- 1 - HC-KAR NC: 2025:KHC:53525 WP No. 30511 of 2025 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 15TH DAY OF DECEMBER, 2025 BEFORE THE HON'BLE SMT. JUSTICE LALITHA KANNEGANTI WRIT PETITION NO. 30511 OF 2025 (GM-DRT) BETWEEN: M/S REWARDS SOURCING PVT LTD HAVING OFFICE AT NO 18, SNS PLAZA, FIRST FLOOR, KUMARA KRUPA ROAD, RAJBHAVAN, BANGALORE IN KA- 560 001 REPRESENTED BY ITS AUTHORISED REPRESENTATIVE SHARVANI SACHIDANAND …PETITIONER (BY SRI. HITTINHALLI VARSHA DILIP, ADVOCATE) AND: CANARA BANK Digitally signed by MEGHA MOHAN Location: HIGH COURT OF KARNATAKA - 2 - HC-KAR NC: 2025:KHC:53525 WP No. 30511 of 2025 INFANTRY ROAD II BRANCH, 91, INFANTRY ROAD, BANGALORE- 560 001 …RESPONDENT (BY SMT. MALINI VINAY, ADVOCATE FOR SRI. VINAY SWAMY C., ADVOCATE) THIS WP IS FILED UNDER ARTICLES 226 AND 227 OF PRAYING TO-SET ASIDE THE IMPUGNED DEMAND NOTICE DATED 07.07.2025 ISSUED BY THE RESPONDENT UNDER SECTION 13(2) OF THE SARFAESI ACT, 2002 (PRODUCED AS ANNEXURE-D).B. SET ASIDE THE IMPUGNED REPLY NOTICE DATED 16.09.2025 ISSUED BY THE RESPONDENT (PRODUCED AS ANNEXURE-F). THIS PETITION, COMING ON FOR ORDERS, THIS DAY, ORDER WAS MADE THEREIN AS UNDER: CORAM: HON'BLE SMT. JUSTICE LALITHA KANNEGANTI - 3 - HC-KAR NC: 2025:KHC:53525 WP No. 30511 of 2025 ORAL ORDER The present writ petition is filed seeking the following prayer: “Wherefore, the petitioner prays that this Hon’ble Court may be pleased: A. Issue a writ, order, rule or direction setting aside the impugned Demand Notice dated 07.07.2025 issued by the respondent under Section 13(2) of the SARFAESI Act, 2002 (produced as Annexure-D) Ref:DN/Rewards/1927-2025-26. B. Issue a writ, order, rule or direction setting aside the impugned Reply Notice dated 16.09.2025 issued by the respondent (produced as Annexure-F). C. Grant such other and further reliefs as are just including the costs of this petition, in the interests of justice and equity.” 2. The brief facts of the case are that, the petitioner is a private company and a registered Micro, Small and Medium Enterprise (MSME) which is in the business of retail trade and is engaged in various other professional, scientific and technical activities. Petitioner has availed MSME OD facilities from the respondent in the year 2019 and thereafter, in the year 2020 and 2021, two separate Guaranteed Credit Facilities were availed by the petitioner. All these credit facilities / loans were - 4 - HC-KAR NC: 2025:KHC:53525 WP No. 30511 of 2025 secured by mortgaging the properties / guarantees. Since the petitioner underwent huge losses post COVID pandemic and suffered financially due to economic downturn, the turnover of the company declined from Rs.42 crores in 2018-19 to Rs.5.5 crores in 2024-25 and this led to delay in EMI payments. It is stated that though the petitioner was in difficult position, he ensured that it made repayments towards the loan EMIs. In this context, the petitioner on multiple occasions met the respondent/Bank and sought for loan restructuring by submitting various proposals. And in this regard, he has also sought repeatedly for a conditional No Objection Certificate (NOC) to sell his assets and reduce its liabilities and also sought for restructuring of the loan. As the petitioner is a MSME and falling within the RBI's Framework for Revival and Rehabilitation of MSMEs. It is stated that since June 2023 from the time a formal request to help in reducing the OD limit was made to the respondent/Bank, a total repayment of Rs.3,03,09,094 has been made by the petitioner to the respondent/Bank towards Interest, Principal, Penalty and other charges. It is the case of the petitioner that the respondent Bank has deliberately and maliciously delayed the renewal of - 5 - HC-KAR NC: 2025:KHC:53525 WP No. 30511 of 2025 the OD facility since June, 2023. The respondent Bank kept delaying the renewal on one or the other pretext. Petitioner gave a request for restructuring proposal on 21.06.2025. While this being the case, the Bank has issued notice under Section 13(2) of the SARFAESI Act, dated 07.07.2025 stating that the petitioner's account has become irregular from 03.04.2025 and stands classified as a NPA since 02.07.2025. 3. It is the case of the petitioner that they have paid latest EMI payment on 29.05.2025 and there is absolutely no basis for considering the account of the petitioner as irregular or classify it as NPA. On 04.09.2025, the petitioner has immediately replied to the notice issued under Section 13(2) dated 07.07.2025, seeking for accounts/statements and clarity on how the account has been classified as NPA. Without the proper classification as NPA, SARFAESI proceedings are not maintainable and further it is the case that their company is a MSME and without following the RBIs guidelines, they cannot be declared as NPA. For that, the Bank had given a response dated 16.09.2025, stating that the classification of NPA is correct and the petitioner has acted in accordance with the - 6 - HC-KAR NC: 2025:KHC:53525 WP No. 30511 of 2025 demand notice dated 07.07.2025. Questioning the same, the petitioner is before this Court. 