Recovery Certificate can bring new life to debt and the holder can initiate CIRP as Financial Creditor under IBC: Supreme Court

Case title:

Kotak Mahindra Bank Ltd. v. A. Balakrishnan & Anr, Civil Appeal No. 689 of 2021

The Supreme Court held that holder of a Recovery Certificate would be entitled to initiate Corporate Insolvency Resolution Process (“CIRP”) within 3 years from the date of issuance of such Certificate. The Court observed that liability in respect of a claim arising out of a Recovery Certificate would be a “financial debt” within the meaning of clause (8) of Section 5 of the Insolvency and Bankruptcy Code, 2016 (“IBC”). Consequently, the holder of the Recovery Certificate would be a financial creditor within the meaning of clause (7) of Section 5 of the IBC.

The present appeal challenges the order of NCLAT holding that the application filed by the petitioner is barred by limitation and the issuance of a Recovery Certificate would not trigger the right to sue.

Brief Facts of the Case

Ind Bank Housing Ltd. (“IBHL”) had sanctioned separate credit facilities to different entities of the Corporate Debtor. These entities defaulted in repayment of the dues and subsequently, all the facilities availed by them were classified as Non-Performing Assets in November 1997. Pursuant thereto, three civil suits were filed before the High Court of Madras, against the borrower entities and the Corporate Debtor, for recovery of the amounts due. During the pendency of the suits, the appellant-Kotak Mahindra Bank Ltd. (“KMBL”) and IBHL entered into a Deed of Assignment dated 13th October 2006, wherein IBHL assigned all its rights, title, interest, estate, claim and demand to the debts due from borrower entities, to KMBL. KMBL filed three applications under Section 31(A) of the erstwhile Recovery of Debts Due to Banks and Financial Institutions Act, 1993, now known as the Recovery of Debts and Bankruptcy Act, 1993. The applications were allowed by the DRT and separate Recovery Certificates dated 7th June 2017 and 20th October 2017 came to be issued against each of the borrower entities and the Corporate Debtor. Based on the aforementioned Recovery Certificates, on 5th October 2018 KMBL, claiming to be a financial creditor, filed an application under Section 7 of IBC before the learned NCLT and sought initiation of CIRP against the Corporate Debtor.

Conclusion

The present appeal is concerned with mainly three issues. Firstly, whether the judgement of this Court in Dena Bank v. C. Shivakumar Reddy & Anr. was per incuriam and ignored provisions of the relevant status and judgements of the larger bench in Jignesh Shah v. Union of India and Gaurav Hargovindbhai Dave v. Asset Reconstruction Company (India) Ltd. Secondly, whether liability in respect of a ‘claim’ arising out of a Recovery Certificate would be included within the meaning of ‘financial debt’ and subsequently, decree-holder be considered financial creditor under IBC. Consequently, whether issuance of a Recovery Certificate gives rise to a fresh cause of action. Lastly, whether under Section 19(22A) of the Debt Recovery Act, the recovery certificates are deemed to be ‘decree’ and therefore, cannot allow the decree-holder to initiate CIRP proceedings against the Corporate Debtor.

The Court while considering the question as to whether the judgment of this Court in the case of Dena Bank is contrary to the judgments of the three-Judge Bench of this Court in the cases of  Jignesh Shah and Gaurav Hargovindbhai Dave, observed that a judgment is said to be per incuriam when any provision of a statute, rule or regulation is not brought to the notice of the court or it is inconsistent with previous judgments passed by co-ordinate or larger bench. However, in the case of Dena Bank, the Court found that all relevant provisions of the IBC and earlier judgments were relied upon; neither was it inconsistent with the earlier judgments of the Apex Court.

While analysing this issue, the court also analysed the trigger point for the initiation of CIRP.  The Court noted that the trigger point for initiation of   CIRP   is default of claim and “Default” is non­payment of debt by the debtor or the Corporate Debtor, which has become due and payable. Further, a “debt” is a liability or obligation in respect of a claim which is due from any person, and a “claim” means a right to payment, whether such a right is reduced to judgment or not. Therefore, the court taking into consideration the object and purpose of the IBC, observed that the legislature could never have intended to keep a debt, which is crystallized in the form of a decree, outside the ambit of clause (8) of Section 5 of the IBC.

The court while affirming the judgement of two­Judge Bench of this Court in the case of Dena Bank, held that “liability in respect of a claim arising out of a Recovery Certificate would be a financial debt within the ambit of its definition under clause (8) of Section 5 of the IBC, as a natural corollary thereof, the holder of such Recovery Certificate would be a financial creditor within the meaning of clause (7) of Section 5 of the IBC. As such, such a person would be a person as provided under Section 6 of the IBC who would be entitled to initiate the CIRP.” Further, the date of limitation would begin from the issuance of the Recovery Certificate as the same gives rise to a fresh cause of action.

For the last issue, the court observed that once a Recovery Certificate is issued by the Presiding Officer under Section 19(22) of the Debt Recovery Act and in view of sub­section (22A) of Section 19 it will be deemed to be a decree or order of the Court for initiation of winding­up proceedings of a Company.  However, there is nothing in this section of the Act to imply that the Legislature intended to restrict the use of the Recovery  Certificate to winding­up proceedings. Further, the court observed

“when the Legislature itself has provided that any  Recovery  Certificate  issued under sub­section (22) of Section 19 of the Act will be deemed to be a decree or order of the Court for initiation of winding­up proceedings, which proceedings are much severe in nature, it will be difficult to accept that the Legislature intended that such a Recovery Certificate could not be used for initiation of CIRP, which would enable the Corporate Debtor to continue as an on­going concern and, at the same time, pay the dues of the creditors to the maximum.”

Since in the present case, the application under Section 7 of the IBC was filed within 3 years of the date of issuance of the recovery certificate, the court allowed the appeal and set aside the NCLAT order in which the tribunal held that the application is barred by limitation. The court also noted that the issues on merit will not be dealt with by this court and the parties are free to bring the same before the learned NCLT.