Summary: The RBI’s MSME restructuring framework encourages early intervention and collaborative revival, while the SARFAESI Act enables swift creditor enforcement. Courts have clarified that MSMEs must proactively invoke restructuring protections before SARFAESI proceedings begin. The dual frameworks highlight the need for timely borrower action and balanced lender discretion to ensure rehabilitation is not sidelined by enforcement.
Introduction
The legal framework that governs financial distress and recovery for Micro, Small, and Medium Enterprises (“MSMEs”) in India is characterised by a complex interplay between sector-specific protections and general creditor enforcement mechanisms. Central to this tension are the Reserve Bank of India’s (“RBI”) 2015 Framework for Revival and Rehabilitation of MSMEs (“2015 Framework”) and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”).
While the former aims to facilitate early identification of financial stress and promote restructuring, the latter empowers secured creditors to enforce security interests without judicial intervention. This duality has created legal uncertainty: Can an MSME invoke the 2015 Framework to stall or override SARFAESI proceedings?
As per the Supreme Court’s recent jurisprudence, the 2015 Framework does not operate as a statutory bar to SARFAESI proceedings, unless proactively invoked by the borrower. This clarification is particularly relevant considering the Court’s reaffirmation of the principles established in Pro-Knits v. Canara Bank, which continues to serve as a touchstone for understanding the procedural obligations of both lenders and MSMEs in financial distress.
Before examining the jurisprudence on the implementation of the 2015 Framework, it is necessary to first examine the 2015 Framework itself and how it creates potential conflicts with the SARFAESI Act.
Framework for Revival and Rehabilitation of MSMEs
On May 29, 2015, the Ministry of Micro, Small and Medium Enterprises, empowered by Section 9 of the Micro, Small and Medium Enterprises Development Act, 2006, (“MSME Act”), introduced a structured framework for the revival and rehabilitation of financially stressed MSMEs.[1]
The framework applies to enterprises with aggregate loan exposure not exceeding INR 25 crore, and aims to identify financial stress at an early stage to prevent accounts from becoming non-performing assets (“NPAs”). Under the framework, stress classification is conducted through special mention account (“SMA”) categories, namely SMA – 0, SMA – 1, and SMA – 2. These categories are based on indicators such as delayed financial reporting, declining profitability, and cheque dishonours. Upon identification of an account as a ‘stressed asset’, a corrective action plan is formulated by a committee comprising bank officials, independent experts, and state government representatives.[2]
The 2015 Framework requires active participation from both lenders and MSMEs, with borrowers bearing the initial obligation to invoke protection. MSMEs must initiate the process by submitting an affidavit-backed application, which then triggers the lender’s obligation to consider corrective measures. The 2015 Framework’s core objective is to preserve viable enterprises through collaborative restructuring rather than immediate enforcement action.
Rights of Secured Lenders under the SARFAESI Act
The SARFAESI Act empowers banks, financial institutions, and notified non-banking financial companies to enforce security interests and recover dues from NPAs without judicial intervention. Under the SARFAESI Act, lenders may issue a 60-day demand notice upon default.[3] If the borrower fails to repay, secured creditors may proceed to take possession of the secured assets and initiate recovery through sale or auction.[4] This direct enforcement mechanism significantly strengthens the creditor’s position, enabling swift recovery and reducing reliance on litigation.
However, for MSMEs, this framework can be particularly challenging. The absence of mandatory restructuring obligations under the SARFAESI Act means that viable enterprises may face asset seizure without being offered a chance to rehabilitate. Unless MSMEs proactively invoke the 2015 Framework and respond to SARFAESI notices with substantiated claims, they risk being excluded from restructuring opportunities, notwithstanding the policy objective of supporting MSME sustainability.
Overlapping Frameworks and Emerging Tensions
The intersection of the SARFAESI Act and the 2015 Framework presents a paradigmatic case of regulatory overlap, where two mechanisms(one oriented towards creditor enforcement and the other towards borrower rehabilitation) operate concurrently. However, procedural coordination is often lacking. While SARFAESI enables secured creditors to initiate recovery proceedings swiftly upon default, the 2015 Framework encourages early identification of financial stress and structured resolution through corrective action plans and restructuring measures. In the absence of clear sequencing or prioritisation protocols, issues arise when both mechanisms are invoked simultaneously or sequentially.
In practice, lenders frequently proceed under SARFAESI without initiating or considering revival measures under the 2015 Framework, particularly when the borrower has not proactively invoked it. Conversely, MSMEs may attempt to invoke the 2015 Framework belatedly, (often after enforcement under SARFAESI Act has commenced) as a defensive strategy to delay or resist recovery. This creates procedural ambiguity and raises questions about lender’s obligations, borrower’s rights, and the appropriate timing for invoking restructuring mechanisms.
