by initiating proceedings under the Act. Therefore, I find no merit in the submissions of the learned counsel for the petitioner/firm. 14. The petition thus lacking in merit, stands rejected. Interim order of any kind subsisting stands dissolved. Consequently, I.A.No.1 of 2025 also stands disposed. SD/- (M.NAGAPRASANNA) JUDGE Bkp CT:SS