Director Lacks Locus Post-Liquidation; MSME Framework Cannot Override SARFAESI and IBC: Bombay High Court
- REEDLAW
- Aug 6
- 4 min read
Updated: Aug 12
REEDLAW Legal News Network reports that the Bombay High Court has held that directors of a corporate debtor undergoing CIRP and liquidation lose the legal locus to challenge recovery actions. The Court further ruled that the MSME revival framework cannot override statutory remedies like SARFAESI and IBC when the borrower has failed to meet RBI-prescribed eligibility or initiate timely corrective steps.
The Bombay High Court Division Bench comprising Justice M.S. Karnik and Justice N.R. Borkar, while adjudicating a writ petition, held that once a corporate debtor enters the Corporate Insolvency Resolution Process (CIRP) and liquidation under the Insolvency and Bankruptcy Code (IBC), its directors lose the legal capacity to challenge recovery actions. The Court further ruled that the MSME revival framework cannot override statutory recovery mechanisms such as the SARFAESI Act, particularly when the borrower fails to proactively seek corrective restructuring or where the account falls outside the eligibility limits prescribed under RBI guidelines.
In a significant ruling, the Bombay High Court dismissed a writ petition filed by the petitioner, a director of the Corporate Debtor, challenging the classification of the company’s account as a Non-Performing Asset (NPA) and the subsequent 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 had invoked the MSMED Act, 2006, particularly relying on the Central Government Notification dated 29.05.2015, arguing that banks and financial institutions were obligated to constitute a Committee for Corrective Action Plans before declaring an MSME account as NPA or initiating recovery. The petitioner further questioned the constitutional validity of recovery statutes and contended that RBI and the Central Government failed to discharge their statutory duties under the MSMED Act and related legislations.
The Court noted that the petitioner’s account had been classified as NPA in October 2019, and SARFAESI proceedings were initiated in January 2020. Importantly, the company was already admitted to the Corporate Insolvency Resolution Process (CIRP) under IBC by NCLT Mumbai in October 2022, and liquidation had been ordered. As per Sections 17 and 34 of the IBC, the powers of the board, including the petitioner-director, stood suspended, and only the Resolution Professional or Liquidator could legally represent the corporate debtor. Consequently, the Court held that the petitioner lacked locus standi to file the present writ petition. The objection of the respondent bank, represented by Senior Counsel, was upheld, and reliance was placed on Supreme Court precedents such as Innoventive Industries Limited v. ICICI Bank and Another, REEDLAW 2017 SC 08563 and Arcelormittal India Private Limited v. Satish Kumar Gupta and Others, REEDLAW 2018 SC 10541.
On the merits, the Court found that the bank’s recovery actions were compliant with applicable RBI guidelines and legal provisions. The Court emphasized that under the 2015 MSME Notification and RBI’s Circular dated 17.03.2016, it is the borrower’s responsibility to approach the bank for corrective restructuring before an account is declared as NPA. The petitioner failed to provide any evidence of availing the MSME revival mechanism prior to classification. The Court further noted that the notification relied upon by the petitioner applied only to accounts with exposure up to ₹25 crores, while the dues of the petitioner’s company exceeded ₹30 crores, thus placing the account outside the purview of the said framework.
Considering that the petitioner had already approached the NCLT and NCLAT for appropriate reliefs, and that the challenge to the classification and recovery measures was already the subject matter of proceedings under Section 60(5)(c) of the IBC, the High Court held that the writ petition was an attempt to stall the scheduled auction of the immovable property. The petition, along with the interim application seeking amendment filed on the eve of the auction, was found to be devoid of merit and was accordingly dismissed, clarifying that the Court’s observations were only prima facie and should not prejudice the outcome of pending statutory proceedings.
Mr. Mathews Nedumpara a/w. Ms. Hemali Kurne, Ms. Maira Nedumpara, Ms. Shameen Fayiz, Mr. Akhilesh, Satsang, Ms. Sweta, i/b. Nedumpara and Nedumpara, Advocates, represented the Applicant in IAL/31676/2024.
Mr. Y.R. Mishra a/w Mr. Upendra Lokegaonkar, Mr. Sachidanand T. Singh, Advocates, appeared for Respondent No. 3 UOI in WPL/31676/2024.
Ms. P.H. Kantharia, GP a/w Mr. Vikrant Parshurami, AGP, appeared for State R-12.
Ms. Bijal Gogri i/b. Mr. O.M. Gujjar Law Chambers, Advocates, appeared for R-6.
Mr. Dhaval Patil i/b. K. Ashar and Co., Advocate, appeared for R-1.
Mr. Kevic Setalwad, Senior Advocate a/w. Mr. Narpat Singh, Ms. Malvika Sachin i/b. India Law LLP, Advocates, appeared for R-4 HDFC.
Mr. Amir Arsiwala, Advocate, appeared for R-13.
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