Compounding this tension is the statutory architecture of the SARFAESI Act, which contains a non-obstante clause, granting the SARFAESI Act overriding effect over any inconsistent law.[5] Additionally, Section 26E, introduced via the 2016 amendment, prioritises the claims of secured creditors over all other debts, including statutory dues, once the security interest is duly registered. These provisions firmly entrench the SARFAESI Act as a creditor-first regime, with statutory supremacy in enforcement proceedings.[6]
By contrast, the 2015 Framework is a regulatory guideline rather than a statute and thus lacks any overriding clause. It operates as a facilitative mechanism contingent upon proactive invocation by the borrower. Without such invocation, lenders are under no obligation to initiate restructuring measures. Consequently, the 2015 Framework remains subordinate to the SARFAESI Act, both in legal hierarchy and practical enforcement, leaving MSMEs procedurally disadvantaged unless they act promptly and substantively.
Judicial Clarifications on The Overlapping Frameworks
In NP Abdul Nazer v. Union Bank of India[7], the Kerala High Court held that the 2015 Framework was not mandatory due to the absence of penal consequences for non-compliance. Similarly, in Navinchandra Steels v. Union of India[8], the Bombay High Court ruled that banks were not bound by the MSME restructuring framework unless the MSME initiated the process.
However, these High Court decisions were subsequently clarified by the Supreme Court in Pro-Knits v. Canara Bank[9], which affirmed the binding nature of the 2015 Framework on lenders. This judicial evolution reflects the Court’s recognition of the need to balance creditor enforcement rights with MSME protection mechanisms.
In Pro-Knits v. Canara Bank, the Supreme Court clarified the binding nature of the 2015 Framework on lenders while emphasising the collaborative responsibility it entails. The Court held that where MSMEs proactively invoke the 2015 Framework through proper procedural channels, lenders are obligated to consider restructuring measures before classifying accounts as NPAs. However, the judgement reinforced that the 2015 Framework’s protections are contingent upon timely and substantive invocation by the borrower, rather than operating as an automatic shield against enforcement proceedings.
Conversely, in Shri Shri Swami Samarth Construction & Finance Solution v. NKGSB Co-operative Bank[10], the Court dismissed a writ petition challenging SARFAESI proceedings on grounds of non-compliance with the 2015 Framework. The petitioner, an MSME, had defaulted on its obligations and was served a demand notice under Section 13(2) of the SARFAESI Act. Rather than invoking the 2015 Framework in response to the demand notice, the petitioner approached the Court only after enforcement proceedings had commenced, seeking to challenge the SARFAESI action as the lender had failed to comply with the 2015 Framework.
The bench, comprising Justices Dipankar Datta and Augustine George Masih, rejected the petitioner’s contentions and held as follows:
Dual Responsibility: Lender and Borrower
The 2015 Framework envisages a collaborative mechanism requiring active participation from both lenders and borrowers. While banks are expected to identify incipient stress in MSME accounts through ongoing monitoring, borrowers bear an equally important duty to proactively initiate the restructuring process. The 2015 Framework does not impose an absolute obligation on lenders to detect stress in every MSME account independently. Instead, MSMEs must submit an affidavit-backed application upon reasonably apprehending financial distress, thereby triggering the lender’s corresponding obligation to consider revival options under the 2015 Framework.
Timing and Procedural Discipline
The Court emphasised on the critical importance of timing in invoking the 2015 Framework and held that MSMEs cannot invoke the 2015 Framework belatedly, particularly after SARFAESI proceedings have commenced. The borrower must assert its MSME status and seek restructuring in response to the Section 13(2) demand notice, preferably through a Section 13(3A) representation. Failure to do so, on time, may result in forfeiture of the 2015 Framework’s protections.
Rejection of Strategic Inaction
The Court highlighted attempts by MSMEs to use the 2015 Framework as a last-minute defence against SARFAESI enforcement. The Court cautioned that allowing passive reliance would distort the regulatory scheme and incentivise strategic delays, thus, firmly establishing that statutory benevolence under the 2015 Framework is not a substitute for procedural diligence.
Conclusion
The Supreme Court’s jurisprudence has clarified that the 2015 Framework offers meaningful protection only when invoked with procedural discipline and timeliness. While the SARFAESI Act remains the dominant enforcement mechanism, MSMEs retain a viable pathway for restructuring if exercised proactively and substantively. The dual frameworks demand dual diligence: for MSMEs, delay can mean forfeiture of restructuring protections; for lenders, enforcement discretion must be balanced with regulatory compliance obligations. The legal landscape now favours early invocation over reactive litigation, establishing a clear procedural hierarchy that rewards proactive engagement while preserving the efficacy of both creditor enforcement and borrower rehabilitation mechanisms.
For further information, please contact:
Monark Gahlot, Partner, Cyril Amarchand Mangaldas
monark.gahlot@cyrilshroff.com
[1] Ministry of Micro, Small and Medium Enterprises | Gazette Notification (Framework for Revival & Rehabilitation of MSMEs).
[2] RBI Notification | Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises (MSMEs).
[3] Section 13 (2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
[4] Section 13 (4) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
[5] Section 35 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
[6] Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016.
[7] 2023 KLT 5 301.
[8] 2024 NHC 649.
[9] 2024 INSC 565.
[10] 2025 INSC 908.
