The Bombay High Court has raised a critical jurisdictional question: whether a financial institution can invoke the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 against a borrower classified as a Micro, Small and Medium Enterprise under the MSME Development Act, 2006. The Court's examination of this issue, grounded in recent Supreme Court rulings, could redefine the scope of secured creditors' remedies in India's financial recovery framework.
Background & Facts
The Dispute
The petitioners, M/s. Rohit Textile and Others, challenged the jurisdiction of ICICI Bank Limited (Respondent No. 1) to initiate proceedings under the SARFAESI Act for recovery of dues. The core contention was that the petitioners' unit had been classified as an MSME under the Micro, Small and Medium Enterprises Development Act, 2006 after the credit facility was advanced by the bank.
Key Facts
- The petitioners availed a credit facility from ICICI Bank Limited
- The petitioners' unit was subsequently classified as an MSME under the MSME Development Act, 2006
- The bank initiated proceedings under the SARFAESI Act for enforcement of security interest
- The petitioners challenged the bank's jurisdiction, relying on two recent Supreme Court judgments:
- PRO Knits vs. Board of Directors of Canara Bank & Ors., (2024) 10 SCC 292
- Shri Shri Swami Samarth Construction and Finance Solution & Anr. vs. Board of Directors of NKGSB Co-op. Bank Ltd. & Ors., 2025 SCC Online SC 1566
Procedural History
- The petitioners filed Writ Petition No. 7719 of 2026 before the Bombay High Court
- The matter was listed for hearing on 29th June 2026
- The Court issued notice for final disposal, returnable on 17th July 2026
- Reply affidavit directed to be filed by 14th July 2026
- The petitioners have also filed a securitisation application before the Debts Recovery Tribunal (DRT), which remains pending
Relief Sought
The petitioners seek a declaration that the respondent bank's recourse to the SARFAESI Act is without jurisdiction and not sustainable in law, given their MSME classification and the Supreme Court's rulings in PRO Knits and Shri Shri Swami Samarth.
The Legal Issue
The central question before the Court is: Does the classification of a borrower as an MSME under the MSME Development Act, 2006, bar a secured creditor from invoking the provisions of the SARFAESI Act for enforcement of security interest?
Arguments Presented
For the Petitioners
The petitioners' counsel, Mr. Sidharth Samantaray, argued that:
- The SARFAESI Act proceedings initiated by the bank are wholly without jurisdiction
- The Supreme Court's judgments in PRO Knits and Shri Shri Swami Samarth establish that MSME classification imposes jurisdictional limits on secured creditors
- The bank's actions are unsustainable in law given these precedents
For the Respondent Bank
Mr. R. L. Motwani, counsel for the respondent bank, contended that:
- The petitioners' reliance on the Supreme Court judgments is misplaced
- There is no substance in the petitioners' contention, even if the law laid down in the cited cases is applied
The Court's Analysis
The Court, comprising Justices Manish Pitale and Shreeram V. Shirsat, framed the issue for examination while acknowledging the pendency of the petitioners' securitisation application before the DRT. The Court explicitly stated:
"We would like to examine the question. We are conscious of the fact that the petitioners have filed a securitisation application before the Debts Recovery Tribunal (DRT), which is pending. We are not staying the proceedings before the DRT."
The Court's approach indicates a doctrinal examination of the interplay between the SARFAESI Act and the MSME Development Act. The reference to Supreme Court precedents suggests that the Court may be evaluating:
- Whether MSME classification creates a statutory bar on SARFAESI proceedings
- The jurisdictional hierarchy between the DRT and the MSME facilitation councils under the MSME Act
- The interpretation of "sustainable in law" in the context of the bank's actions
The Court's decision to issue notice for final disposal without staying DRT proceedings reflects a cautious approach, balancing the need for jurisdictional clarity with the avoidance of procedural delays.
The Verdict
The Court issued the following directions:
- Notice for final disposal returnable on 17th July 2026
- Service deemed complete as counsel for respondents waived notice
- Reply affidavit to be filed by 14th July 2026
- No stay granted on DRT proceedings
- The matter to be included in the supplementary list
The Court did not conclusively rule on the jurisdictional question but signaled its intent to examine the legal sustainability of SARFAESI proceedings against MSME-classified borrowers.
What This Means For Similar Cases
MSME Classification as a Jurisdictional Bar
- Practitioners must now argue that MSME classification under the MSME Development Act may limit the applicability of the SARFAESI Act
- Secured creditors should conduct due diligence on borrowers' MSME status before initiating SARFAESI proceedings
- DRT proceedings may face jurisdictional challenges if the borrower is an MSME, potentially leading to delays or dismissals
Precedent-Based Litigation Strategy
- Borrowers can rely on PRO Knits and Shri Shri Swami Samarth to challenge SARFAESI proceedings on jurisdictional grounds
- Banks and financial institutions must distinguish these precedents or demonstrate compliance with MSME-specific recovery mechanisms
- Courts may increasingly scrutinize the interplay between the SARFAESI Act and MSME Development Act, leading to more nuanced interpretations
Procedural Safeguards for Borrowers
- MSME borrowers should proactively file securitisation applications before the DRT to preserve their rights
- Legal notices and representations should explicitly invoke MSME classification as a defense against SARFAESI actions
- Interim relief strategies should focus on preventing asset seizure while jurisdictional questions are resolved