4. Learned counsel appearing for the petitioner submits that the action of the respondent is in contravention of the RBI Circular and guidelines of the respondent/Bank as well. It is the case of the petitioner that there has been no default beyond 90 days in repayment on the part of the petitioner to declare the account as an NPA. It is submitted that though the respondent has issued a notice under Section 13(4) of the SARFAESI Act and they are taking steps to approach respondent/Bank seeking orders under Section 14. They issued the Sale Notification on 19.11.2025 and the auction is scheduled to be held on 24.12.2025. It is submitted that the whole purpose of issuing a reply to 13(2) Notice is to bring all the factual aspects, in this case, that the petitioner's company is a MSME and as per the RBI guidelines, like any other account, they cannot declare their account as NPA. Hence, they have given the reply which was not considered and mechanically reply is given by the Bank. It is submitted that all the subsequent proceedings that are initiated by the - 7 - HC-KAR NC: 2025:KHC:53525 WP No. 30511 of 2025 Bank are contrary to the guidelines issued by the RBI and as such, the same needs to be set aside. 5. Learned counsel appearing for the Bank has filed its objections. As per the objections, it is stated that High Court of Telangana had dismissed the writ petition in case of M/s S V Developers v. State Bank of India, 1that at the stage of issuance of notice under Section 13(2) of the SARFAESI Act, no interference is called for and they have also relied on the judgment of the Karnataka High Court in the case of C.Sarasamma v. KSFC & Others reported in WP.No20356/2018 dated 07.09.2023 submitted that a writ petition is not maintainable against the notice issued under Section 13(2). It is stated that the writ petitioner has raised vague pleadings with regard to the contention that the petitioners unit is an MSME and are entitled to the Notification / Framework issued by the Government of India for restructuring the loans. It is stated that in the reply dated 20.02.2025, the Bank has clarified all the issues and they have given a befitting reply to the reply issued by the petitioner under Section 13(2) 1 2022 SCC ONLINE TS 1357 - 8 - HC-KAR NC: 2025:KHC:53525 WP No. 30511 of 2025 of the SARFAESI Act. It is stated that the reply to the Demand Notice issued by the petitioner though contains a point that they being MSME are entitled to the benefits of restructuring, they have not produced any verifiable documents supported by an affidavit citing reasons for their right to restructure, rehabilitate, which is a legal requirement as per the very notification of MSME of 2015. It is stated that the petitioner has given reply just before the expiry of 60 days period, speaks volumes of the seriousness in claiming any benefit of restructure for repaying the loans. 6. Learned counsel appearing for the respondent/ Bank further submits that the Hon'ble Apex Court in the case of Pro Knits v. Board of Directors of Canara Bank2 has categorically held that the benefit of the framework for revival and rehabilitation has to be initiated before the account turns Non Performing Asset (NPA) and it is incumbent on the part of concerned Micro, Small and Medium Enterprise. To be determined to follow the process laid down under the said 2 (2024) 10 SCC 292 - 9 - HC-KAR NC: 2025:KHC:53525 WP No. 30511 of 2025 framework and bring to the notice of the concerned Bank for producing authenticated and verifiable documents and materials to show eligibility to get benefits on a said framework but not pleading all these grounds subsequent to initiation of SARFAESI proceedings is belated. 7. The counsel has also relied on the judgment in 3Shri Shri Swami Samarth Construction and Finance & Ors v. Board of Directors of NKGSB Co-op Bank Ltd., The Hon'ble Apex Court has clearly justified and has explained how the borrower has to approach the Bank and seek the benefit of the MSME. It is submitted that the petitioner has not filed any single document to establish that they fall under the category for availing the benefit of the MSME. The Bank in its reply has also clarified that the accounts are classified as NPA as per the RBI guidelines and also referred to their reply letter dated 20.02.2025. It is stated that the writ petition is not maintainable before this Court as Section 13(2) is not at all a measure under the SARFAESI Act and the writ petition is not maintainable. 