Kerala HC Holds MSME Enterprises Equally Responsible to Initiate Rehabilitation Proceedings Under the Framework
Case Overview
Case Name: Sree Matha Cosmetic Industries Vs Board of Directors (Kerala High Court)
A Division Bench of the Kerala High Court recently dismissed a writ appeal filed by an MSME enterprise that had challenged the classification of its loan account as a Non-Performing Asset and the subsequent enforcement action initiated by a bank under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter referred to as the SARFAESI Act). The court's ruling reinforces a critical but often overlooked principle — that the rehabilitation framework available to MSMEs is not a shield to be picked up only when enforcement proceedings have already advanced, but a proactive mechanism that the enterprise itself must voluntarily invoke when warning signs of financial distress first emerge.
Background and Factual Matrix
Sree Matha Cosmetic Industries, the appellant, had availed an M.S.E. cash credit facility from UCO Bank, Kollam Branch. As business conditions deteriorated, the bank classified the account as a Non-Performing Asset (NPA) on 31.07.2024. Following this classification, the bank issued a demand notice under Section 13(2) of the SARFAESI Act on 17.08.2024.
The sequence of enforcement steps that followed was as described below:
- 17.08.2024 — Demand notice issued under
Section 13(2)of the SARFAESI Act - 16.11.2024 — Possession notice issued by the bank
- 03.05.2025 — The learned Chief Judicial Magistrate passed an order appointing an Advocate Commissioner to take physical possession of the secured assets
- 05.11.2025 — Sale notice issued, with the auction scheduled for 28.11.2025
- 13.11.2025 — Possession notice issued by the Advocate Commissioner for physical possession on 03.12.2025
Throughout this entire chain of proceedings, the appellant enterprise took no steps to respond to the bank's notices, made no application for rehabilitation under the Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises (notified vide S.O.1432(E) dated 29.05.2015), and filed no reply to the Section 13(2) demand notice. It was only at an advanced stage of enforcement that the writ petition was filed before the Single Judge, which was dismissed. The present writ appeal arose from that dismissal.
Legal Challenge Raised by the Appellant
The appellant's primary argument, advanced by learned counsel Mr. Mathew Nedumpara, centered on the alleged failure of UCO Bank to comply with the Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises notified on 29.05.2015 under the Micro, Small and Medium Enterprises Development Act, 2006 (hereinafter MSMED Act).