(MENAFN- KNN India) Mumbai, Jan 16 (KNN) The Bombay High Court clarified that banks and non-banking financial companies (NBFCs) are not mandated to initiate the restructuring process for MSMEs, in a recent ruling.
The verdict emphasised that the initiation of the restructuring process is contingent upon the submission of an application by the concerned Micro, Small, and Medium Enterprise (MSME).
The court emphasised that the restructuring process, outlined in a notification, is initiated by the identification of incipient stress in MSME accounts.
The court interpreted "incipient stress" as the onset of financial difficulties for MSMEs, asserting that banks and NBFCs cannot independently identify this stress and necessitate the MSME's application.
Highlighting the significance of the notification dated May 29, 2015, under Section 9 of the MSME Development Act, 2006, the court ruled that the provision for restructuring only applies when MSMEs approach banks or NBFCs.
The petitioners had argued that the notification mandates the formation of a committee comprising bank officers and independent experts for MSMEs. Banks and NBFCs are obligated to submit an application for a corrective action plan, and if unsuccessful, recovery steps can be adopted.
Respondent Banks had argued that the notification allows for a 90-day period before an MSME is classified as a Non-Performing Asset (NPA).
During this period, MSMEs are expected to recognise financial stress and apply for the constitution of a committee for restructuring efforts.
After the 90-day period, if an account is classified as NPA, action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act must follow. The banks claimed that the MSMEs involved never invoked the notification for restructuring.
The court accepted the petitioner MSMEs' arguments and cited Clause 1(3) of the notification, stating that the application for initiating proceedings requires an affidavit from an authorised person, typically the person in charge of the MSME.
Furthermore, the court asserted that the notification comes into play only when the MSME approaches banks or NBFCs with an application and supporting affidavit, following which the institutions categorise the MSMEs into sub-categories.
The division bench that concluded this case titled, 'M/s. A. Navinchandra Steels Pvt. Ltd v. Union of India and Ors. with connected matters' comprised Justice BP Collabawalla and Justice MM Sathaye.
(KNN Bureau)
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