MSME Benefits Can’t Be Claimed as a Last-Minute Shield After SARFAESI Actions Begin: Orissa High Court Clarifies Borrower’s Duty

“An MSME must assert its status and invoke the RBI Framework at the stage of reply to Section 13(2) notice—silence amounts to waiver” —  In a significant judgment clarifying the obligations of MSME borrowers under the SARFAESI Act, the Orissa High Court has ruled that a borrower cannot belatedly claim benefits under the RBI's MSME Revival Framework after the secured creditor has already taken advanced steps under the SARFAESI process.

Division Bench comprising Justice B. P. Routray and Justice Chittaranjan Dash dismissed a writ petition challenging e-auction proceedings initiated by Indian Bank for sale of mortgaged residential properties belonging to a defaulting borrower. The Court held that there was “no arbitrariness or procedural impropriety” on part of the Bank and stated that “the borrower cannot take shelter under the MSME Framework after the horse has bolted.”

“MSME Status Must Be Asserted With an Affidavit in Reply to Section 13(2) Notice — Silence Cannot Be Rewarded”

The Court began its judgment by addressing the core of the Petitioner’s grievance — that Indian Bank had reduced the reserve prices of mortgaged residential properties in a third round of e-auction held in January 2024 and failed to consider the Petitioner's MSME status while initiating SARFAESI measures.

However, the Court firmly rejected this plea, stating:

“No material has been placed to demonstrate that the Petitioner, in response to the demand notice issued under Section 13(2) of the SARFAESI Act, ever asserted its MSME status or sought the benefit of the RBI framework by filing objections supported by an affidavit, as mandatorily contemplated.”

It was noted that the Petitioner had failed to submit any restructuring proposal or revival package despite being an MSME. The Court cited with approval the rulings of the Supreme Court in M/s Pro Knits v. Canara Bank (2024 INSC 56) and Shri Shri Swamy and Finance Solution v. NKGSB Co-op Bank Ltd. (2025 INSC 908), reiterating that the RBI’s Framework for Revival and Rehabilitation of MSMEs places a corresponding obligation on the borrower to proactively claim benefits at the earliest stage.

Quoting from Shri Shri Swamy, the Court observed: “If such an Enterprise allows the entire process for enforcement of security interest under the SARFAESI Act to be over... it could not be permitted to misuse the process of law for thwarting the actions taken under the SARFAESI Act by raising the plea of being an MSME at a belated stage.”

“SARFAESI Is Not a Safe Haven for Strategic Defaults — Borrowers Must Act With Diligence”

Rejecting the contention that the Bank acted arbitrarily in reducing reserve prices, the Bench held that repeated failure of auction attempts warranted revision, and such reduction was undertaken strictly in compliance with Rules 8 and 9 of the SARFAESI Rules, 2002.

“The reduction of reserve price by 10% in the third auction was strictly in accordance with bank guidelines and SARFAESI Rules after repeated auction failures,” the Court remarked.

The Petitioner’s reliance on independent valuation reports was also dismissed as “misleading” and contrary to official norms.

In a sharply worded observation, the Court noted: “The Petitioner, having failed to avail the statutory remedies in the manner and at the stage prescribed by law, cannot be permitted to invoke the equitable jurisdiction of this Court to stall proceedings lawfully initiated under the SARFAESI Act.”

Emphasizing the measured approach of the Bank, the Court acknowledged that one mortgaged property had been released to allow the Petitioner to liquidate dues, FDRs had been adjusted, and further deposits were accepted — all showing that the Bank had extended substantial latitude before proceeding with recovery.

“The Bank adopted a fair, measured and restrained approach. There is no arbitrariness or procedural impropriety,” the Court held.

Judicial Refusal to Rescue: Court Dismisses Writ Petition with Strong Caution Against Misuse of MSME Label

Concluding that there was no violation of statutory mandate, the Court dismissed the writ petition and upheld the auction proceedings as lawful, stating: “The measures initiated by the Bank are in consonance with the provisions of the SARFAESI Act and the Rules framed thereunder, and no arbitrariness, procedural impropriety, or violation of statutory mandate is discernible.”

The verdict reinforces the principle that borrowers cannot lie low during crucial procedural stages and later invoke judicial protection, especially when they have defaulted on loans and the lender has complied with the legal framework.

Date of Decision: 30 January 2026