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of <h1>Writ petition dismissed, upholding bank's fraudulent classification under RBI Circular dated 15.07.2024; petitioner must pay or challenge circular</h1> <h3>M/s. Kirubha Exports Versus Reserve Bank of India and Others</h3> M/s. Kirubha Exports Versus Reserve Bank of India and Others - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether the declaration of the borrower's account as 'fraudulent' by the bank under the RBI circular dated 15.07.2024 is open to challenge in writ proceedings when steps under the SARFAESI Act have been initiated. 2. Whether the statutory/administrative FRAMEWORK for MSMEs (S.O.1432(E) dated 29.05.2015) required the secured creditor to follow a corrective action/rehabilitation procedure before classifying an MSME account as NPA/fraudulent and proceeding under SARFAESI, and if failure to follow that FRAMEWORK vitiates the bank's action. 3. The legal effect of recent Supreme Court pronouncements (including the earlier decision relied upon by the petitioner and a subsequent decision relied upon by the respondent) on the obligation of banks to apply the MSME FRAMEWORK and on the availability of relief to borrowers who failed to seek rehabilitation under the FRAMEWORK in response to demand/possession notices. 4. The appropriate relief/remedial course where a borrower challenges classification and imminent auction when there is a substantial admitted or adjudicated outstanding liability. ISSUE-WISE DETAILED ANALYSIS Issue 1: Validity of declaration of account as 'fraudulent' under RBI circular dated 15.07.2024 Legal framework: The RBI circular of 15.07.2024 provides a regulatory framework for prevention, early detection and timely reporting of incidents of fraud by banks to LEAs, RBI and NABARD and for dissemination of information; banks may classify accounts as fraudulent in consonance with those directions. Parallelly, the SARFAESI Act provides the statutory regime for enforcement of security interest including demand, possession and sale notices. Precedent Treatment: The Court considered subsequent apex court authority (Sri Sri Swami Samarth Construction & Finance Solution & Another v. Board of Directors of NKGSB Co-op. Bank Ltd. & Ors.) which clarified the interplay between the FRAMEWORK and SARFAESI remedies, and which effectively narrowed the availability of relief where borrowers failed to follow the FRAMEWORK after demand notice. Interpretation and reasoning: The Tribunal held that so long as the RBI circular remains in force and the declared reasons align with that circular's purpose (prevention and reporting of fraud), challenge to the fraudulent classification in writ is not maintainable in the face of binding Supreme Court authority constraining relief. The Court emphasized that the circular supplies the authorised regulatory context for declaring fraud and reporting to LEAs, and that the petitioner's remedy, if any, lies in challenging the circular itself or in complying with the remedy routes under SARFAESI/framework. Ratio vs. Obiter: Ratio - courts cannot furnish relief against a bank's classification of an account as fraudulent under an extant RBI circular where binding apex jurisprudence precludes such relief and where the borrower has not taken or is not shown to have pursued the FRAMEWORK remedies in time. Obiter - factual observations about the policy rationale of the RBI circular and the purpose clause (para 1.3) are explanatory. Conclusion: No writ remedy available against the fraudulent classification under the existing RBI circular in the present facts; petitioner must either pay the admitted liability or challenge the circular independently. Issue 2: Applicability and mandatory nature of the MSME FRAMEWORK (S.O.1432(E) dated 29.05.2015) before classifying an MSME account as NPA/fraudulent and invoking SARFAESI Legal framework: The Ministry of MSME notification prescribes a corrective action plan/FRAMEWORK for rehabilitation of MSMEs, directing creditors to consider revival measures through prescribed committees/processes prior to enforcement. Precedent Treatment: The Court examined prior Supreme Court decisions that interpreted the FRAMEWORK. One coordinate-bench decision had emphasized that the FRAMEWORK is binding on lending banks/secured creditors and that MSMEs must proactively present authenticated evidence to claim benefits. A later Supreme Court decision was held to have clarified/qualified that obligation by placing onus on the borrower to invoke the FRAMEWORK when the statutory SARFAESI process reaches demand/possession stage. Interpretation and reasoning: The Tribunal reasoned that while the FRAMEWORK sets out