Recovery Certificate under Debt Recovery Law is not limited to winding up proceedings only but extends to IBC: Clarifies Supreme Court

Ravi Charan Pentapati comments on clarification given by the Apex Court on the aspect of a recovery certificate under the Debt Recovery Law not being limited to winding up proceedings only but further extending to the Insolvency and Bankruptcy Code.

Introduction:

Recently, the Hon’ble Supreme Court in the case of Kotak Mahinda Bank Limited vs A. Balakrishnan & another (Civil Appeal No.689 of 2021) has held that any liability arising out of a recovery certificate needs to be treated as financial debt within vis-à-vis clause (8) of Section 5 of the Insolvency and Bankruptcy Code, 2016¹ and the holder of recovery certificate would be a financial creditor within the meaning of clause (7) of Section 5 of IBC. As such, the holder of such a certificate would be entitled to initiate the Corporate Insolvency Resolution Process if initiated within a period of three years from the date of issuance of the Recovery Certificate.

• Recovery Certificate
• Financial Debt
• Financial Creditor
• 3 years

Short Facts:

• a. Ind Bank Housing Limited² sanction various credit facilities to three borrower entities namely, M/s. Green Gardens Private Limited³, M/s. Gemini Arts Private Limited, M/s. Mahalakshmi Properties & Investments Private Limited during the period of 1993-1994.


• b. M/s. Prasad Properties and Investments Private Limited⁴ stood as guarantor/mortgagor by mortgaging its immovable property to secure the credit facilities sanctioned to Borrower Entities.


• c. The Borrower Units defaulted on the repayment of dues, in response to which IBHL declared them to be Non-performing Assets (NPA) in 1997. IBHL filed three recovery suits before the High Court of Madras against the Borrower Units and the Corporate Debtor. While the suits were pending, IBHL entered into a Deed of Assignment with Kotak Mahindra Bank Limited⁵ in 2006, assigning all its title, rights, interests, claims and demands to KMBL.


• d. KMBL and Borrower Units subsequently entered into a compromise agreement in the year 2006. However, Borrower Units allegedly failed to make payments as per the compromise agreement. Owing to the said default, KBML issued a demand notice followed by a possession notice under Section 13(2) and Section 13(4) of the SARFAESI Act, 2002. Subsequently, KBML issued a winding up notice under Section 433 and 434 of the Companies Act, 1956. KBML also filed applications under Section 31(A) of the RDDBFI Act, 1993 and the same was allowed by a Debts Recovery Tribunal⁶ in the year 2016. Pursuant to which DRT also issued separate recovery certificates against each of the Borrower Units and Corporate Debtor.


• e. KBML based on the aforesaid recovery certificates filed an application under Section 7 of IBC to initiate Corporate Insolvency Resolution Process⁷. The National Company Law Tribunal⁸ admitted the application vide order dated 20.09.2019 which was reversed by National Company Law Appellate Tribunal⁹ (NCLAT) on the grounds of limitation vide order dated 24.11.2020. An appeal was filed before the Hon’ble Supreme Court.

Issues for consideration:

(i)   Whether a person, who holds a Recovery Certificate would be a financial creditor within the meaning of clause (7) of Section 5 of the IBC?
(ii)   Whether the petition under Section 7 of the IBC was barred by limitation?

Ruling:

• a) A contention was raised before Hon’ble Supreme Court thatcause of action has merged intothe order of issuance of the recovery certificate by the DRT andtherefore, by application of the doctrine of merger, the debt nomore survives and initiation of initiation of CIRP by KMBL would amount to filing of second proceedings for the very same cause of action and thus wouldbe hit by the doctrine of res judicata and particularly, per remjudicatam.


• b) The Hon’ble Supreme Courtupheld the contentions of the precedent in the Dena Bank (Now Bank of Baroda) vs C. Shivakumar Reddy and another where it was held that once a claim fructifies into a final judgment and order/decree, upon adjudication, and a certificate of recovery is also issued authorizing the creditor to realize its decretal dues, a fresh right allows the creditor to recover the amount specified in the Recovery Certificate. However, it has decided to analyze the circumstances and decision of the case as to whether it is per incuriam.


• c) The Hon’ble Supreme Court while analysing the doctrine of per incuriam explained that the term per incuriam applies only when a judgement is in contravention of any existing statute, rule or regulation, or when a judgement/order has been given without paying heed to existing precedents on the matter and rejected the contention that the Dena Bank judgement is per incuriam.


• d) The Hon’ble Supreme Court while evaluating clause (8) of Section 5 and other provisions of theIBC observed that the words “means a debt alongwith interest, if any,which is disbursedagainsttheconsideration for the timevalue of money” are followed by thewords “and includes”. Thereafter various categories (a) to (i)have been mentioned. That by employing the words“and includes”, the legislature has only given instances, whichcould be included in the term “financial debt”. However, the listis not exhaustive but inclusive.The legislative intent could nothave been to exclude a liability in respect of a “claim” arisingout of a recovery certificate from the definition of the term“financial debt”, when such a liability in respect of a “claim”simpliciter would be included in the definition of the term“financial debt”. Accordingly, Hon’ble Supreme Court concluded that liabilities arising out of recovery certificates would be financial debt and the holder of such a certificate is entitled to initiate CIRP under the IBC within three (3) years from the date on which the recovery certificate was issued.


• e) Another contention was put forth before Hon’ble Supreme Court that the recovery certificate is for the limited purpose of initiation ofwinding up proceedings in terms of sub-sections (22) and (22A) of Section 19 of theRecovery of Debts and Bankruptcy Act, 1993¹⁰ .The Hon’ble Supreme Court while rejecting the contention held that the plain and simple interpretation of the wordsused in sub­section (22A) of Section 19 of the Debt RecoveryAct makes it amply clear that the Legislature provided thatfor the purposes of winding­up proceedings against a Company,etc., a recovery certificateissuedbythe PresidingOfficerunder sub­section (22) of Section 19 of the Debt Recovery Actshall be deemed to be a decree or order of the court and there is nothing is sub­section (22A) of Section 19 of the Debt Recovery Act toimply that the Legislature intended to restrict the use of the recovery certificate limitedfor the purposeof winding­upproceedings.


• f) Finally, the Hon’ble Supreme Court held thatthe application under Section 7 of the IBC was filed within a period of three years from the date on which the recovery certificate was issued andNCLAT had erred in holding that it is barred by limitation.

Observations:

The judgement is a boon for creditors who can initiate claim as financial creditors under IBC based on recovery certificate issued under Debt Recovery Act even if the period of limitation from the date of original default has expired so long as they have initiatedrecovery proceedings in time and pursue it to get the adjudication of their claim along with issuance of recovery certificate by the DRT.