M/S PRO KNITS versus THE BOARD OF DIRECTORS OF CANARA BANK & ORS.

Citation: [2024] 8 S.C.R. 140 · Decided: 01-08-2024 · Supreme Court of India · Bench: BELA M. TRIVEDI · Disposal: Appeal(s) allowed

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Judgment (excerpt)

[2024] 8 S.C.R. 140 : 2024 INSC 565
M/s Pro Knits
v.
The Board of Directors of Canara Bank & Ors.
(Civil Appeal No. 8332 of 2024)
01 August 2024
[Bela M. Trivedi* and R. Mahadevan, JJ.]
Issue for Consideration
Whether the Notification dated 29.05.2015 issued by the Central 
Government in exercise of the powers conferred under Section 
9 of the Micro, Small and Medium Enterprises Development Act, 
2006, containing Instructions for the “Framework for Revival and 
Rehabilitation of Micro, Small and Medium Enterprises” as revised 
from time to time, is mandatory or directory. 
Headnotes†
Micro, Small and Medium Enterprises Development Act, 2006 – 
ss.9, 10 – The Securitisation and Reconstruction of Financial 
Assets and Enforcement of Security Interest Act, 2002 – 
Banking Regulation Act, 1949 – ss.21, 35A – Loan accounts 
of the appellants-MSMEs were classified as Non-Performing 
Assets (NPA) by the respondents-Banks/Non-Banking Financial 
Companies (NBFCs) without following the procedure laid down 
in the Instructions for Framework for Revival and Rehabilitation 
of MSMEs issued vide Notification dated 29.05.2015 to provide 
a simpler and faster mechanism to address the stress in 
the accounts of MSMEs and to facilitate the promotion and 
development of MSMEs – Challenged by appellants – Writ 
petitions dismissed by High Court holding that the Banks/
NBFCs were not obliged to adopt the restructuring process 
contemplated in the aforesaid Notification on its own without 
there being any application by the MSMEs – Correctness:
Held: Not correct – Instructions for the “Framework for Revival 
and Rehabilitation of MSMEs” as notified vide Notification dated 
29.05.2015 in exercise of the powers conferred u/s.9 of the MSMED 
Act, as revised by the RBI Notification dated 17.03.2016 and the 
Reserve Bank of India (Lending to Micro, Small and Medium 
Enterprises Sector) Directions, 2016, issued by RBI in exercise of 
the powers conferred by ss.21 and 35(A) of the Banking Regulation 
* Author
[2024] 8 S.C.R. 
141
M/s Pro Knits v. The Board of Directors of Canara Bank & Ors. 
Act, having statutory force, are mandatory in nature and binding 
on all Scheduled Commercial Banks, licensed to operate in India 
by RBI – 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 MSMEs, before their accounts turn into 
non-performing assets, by creating three sub-categories under the 
“Special Mention Account” Category – Further, it is also incumbent 
on the part of the concerned MSME to produce authenticated and 
verifiable doucments/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-secured 
creditors would be entitled to take the recourse to Chapter III of 
the SARFAESI Act for the enforcement of the security interest – 
Impugned order set aside. [Paras 13, 16, 19]
The Securitisation and Reconstruction of Financial Assets 
and Enforcement of Security Interest Act, 2002 – Chapter III; 
ss.35, 13 – Enforcement of security interest created in favour 
of secured creditor – Process of initiation:
Held: Security interest created in favour of any Bank or secured 
creditor may be enforced by such creditor in accordance with the 
provisions contained in Chapter-III of the SARFAESI Act – As 
per s.35, the provisions of the SARFAESI Act have the effect, 
notwithstanding anything inconsistent therewith contained in any 
other law for the time being in force or any instrument having effect 
by virtue of any such law – However, the process of enforcement 
of security interest as contained in Chapter III could be initiated 
only when the borrower makes any default in repayment of secured 
debt or any instalment thereof, and his account in respect of such 
debt is classified by the secured creditor as non-performing asset, 
in view of Section 13(2) of the said Act. [Para 14]
Banking Regulation Act, 1949 – ss.21, 35A – Directions issued 
under, mandatory:
Held: ss.21 and 35A empower the RBI to frame the policy and give 
directions to the banking companies in relation to the advances 
to be followed – Such directions supplement the provisions of 
the Banking Regulation Act and have statutory force and are 
mandatory. [Para 13]
Micro, Small and Medium Enterprises Development Act, 
2006 – Securitisation and Reconstruction of Financial Assets

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