3 2025 SCC ONLINE SC 1566 - 10 - HC-KAR NC: 2025:KHC:53525 WP No. 30511 of 2025 8. Having heard the learned counsels on either side, perused the entire material on record. When once the account is declared as NPA, the Bank will issue notice under Section 13(2) of the SARFAESI Act. Under Section 13(3A) of the Act borrower has a right to give reply to the demand notice issued under Section 13(2). The Bank has an obligation to give reply to the same within 15 days either by accepting or rejecting the same. The whole purpose and the purport of giving an opportunity to the borrowers and also an obligation on the Bank to respond to the same, is not a mere formality but to give a reasoned reply by application of mind. In majority cases the Banks are giving stereotyped replies. In this case also admittedly, the company is registered as MSME as on the date the loan is given by the Bank and the Bank is aware of the same. The replay given by the Bank shows that as a formality reply is given without application of mind. 10. It is submitted that as per the judgments of the Hon’ble Apex Court in the case of Pro Knits and C.Sarasamma referred supra, the borrower has to come up with verifiable documents with an affidavit. If that is the case of - 11 - HC-KAR NC: 2025:KHC:53525 WP No. 30511 of 2025 the Bank and they were able to consider the reply of the petitioner to the 13(2) Notice on this ground, the Bank would have stated so in their reply under Section 13(3A). A perusal of the reply that is given by the Bank makes it clear that the Bank has not replied anything pertaining to the MSME. Bank is relying on the judgments in Shri Shri Swami Samarath Contruction case referred supra, in this case, the Court has observed at paragraph No.7 that the borrower therein does not seem to have ever claimed the benefit in terms of the framework after the demand notice under Section 13(2) of the SARFAESI Act was issued. It is raised the stage of compliance with an order passed by the Magistrate under Section 14 of the SARFAESI Act, the writ petition was filed claiming benefit of the framework to restrain the Bank and its officers from proceeding further under the SARFAESI Act. In the above referred case, petitioner has approached the Bank at a later stage. The Hon’ble Apex Court had held that he ought to have taken the stand when 13(2) notice is issued. In Pro Knit's case referred supra, in paragraph No.22, the Hon'ble Apex Court has observed that the Banks are not obliged to adopt the restructuring process on its own or that the Framework - 12 - HC-KAR NC: 2025:KHC:53525 WP No. 30511 of 2025 contained in the Notification dated 29.05.2015, as revised from time to time could not be said to be mandatory in nature, are highly erroneous and cannot be countenanced and accordingly, set aside the order passed by the High Court. 11. Learned counsel in her submission has relied on the judgment of the Apex Court in ITC v. Blue Coast Hotels Limited 4she relied on paragraph Nos. 20 to 27, which reads as follows: “20. The Act and the Rules thus provide for a locus poenitentiae. The borrower may raise an objection or make a representation of any nature that the creditor must consider, and if found not acceptable, may reject the same before proceeding to resort to any of the measures provided by Section 13(4) of the Act. The borrower may thus raise an objection against the proposed measures or make a representation explaining the circumstances in which he cannot discharge his liabilities and propose reschedulement. This may result in reconsideration by the creditor of whether or not it would be prudent to carry out the proposed measures and may even result in a renovation of the contract. 21. Sub-section (3-A) of Section 13 was introduced in the Act by Parliament in pursuance of the following observations of this Court in Mardia [Mardia Chemicals Ltd. v. Union of India, (2004) 4 SCC 311] Chemicals: (SCC p. 347, para 45) 4 (2018) SCC 99 - 13 - HC-KAR NC: 2025:KHC:53525 WP No. 30511 of 2025 “45. … The purpose of serving a notice upon the borrower under sub-section (2) of Section 13 of the Act is, that a reply may be submitted by the borrower explaining the reasons as to why measures may or may not be taken under sub- section (4) of Section 13 in case of non-compliance with notice within 60 days. The creditor must apply its mind to the objections raised in reply to such notice and an internal mechanism must be particularly evolved to consider such objections raised in the reply to the notice. There may be some meaningful consideration of the objections raised rather than to ritually reject them and proceed to take drastic measures under sub-section (4) of Section 13 of the Act. Once such a duty is envisaged on the part of the creditor it would only be conducive to the principles of fairness on the part of the Banks and financial institutions in dealing with their borrowers to apprise them of the reason for not accepting the objections or points raised in reply to the notice served upon them before proceeding to take measures under sub-section (4) of Section 13. Such