MSME loan account cannot be invoked under the SARFAESI Act, 2002

 

The statement “MSME loan account cannot be invoked under the SARFAESI Act, 2002” is not correct as an absolute proposition of law.
However, there are important statutory protections and conditions under which SARFAESI action against MSME borrowers may be restricted or rendered illegal.

Below is a legally accurate, nuanced position, which is often relevant in DRT challenges:

1. SARFAESI Act applies to MSME loans

There is no blanket exemption for MSME loans under the SARFAESI Act, 2002.

✔ If the loan is:

• Secured (mortgage / hypothecation / charge)
• Granted by a secured creditor (bank / financial institution)
• Classified as NPA

👉 SARFAESI proceedings can be initiated, subject to compliance with other applicable laws.

2. Mandatory protection under MSMED Act, 2006 (Section 15–23)

Where the borrower is an MSME registered under the MSMED Act, 2006, the bank cannot ignore statutory safeguards, particularly:

(A) RBI Framework for Revival & Rehabilitation of MSMEs

• RBI has issued binding circulars mandating:
• Identification of stress
• Corrective Action Plan (CAP)
• Restructuring options
• Failure to follow RBI MSME rehabilitation norms before declaring NPA renders SARFAESI action vulnerable.

📌 Key authority:
Mardia Chemicals Ltd. v. Union of India (2004) 4 SCC 311 – SARFAESI action must comply with RBI directions.

3. Section 18 of MSMED Act overrides SARFAESI in limited contexts

Where:

• A dispute relating to dues is referred to the MSME Facilitation Council
• Conciliation or arbitration is pending

👉 Coercive recovery including SARFAESI may be stayed, as the MSMED Act has an overriding effect under Section 24.

📌 Relevant principle:
Special statute with overriding clause prevails in case of inconsistency.

4. Wilful defaulter & NPA classification in MSME cases

In MSME accounts:

• Mechanical classification as NPA
• Without giving opportunity for restructuring
• Without speaking order on representation under Section 13(3A)

👉 Has been repeatedly held by DRTs and High Courts as illegal and arbitrary.

5. When SARFAESI action against MSME is liable to be set aside

SARFAESI proceedings are unsustainable if:

❌ Borrower is a registered MSME
❌ RBI MSME restructuring framework not followed
❌ No CAP / revival exercise undertaken
❌ Representation under Section 13(3A) rejected without reasons
❌ Action initiated during pendency of MSMED proceedings

6. Correct legal position (ready-to-use formulation)

“Though the SARFAESI Act, 2002 does not expressly exempt MSME loan accounts, invocation of SARFAESI provisions against an MSME borrower without strict compliance of the mandatory RBI Framework for Revival and Rehabilitation of MSMEs and without considering statutory protection under the MSMED Act, 2006, is arbitrary, illegal and unsustainable in law.”