MSME restructuring notification is borrower-initiated, and non-compliance does not invalidate NPA classification or SARFAESI action.

The 29 May 2015 MSME notification was construed as a borrower-initiated restructuring framework triggered by an MSME application supported by an authorised affidavit on incipient stress; banks and NBFCs were not required to commence restructuring suo motu. On that reading, non-compliance with the framework did not, by itself, invalidate classification of the account as an NPA or the ensuing SARFAESI recovery measures. The Bombay HC therefore rejected the contention that the notification created a mandatory precondition to NPA classification or enforcement action.

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Issues: Whether the 29 May 2015 notification issued under section 9 of the Micro, Small and Medium Enterprises Development Act, 2006 required banks and NBFCs to suo motu initiate restructuring and classify MSME accounts in SMA categories before treating them as NPAs, and whether non-compliance rendered SARFAESI proceedings invalid.

Analysis: The notification was read as a framework that begins with identification of incipient stress and contemplates initiation by the MSME through an application supported by an affidavit of an authorised person. On that construction, the bank or NBFC is not obliged to commence restructuring on its own without such initiation by the borrower. The Court also agreed with the view that the framework is not mandatory in the sense contended for by the petitioners and that failure to follow it does not, by itself, invalidate classification of an account as an NPA or the consequential recovery steps. The petitions were therefore held not to succeed on the limited ground pressed before the Court.

Conclusion: The notification does not impose a suo motu statutory obligation on banks or NBFCs to begin restructuring absent an MSME application, and non-compliance with that framework does not vitiate the impugned SARFAESI action.

Ratio Decidendi: A restructuring framework under section 9 of the Micro, Small and Medium Enterprises Development Act, 2006 can be invoked only when the MSME itself initiates it on the basis of incipient stress, and the framework does not, by itself, bar NPA classification or SARFAESI recovery proceedings.

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