Borrower must disclose being MSME to Avail Benefit: Supreme Court clarifies in MSME-SARFAESI Connected Case [Read Order]

The Supreme Court has recently declined to entertain a writ petition by an MSME borrower seeking to halt SARFAESI enforcement, while clarifying how the 2015 MSME revival framework and the SARFAESI Act interact.

The dispute followed a loan default by an enterprise registered under the MSME Act. NKGSB issued a demand notice on May 13, 2024 under Section 13(2) of the SARFAESI Act, granting 60 days to pay.

A Section 14 order appointing a Court Commissioner was passed on April 3, 2025 and communicated on June 18, 2025. The borrower filed a writ petition under Article 32 on July 14, 2025, without having earlier invoked the MSME framework against the demand notice.

Arguing that the Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises compels creditors to identify “incipient stress” before classifying an account as NPA, counsel contended that every SARFAESI step taken absent such identification is ultra vires. Reliance was placed on Pro Knits v. Canara Bank to say non-compliance imperils classification itself.

The Court refused even to issue notice, and instead harmonised the two regimes. Reading paragraph 1 of the Framework “as a whole,” it stressed that “Identification by Banks or Creditors” is immediately followed by “Identification by the Enterprise,” which may itself trigger the process with an affidavit when it reasonably apprehends failure or likely inability to pay debts. On such a request, the lender is bound to constitute a committee and explore revival.

Crucially, the Bench held that where a bank has no conscious knowledge that the borrower is an MSME, it may classify the account as NPA and issue a Section 13(2) notice without first detecting “incipient stress.” However, if the borrower responds under Section 13(3-A) asserting MSME status with reasons supported by affidavit, the creditor must pause SARFAESI steps, examine the claim, and if merited, move the account into the Framework for revival.

The Court warned that reading the Framework as placing an absolute, standalone duty on banks would render the borrower-initiation limb redundant and incentivise MSMEs to “rest on their oars,” undermining the statute’s design.

In fact, the petitioner never sought Framework protection upon receiving the demand notice and surfaced only after the Magistrate’s order casting doubt on bona fides. Pro Knits remains good law that the Framework binds lenders, but it also obliges MSMEs to be vigilant and to produce authenticated material at the earliest; belated pleas cannot derail enforcement.

A Bench of Justices Dipankar Datta and Augustine George Masih, finding no case for Article 32 interference, dismissed the writ petition, with liberty to pursue the statutory remedy under Section 17 before the Debt Recovery Tribunal.

The MSME Framework is a collaborative safety net, not a pre-emptive straitjacket. Banks can proceed if unaware of MSME status; once the borrower steps forward in time, revival must take precedence over coercive recovery.

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