DRT Can Decide Legality of SARFAESI Action Against MSME Companies: Calcutta High Court
The Calcutta High Court has held that the Debt Recovery Tribunal (DRT) can examine whether SARFAESI proceedings initiated by a bank against MSME companies were legally permissible, including whether the bank complied with the Reserve Bank of India’s framework governing revival and rehabilitation of MSMEs.
The observation was made by a Division Bench comprising Justice Shampa Sarkar and Justice Arjun Ray Mukherjee in Merchant Monger Agrotech Pvt. Ltd. & Ors. v. Indian Bank & Ors., decided on August 25, 2026. The case arose from challenges to SARFAESI measures initiated by Indian Bank against two companies associated with tea-garden operations.
The companies contended that their loan accounts had been incorrectly classified as Non-Performing Assets (NPAs) and that consequential action under Section 13 of the SARFAESI Act was unlawful because the bank had failed to properly consider the RBI’s Framework for Revival and Rehabilitation of MSMEs.
The companies were registered as MSMEs and their credit facilities had been sanctioned under an MSME-related scheme. They argued that the bank was required to identify signs of financial stress and consider the regulatory framework before proceeding with recovery measures.
The bank, however, opposed the challenge and relied upon the conduct of the borrowers. It pointed out that the companies had given an undertaking concerning repayment and closure of one of the loan accounts but had failed to comply with that undertaking. By the time the dispute reached the High Court, the bank had already taken steps under the SARFAESI Act.
A significant factor was that the companies had already approached the DRT under Section 17 of the SARFAESI Act and challenged the bank’s measures there. Against this background, the Division Bench observed that the legality of the SARFAESI action could appropriately be examined by the specialised Tribunal.
The Bench prima facie held that the question whether the SARFAESI proceedings had been rightly initiated, and whether the measures adopted by the bank were legally permissible in view of the RBI’s MSME framework, could be decided by the DRT.
The ruling is important because it recognises that the DRT’s jurisdiction is not confined merely to mechanical scrutiny of SARFAESI notices. Where the legality of the bank’s action depends upon compliance with applicable regulatory requirements, including the RBI framework concerning MSMEs, such questions can also fall for consideration before the Tribunal.
At the same time, the High Court did not hold that the two companies were automatically entitled to restructuring or revival benefits merely because they were MSMEs.
The Bench noted that the Supreme Court’s decisions in Pro Knits and Shri Shri Swami Samarth require an MSME borrower to be vigilant and to follow the prescribed procedure if it seeks protection under the RBI framework. An MSME cannot simply raise its status at a belated stage after SARFAESI proceedings have substantially progressed.
In the case before the Court, the Bench found prima facie that the companies had not clearly sought consideration under the RBI revival framework at the appropriate stage. Their correspondence with the bank largely concerned repayment and regularisation, rather than specifically invoking the framework for revival and rehabilitation.
Consequently, the Division Bench refused to grant interim protection against the ongoing SARFAESI proceedings. The Court observed that the conduct of the borrowers, including their failure to comply with the undertaking given to the bank, was relevant while considering whether interim relief should be granted.
The Bench also found a procedural defect in the manner in which the Single Judge had earlier disposed of the writ petitions. The Single Judge had heard the matters on the question of interim relief but subsequently dismissed the writ petitions on merits without calling for affidavits on the factual disputes raised by the bank.
The Division Bench held that this approach amounted to a procedural irregularity and violated principles of natural justice. It therefore set aside the dismissal orders and directed that the writ petitions be considered after the parties had filed their affidavits.
However, the Division Bench made it clear that its observations were only prima facie and would not determine the ultimate rights of the parties. The Single Judge was directed to independently consider the writ proceedings.
The judgment thus draws an important distinction for MSME borrowers. An MSME can challenge the legality of SARFAESI action and the DRT can examine whether the bank’s action complied with the applicable RBI framework. But the MSME must itself act within the prescribed regulatory process and cannot wait until recovery proceedings have reached an advanced stage before claiming the benefit of the framework.
The decision comes against the backdrop of another recent Calcutta High Court ruling involving Debpara Tea Company Ltd. v. State Bank of India. On September 2, 2026, Justice Krishna Rao dismissed a writ petition where the MSME sought revival-framework benefits after the bank had already issued a Section 13(4) SARFAESI notice and the borrower had invoked the DRT remedy. The Court held that once the borrower had invoked Section 17 before the DRT, the grievance could not ordinarily be adjudicated through the writ proceedings.
Taken together, the recent rulings indicate a clear judicial approach: the DRT remains the principal statutory forum for challenging SARFAESI measures, while MSME status and alleged non-compliance with RBI requirements can form part of the Tribunal’s examination. At the same time, MSME borrowers cannot use the revival framework as a last-minute mechanism to obstruct recovery after SARFAESI action has already advanced.
The Calcutta High Court’s latest ruling therefore reinforces both sides of the regulatory equation—banks must comply with applicable RBI requirements before taking recovery action against eligible MSMEs, but MSME borrowers must also assert their rights promptly and follow the prescribed framework rather than seeking relief only after SARFAESI measures have commenced.