mandatory procedural expectations, its protective effect is conditioned upon the MSME borrower's vigilance and timely invocation of the FRAMEWORK. If the borrower fails to apply for rehabilitation under the FRAMEWORK upon issuance of the demand notice, continued remedial action under SARFAESI may not be stayed. The Court noted authorities that caution against belated invocation of the MSME relief to frustrate SARFAESI processes. Ratio vs. Obiter: Ratio - the FRAMEWORK's protections are not absolute; they require timely assertion and substantiation by the MSME borrower, and the bank must consider such a claim if made before final enforcement. Obiter - remarks on the recommended conduct of MSMEs to keep records and produce authenticated material. Conclusion: The bank's failure to follow the FRAMEWORK would only vitiate its actions if the borrower showed timely invocation and substantiation of entitlement under the FRAMEWORK; absent such timely/persuasive claim, the bank's SARFAESI measures (including classification) are not necessarily invalidated. Issue 3: Impact of apex court decisions on availability of relief and on the bank's duty when borrower claims MSME status post-demand notice Legal framework: Interaction of judicial precedents with administrative circulars/framework and statutory SARFAESI procedure. Precedent Treatment: The Court contrasted an earlier Supreme Court decision (which emphasised obligatory application of the FRAMEWORK by banks and vigilance required of MSMEs) with a later Supreme Court decision (which clarified that if the borrower does not apply for rehabilitation under the FRAMEWORK upon demand notice, further relief may not be available). The later decision was treated as narrowing/qualifying the earlier ratio. Interpretation and reasoning: The Tribunal followed the later apex decision as authoritative and determinative. It observed that where the statutory process has proceeded to issuance of demand/possession notices and the borrower has not sought rehabilitation within the FRAMEWORK in response, relief in writ may be denied. The Court further held that if a borrower, in response to a demand notice under Section 13(3-A), does assert MSME status with affidavit and material, the lending bank is mandatorily bound to examine that claim and keep further action in abeyance while the claim is considered in accordance with the FRAMEWORK. Ratio vs. Obiter: Ratio - later Supreme Court clarification is binding: timely application under the FRAMEWORK is a precondition for its protection; banks must consider bona fide claims made in response to demand notices and keep action in abeyance while such claims are considered as per FRAMEWORK. Obiter - commentary on coordination of multiple judgments. Conclusion: The subsequent apex decision limits the petitioner's contention; relief is not available where the borrower failed to apply for rehabilitation timely. If a timely and properly supported MSME claim is made, the creditor must consider it and may need to keep SARFAESI action in abeyance. Issue 4: Appropriate relief when auction is imminent and admitted outstanding remains substantial Legal framework: SARFAESI Act remedies, bank sale notices, and equitable relief in writ jurisdiction. Precedent Treatment: The Court applied established principles that equitable interim relief to stave off auction typically requires payment of admitted liability or demonstration of prima facie illegality/misconduct by creditor sufficient to displace statutory remedy, in light of binding regulatory/institutional mandates. Interpretation and reasoning: The Tribunal held that the petitioner's realistic option to prevent an imminent auction was payment of the admitted liability as per the sale notice. The Court declined to grant prophylactic relief against classification or auction in the absence of a successful challenge to the RBI circular or demonstrable timely invocation of the FRAMEWORK that would halt SARFAESI steps. Ratio vs. Obiter: Ratio - where statutory enforcement processes have reached sale stage and the outstanding is admitted/substantial, the practical route to stay auction is payment of the admitted liability or successful independent challenge of the regulatory provision; courts will not ordinarily grant stay merely because procedural non-compliance is alleged post-facto without proven prejudice. Obiter - suggestions on litigational avenues (challenging the circular independently). Conclusion: No interim relief; petitioner given liberty to pay amounts to stave off re-auction and to pursue remedies otherwise available in law (including independent challenge to the RBI circular).
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