MSME borrower cannot raise grounds in later proceedings when they were available in earlier SARFAESI litigation: Kerala high court

Kerala High Court rules that MSME borrowers cannot introduce new grounds in later proceedings if they were available in earlier SARFAESI litigation.

The Kerala High Court, in Soubhagye Road Builders & Ors. v. Reserve Bank of India & Ors., W.A. No. 1560 of 2026, decided on 1 September 2026, examined whether an MSME borrower could subsequently rely on the MSME Notification dated 29 May 2015 and the RBI Circular dated 17 March 2016 to challenge auction proceedings initiated under the SARFAESI Act.

The appellants had availed an overdraft facility from the bank. After the account was classified as an NPA, the bank initiated proceedings under the SARFAESI Act. The borrowers had earlier approached the High Court challenging the recovery proceedings. That writ petition was dismissed, while leaving them at liberty to challenge the measures taken by the secured creditor in accordance with the SARFAESI Act. Instead of approaching the Debt Recovery Tribunal, the appellants filed another writ petition and sought protection under the MSME Notification and RBI Circular.

The appellants argued that the MSME framework required the bank to follow the prescribed revival and rehabilitation mechanism before proceeding with recovery measures. The Court, however, noted that the appellants had not approached the bank to avail themselves of the framework after the Section 13(2) demand notice was issued and had not made an application for rehabilitation.

The Court further observed that if the appellants believed that the SARFAESI proceedings had been initiated in disregard of the MSME Notification and RBI guidelines, that ground was available to them during the earlier round of litigation. The subsequent issuance of an auction notice did not create an independent basis to reopen the earlier challenge. The Court held that the appellants could not selectively raise grounds in successive proceedings when those grounds were already available to them earlier.

In reaching this conclusion, the Court relied on the Henderson Principle, as explained by the Supreme Court in CELIR LLP v. Sumati Prasad Bafna & Ors., and the principles underlying constructive res judicata. The Court emphasised that parties are expected to bring forward the claims and grounds that properly belong to the subject matter of the earlier litigation and cannot ordinarily seek to reopen the same dispute on grounds that could have been raised previously.

Importantly, the High Court did not decide the underlying SARFAESI dispute on merits. It declined to interfere with the Single Judge's order and reiterated that the appellants had an efficacious statutory remedy before the DRT under Section 17 of the SARFAESI Act. The Court permitted the appellants to approach the DRT within three weeks, without insisting on an application for condonation of delay.

The decision therefore highlights the importance of raising all available grounds at the appropriate stage of litigation. A subsequent auction notice cannot, by itself, be used to reopen an earlier SARFAESI challenge by introducing grounds that were already available to the borrower.

Citation: Soubhagye Road Builders & Ors. v. Reserve Bank of India & Ors., W.A. No. 1560 of 2026, decided on 1 September 2026.