reasons, overruling the objections of the borrower, must also be communicated to the borrower by the secured creditor. It will only be in fulfilment of a requirement of reasonableness and fairness in the dealings of institutional financing which is so important from the point of view of the economy of the country and would serve the purpose in the growth of a healthy economy. It would certainly provide guidance to the secured debtors in general in conducting the affairs in a manner that they may not be found defaulting and being made liable for the unsavoury steps contained under sub-section (4) of Section 13. At the same time, more importantly, we must make it clear unequivocally that communication of the reasons for not accepting the objections taken by the secured borrower may not be taken to give occasion to resort to such proceedings which are not permissible under the provisions of the Act. But communication of reasons not to accept the objections of the borrower, would certainly be for the purpose of his knowledge which would be a step forward towards his right to know - 14 - HC-KAR NC: 2025:KHC:53525 WP No. 30511 of 2025 as to why his objections have not been accepted by the secured creditor who intends to resort to harsh steps of taking over the management/business of viz. secured assets without intervention of the court. Such a person in respect of whom steps under Section 13(4) of the Act are likely to be taken cannot be denied the right to know the reason of non-acceptance and of his objections. It is true, as per the provisions under the Act, he may not be entitled to challenge the reasons communicated or the likely action of the secured creditor at that point of time unless his right to approach the Debts Recovery Tribunal as provided under Section 17 of the Act matures on any measure having been taken under sub-section (4) of Section 13 of the Act.” (emphasis supplied) 22. Parliament transformed the observations of this Court into a provision in the Act with a plain intention to introduce a pause for the creditor to rethink and reconsider the action proposed by the debtor. It is a departure from the usual steps that an ordinary creditor is bound to take for recovering the loan i.e. through the intervention of the Court. 23. The question that arises for consideration before us is whether Parliament intended for a total invalidity to result from the failure to reply and give reasons for the non-acceptance of the borrower's representation. In other words, whether sub- section (3-A) of Section 13 is mandatory or directory in nature. 24. There is no doubt that if a reply with reasons is an integral and indispensable part of the statutory scheme, the courts would not excuse a departure from it. But, on the other hand, if the reply is merely a direction and not of substance to the scheme, the non-compliance may be excused. 25. This question must be answered upon a construction of the statute according to its true intent by taking into account the language in which - 15 - HC-KAR NC: 2025:KHC:53525 WP No. 30511 of 2025 the intent is clothed. In a passage from Crawford's Statutory Construction, it is stated: “The question as to whether a statute is mandatory or directory depends upon the intent of the legislature and not upon the language in which the intent is clothed. The meaning and intention of the legislature must govern, and these are to be ascertained not only from the phraseology of the provision, but also by considering its nature, its design, and the consequences which would follow from construing it the one way or the other.” [ Passage from Crawford: Statutory Construction, p. 516] This has been followed in several decisions of the Supreme Court [State of U.P. v. Manbodhan Lal Srivastava, AIR 1957 SC 912 at p. 918 : 1958 SCR 533; State of U.P. v. Babu Ram Upadhya, AIR 1961 SC 751 : (1961) 2 SCR 679 : (1961) 1 Cri LJ 773; Special Reference No. 1 of 1998 (Article 143 of the Constitution of India), In re, (1998) 7 SCC 739 at p. 769; State of Mysore v. V.K. Kangan, (1976) 2 SCC 895, p. 899 : AIR 1975 SC 2190 at p. 2192; Govindlal Chhaganlal Patel v. Agricultural Produce Market Committee, (1975) 2 SCC 482, p. 487 : AIR 1976 SC 263 at p. 267; Ganesh Prasad Sah Kesari v. Lakshmi Narayan Gupta, (1985) 3 SCC 53 at pp. 59- 60 : AIR 1985 SC 964; B.P. Khemka (P) Ltd. v. Birendra Kumar Bhowmick, (1987) 2 SCC 407 at p. 415 : AIR 1987 SC 1010; M.V. Vali Pero v. Fernandeo Lopez, (1989) 4 SCC 671, p. 681 : AIR 1989 SC 2206 at p. 2213; State of M.P. v. Pradeep Kumar, (2000) 7 SCC 372 at p. 377 and Sarla Goel v. Kishan Chand, (2009) 7 SCC 658 at pp. 668-69, para 30 : (2009) 3 SCC (Civ) 243.] . Subbarao, J. in State of U.P. v. Babu Ram Upadhya [State of U.P. v. Babu Ram Upadhya, AIR 1961 SC 751 : (1961) 2 SCR 679 : (1961) 1 Cri LJ 773] points out: “For ascertaining the real intention of the legislature, the court may consider, inter