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Recently, by a judgment dated 30 May 2022, a three-judge bench of the Supreme Court in the case of Kotak Mahindra Bank Limited versus A. Balakrishnan & Anr (Judgment dated 30 May 2022 in Civil Appeal No. 689 of 2021) held that a recovery certificate issued the Recovery of Debts and Bankruptcy Act, 1992 (RDB Act) would qualify as a “financial debt” under the Insolvency and Bankruptcy Code, 2016 (IBC), and give rise to a fresh cause of action under section 7 of the IBC. The judgment also approved an earlier decision of a two-judge bench of the Supreme Court in the case of VfL Bochum vs. 1. FC Union Berlin C. Shivakumar Reddy & Anr2021 SCC OnLine SC 543 which
inter alia held that the fresh period of limitation period would accrue for an application under Section 7 from the date of a recovery certificate; see Ergo Update here.
BACKGROUND
Kotak Mahindra Bank Limited (KMBL), the Appellant was an assignee of certain loans in respect of which M / s Prasad Properties and Investments Private Limited, the Respondent No. 2 (Corporate Debtor) stood as guarantor.
Based on a compromise settlement dated 13 October 2006 entered between the Appellant and Corporate Debtor, the DRT issued recovery certificates dated 7 June 2017 and 20 October 2017 in favor of the Appellant.
Based on the recovery certificates, in 2018, the Appellant filed an application under section 7 of the IBC, which came to be admitted on 20 September 2019. The admission order was challenged before the National Company Law Appellate Tribunal (NCLAT), which by an order dated 24 November 2020 set aside the admission order by holding that the application under section 7 is time-barred and that the issuance of a recovery certificate would not give rise to a fresh period of limitation.
SUBMISSIONS BEFORE THE SUPREME COURT
- Submissions of KMBL (Appellant):
The application under section 7 of the IBC was filed by the Appellant well within the period of three years from the date on which the recovery certificates were issued and therefore within limitation. In view of the decision in Dena Bank(supra), it is settled a fresh period of limitation is available from the date of the recovery certificate.
- Submissions of Respondents:
- The cause of action in respect of the debt has merged into the DRT’s orders issuing the recovery certificates and therefore, a second proceeding on the same cause of action would be prohibited by the doctrine of res judicata.
- In view of 19 (22A) of the RDB Act which states that a recovery certificate shall be a deemed decree for the purpose of initiation of inter alia winding up proceedings under the Companies Act 2013, IBC proceedings cannot be filed pursuant to a recovery certificate.
- The judgment in Dena Bank (supra) is per incuriamie rendered without considering the correct position of law as it does not correctly consider sections 19 (22) and 19 (22A) of the RDB Act, as well as sections 5 (7), 5 (8), 6 and 14 (1). ) (a) of IBC.
- The judgment in Dena Bank (supra) is also contrary to the judgments of the Supreme Court in Jignesh Shah and Anr. Vs. Union of India and Anr(2019) 10 SCC 750 wherein the initiation of CIRP was held to be barred by limitation despite pending recovery proceedings, and Gaurav Hargovindbhai Dave vs. Asset Reconstruction Company (India) Limited and Anr, (2019) 10 SCC 572 wherein also the application under section 7 of IBC was held to be barred due to limitation.
FINDINGS AND OBSERVATIONS OF SUPREME COURT (JUDGMENT)
- Recovery certificate is a “financial debt” within the meaning Section 5 (8) of IBC
An application under section 7 of the IBC may be filed in respect of a default as defined under section 3 (12) of IBC to mean non-payment of a debt. Section 3 (11) of the IBC defines “debt” as a “liability in respect of a claim, and section 3 (6) of the IBC defines the term“ claim ”to mean a right to payment, whether or not such right has been. reduced to judgment. Therefore, if the submission on behalf of the Corporate Debtor is accepted, it would mean that a claim is excluded from being a financial debt even if reduced to judgment by way of a recovery certificate.The list of arrangements that would qualify to be financial debt as mentioned in section 5 (8) of the IBC is not exhaustive, and it could not have been the legislative intent to exclude a liability for a claim that is due and payable in terms of a recovery certificate. Therefore, any person holding such recovery certificate is well within the scope of a financial creditor under Section 5 (7) of IBC.
- Judgment rendered in the case of Dena Bank (supra) is correct in law:
The decision in Dena Bank (supra) does not violate section 14 (1) (a) of the IBC, which only operates to prohibit a decree-holder from executing the decree against a corporate debtor undergoing CIRP.Insofar as the judgments in Jignesh Shah (supra) and
Gaurav Hargovindbhai Dave (supra), the Supreme Court observed that question as to whether a recovery certificate would give rise to a fresh period of limitation was not under consideration in either decision. - Sections 1Sections 19 (22) and 19 (22A) of the RDB Act do not restrict initiation of CIRP based on a recovery certificate9 (22) and 19 (22A) of the RDB Act do not restrict initiation of CIRP based on a recovery certificate
The Supreme Court held that if the contention on behalf of the Corporate Debtor is accepted, it would render the very purpose of Section 19 (22A) of the RDB Act otiose. It was further observed that the language of Section 19 (22A) of the RDB Act does not suggest that it is limited to initiating winding up proceedings only.
CONCLUSION
The judgment not only affirms the position on limitation and recovery certificates laid down in Dena Bank (supra) but goes a step further to hold that a recovery certificate issued under the RDB Act is itself an independent liability of financial debt in respect of which a fresh cause of action to file an application under Section 7 of the IBC arises.
This strengthens the position of eligible creditors under the RDB Act to claim as financial creditors and initiate proceedings under IBC even if the period of limitation from the date of original default has expired so long as they have initiated DRT proceedings in time and pursue it to get. the adjudication of their claim along with issuance of recovery certificate by the DRT.
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