Bombay High Court: MSME Director Lacks Locus to Challenge Recovery; SARFAESI and IBC Actions Stand Despite Revival Framework Claims

The Bombay High Court held that the director of an MSME lacks the legal locus to challenge recovery actions and upheld the proceedings initiated under SARFAESI and IBC despite the petitioner’s reliance on the MSME revival framework.

The Division Bench of the Bombay High Court, comprising Justice M.S. Karnik and Justice N.R. Borkar, while adjudicating an urgent writ petition, held that once a corporate debtor enters the Corporate Insolvency Resolution Process (CIRP) and undergoes liquidation under the IBC, its directors cease to have locus standi to initiate legal proceedings on its behalf. The Court further observed that borrowers must proactively invoke the MSME revival framework before alleging non-compliance by banks, particularly in cases where the loan exposure exceeds ₹25 crores and falls under separate RBI guidelines.

The Bombay High Court recently dealt with an urgent writ petition filed by the director of Ritu Automobiles Pvt. Ltd., an MSME, who sought sweeping reliefs against recovery proceedings initiated by HDFC Bank under the SARFAESI Act, the Recovery of Debts and Bankruptcy Act (RDB Act), and the Insolvency and Bankruptcy Code (IBC). The petitioner contended that the bank had violated the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 and the Central Government’s notification dated 29.05.2015, which requires banks to follow a structured mechanism for resolving financial stress before classifying MSME accounts as NPAs or initiating recovery. The petitioner also challenged the constitutional validity of several recovery statutes and sought restoration of the loan account, along with compensation for the alleged regulatory lapses.

The High Court, however, upheld a preliminary objection raised by the respondent-bank regarding the maintainability of the petition. It observed that since the company had already been admitted into the Corporate Insolvency Resolution Process (CIRP) and subsequently liquidated under orders of the NCLT, all powers of the board of directors, including that of the petitioner, stood suspended under Sections 17 and 34(2) of the IBC. Accordingly, the petitioner lacked the legal capacity to initiate or prosecute the writ petition. The Court also noted that the reliefs sought were already under consideration before the appropriate forums, including the NCLT and the NCLAT.

On merits, the Court found that the petitioner had not placed any evidence to show that he had triggered the MSME revival mechanism before the classification of the account as an NPA. Citing the Supreme Court’s ruling in Pro Knits v. The Board of Directors of Canara Bank and Others, REEDLAW 2024 SC 08201, the Court reiterated that the onus lies on the borrower to initiate revival steps under the MSME framework. The bank’s actions, including issuance of the demand notice under Section 13(2) of the SARFAESI Act in January 2020, were held to be in conformity with RBI guidelines and prudential norms.

Furthermore, the Court accepted the RBI’s submission that the 2015 notification relied upon by the petitioner was inapplicable, as the petitioner’s loan exposure exceeded ₹25 crores. Such large-value MSME accounts, it held, were governed by the RBI’s 2016 framework under the Corporate Debt Restructuring (CDR) and Joint Lenders’ Forum (JLF) mechanisms. The Court found no merit in the petitioner’s challenge to the validity of the RBI’s circular.

The Court also noted that the writ petition appeared to be a tactical attempt to stall the scheduled e-auction of the company’s secured assets. The amendment application filed on the very day of the hearing was viewed as an abuse of process. Since adequate statutory remedies were already available and had been invoked by the petitioner before appropriate tribunals, the Court declined to entertain the writ. It dismissed the petition without costs, making it clear that its observations were prima facie and would not affect the outcome of ongoing proceedings before statutory forums.

Mr. Mathews Nedumpara, a/w Ms. Hemali Kurne, Ms. Maira Nedumpara, Ms.Shameen Fayiz, Mr.Akhilesh, Satsang, Ms.Sweta, i/b Nedumpara & Nedumpara, represented for Petitioner in IAL/31676/2024.

Mr. Y.R.Mishra, a/w Mr. Upendra Lokegaonkar, Mr. Sachidan and T. Singh, appeared for Respondent No. 3 UOI in WPL/31676/2024.

Ms. P.H.Kantharia, GP a/w Mr. Vikrant Parshurami, AGP, appeared for State Respondent No.12.

Ms. Bijal Gogri, i/b Mr. O.M. Gujar Law Chambers, appeared for the Respondent No. 6.

Mr. Dhaval Patil i/b. K. Ashar & Co. appeared for the Respondent No. 1.

Mr. Kevic Setalwad, Senior Advocate a/w Mr. Narpat Singh, Ms. Malvika Sachin i/b India Law LLP, appeared for the Respondent No. 4 HDFC.

Mr. Amir Arsiwala, Advocate, appeared for the Respondent No. 13.

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REEDLAW 2025 Bom 06528