alia, the nature and design of the statute, and the consequences which would follow from construing it the one way or the other; the impact of other - 16 - HC-KAR NC: 2025:KHC:53525 WP No. 30511 of 2025 provisions whereby the necessity of complying with the provisions in question is avoided, the circumstances, namely, that the statute provides for a contingency of the non-compliance with the provisions, the fact that the non-compliance with the provisions is or is not visited by some penalty; the serious or the trivial consequences, that flow therefrom; and above all, whether the object of the legislation will be defeated or furthered.” (AIR p. 765, para 29) 26. We find the language of sub-section (3-A) to be clearly impulsive. It states that the secured creditor “shall consider such representation or objection and further, if such representation or objection is not acceptable or tenable, he shall communicate the reasons for non-acceptance” thereof. We see no reason to marginalise or dilute the impact of the use of the imperative “shall” by reading it as “may”. The word “shall” invariably raises a presumption that the particular provision is imperative [State of U.P. v. Manbodhan Lal Srivastava, AIR 1957 SC 912 at p. 917 : 1958 SCR 533] . 27. There is nothing in the legislative scheme of Section 13(3-A) which requires the Court to consider whether or not, the word “shall” is to be treated as directory in the provision. As the section stood originally, there was no provision for the abovementioned requirement of a debtor to make a representation or raise any objection to the notice issued by the creditor under Section 13(2). As it was introduced via sub-section (3-A), it could not be the intention of Parliament for the provision to be futile and for the discretion to ignore the objection/representation and proceed to take measures, be left with the creditor. There is a clear intendment to provide for a locus poenitentiae which requires an active consideration by the creditor and a reasoned order as to why the debtor's representation has not been accepted.” - 17 - HC-KAR NC: 2025:KHC:53525 WP No. 30511 of 2025 12. The whole purpose of issuance of the RBI guidelines in respect of MSMEs is to protect the small and medium enterprises from abrupt, arbitrary and disproportionate recovery action, while ensuing financial discipline in the Banking system. The respondent/Bank is bound by the guidelines issued by the RBI in this regard from time to time. If the objections are not raised by the borrower, to the notice issued by the secured creditor under Section 13(2) of the Act, in the light of the judgment, in Swami Samarath Construction referred supra, such a ground is not available to the borrower at a subsequent point of time. The argument of the learned counsel for the respondent/Bank is that unless and until with a verifiable document and affidavits are not placed, that itself is a ground for not considering the case of the MSME. The argument that is advanced by the counsel for the Bank is the reason for rejection, it would have reflected in the reply given by the Bank. Now the counsel submits that they have stated this in their objections. The Bank cannot supplement its view by way of objections in the writ petition and it will not cure the defect in the reply given by them. - 18 - HC-KAR NC: 2025:KHC:53525 WP No. 30511 of 2025 13. Learned counsel submits that after the notice under Section 13(2) was issued, they have paid certain amounts to the Bank. 14. Learned counsel appearing for the petitioner submits that there is a typographical mistake in mentioning the name of the company, it should be “Rewards Sourcing Pvt. Ltd.”, but in the Demand Notice it is mentioned as “Rewards Resourcing Pvt Ltd. Company”. 15. Learned counsel appearing for the respondent/Bank submits that they will rectify the same. 16. In the light of the above discussion, this Court is of the view that the demand notice issued under Section 13(2) has to be set aside and the Bank is at liberty to issue a fresh demand notice stating, what is the outstanding amount that has to be paid to the Bank. In view of the same, this Court is passing the following: ORDER i. The impugned Demand Notice dated 07.07.2025 issued by respondent/Bank under - 19 - HC-KAR NC: 2025:KHC:53525 WP No. 30511 of 2025 Section 13(2) of the SARFAESI Act, 2002 is set aside and all consequential proceedings that are initiated by the respondent/Bank are also set aside. ii. The Bank is at liberty to give a fresh notice under Section 13(2) of the SARFAESI Act, the borrower is at liberty to reply to the same or approach the Bank as per the Circulars that are issued by the Reserve Bank of India from time to time for the benefit of the MSME. iii. According, the writ petition is allowed. iv. All pending I.As., in the petition shall stand closed. SD/- (LALITHA KANNEGANTI) JUDGE PSJ List No.: 1 Sl No.: 39