The Supreme Court Reiterates the Status of Recovery Certificates under the IBC

[Abhyudaya Yadav and Adhiraj Lath are 4th year B.A., LL.B. (Hons.) students at Dharmashastra National Law University, Jabalpur]

Recently, the Supreme Court of India (“Court”) in Kotak Mahindra Bank Ltd. v. A. Balakrishnan dealt with the issue of whether the issuance of a recovery certificate by a Debt Recovery Tribunal (“DRT”) can be treated as a “financial debt” within the meaning of section 5(8) of the Insolvency and Bankruptcy Code, 2016 (“IBC”). Consequently, can a holder of such a recovery certificate be regarded as a “financial creditor” who has a fresh cause of action to initiate insolvency resolution process (“CIRP”) proceedings under section 7 of the IBC.

The authors seek to analyse this ruling and examine whether the decision arrived at by the Court is arguably deficient in its reasoning while discussing the nature of recovery certificates as “claims” under the scheme of the IBC.

Factual Background

In 1993, separate credit facilities were sanctioned to three different borrower entities namely, Green Garden Pvt. Ltd., Gemini Arts Pvt. Ltd. and Mahalakshmi Properties and Investment Pvt. Ltd. by Ind Bank Housing Ltd. (“IBHL”). Another party, Prasad Properties & Investment Pvt. Ltd. (“corporate debtor”), stood as corporate guarantor in respect of credit facilities availed by the abovementioned entities. Following the default committed by these entities, their credits were classified as non-performing assets (“NPA”) and consequently civil suits were filed against them. IBHL, meanwhile, assigned all its rights, liabilities, interest & claim in respect of such credit to Kotak Mahindra Bank (“KMB” or “certificate holder”).

Pursuant to the assignment deed, KMB entered into compromise with borrower entities and subsequently, the High Court recorded the compromise and issued a decree, in terms of holding corporate debtor and borrower entities jointly and severally liable for default. On account of continuous default by the corporate debtor, proceedings under Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI”) were initiated, but again, the corporate debtor defaulted. Aggrieved by another default, KMB filed an application under section 31(A) of the Recovery of Debts Due to Banks & Financial Institutions Act, 1993 (“DRA”) to obtain recovery certificates against the corporate debtor and borrower entities in terms of the compromise decree. Pursuant to the issuance of recovery certificates by the DRT, KMB filed a fresh application under section 7 of the IBC before the National Company Law Tribunal (“NCLT”) as a financial creditor defined under section 5(7) of the IBC.

The said application came to be admitted by the NCLT and the corporate debtor filed an appeal before the National Company Law Appellate Tribunal (“NCLAT”). The grounds of appeal raised by the corporate debtor were against the initiation of CIRP against the corporate debtor being filed after the expiry of the limitation period. The NCLAT acceded to this ground and subsequently the KMB approached the Supreme Court challenging the judgment given by the NCLAT.

Issue

The focal issue before the Court was whether the issuance of a Recovery Certificate by a DRT be treated as a “financial debt” within the meaning of section 5(8) of the IBC?

Accordingly, would a holder of such a Recovery Certificate be regarded as a “financial creditor” within the meaning of section 5(7) of the IBC. Hence, as a corollary, would such a “financial creditor” have a fresh cause of action to initiate proceedings under section 7 of the IBC.

Ruling and Analysis

The Supreme Court set aside the judgement rendered by NCLAT and allowed the appeal. While doing so, the Court extensively reasoned and addressed the contentions put forth by the parties as discussed below.

Dena Bank- Per Incuriam?

Mr.  Viswanathan, counsel for the corporate debtors, submitted that the judgment of a two-judge bench of the Court in the case of Dena Bank (now Bank of Baroda) v. C. Shivakumar Reddy (“Dena Bank”) was per incuriam. To this end, he submitted that the judgment in Dena Bank has wrongly applied the judgments of this Court in the cases of Jignesh Shah v. Union of India (“Jignesh Shah”) and Gaurav Hargovindbhai Dave v. Asset Reconstruction Company (India) Ltd. (“Gaurav Hargovindbhai”). In Dena Bank, the Court ruled, inter alia, that the issuance of the recovery certificate in favour of the “financial creditor” would give rise to a fresh cause of action to initiate proceedings under section 7 of the IBC.

The Court rejected this contention by thoroughly delving into the rationale behind these decisions. In Jignesh Shah, the Court settled the proposition that the period of limitation for making an application under section 7 or 9 of the IBC was three years from the date of accrual of the right to sue i.e. the date of default. As such, the Court opined, the question for consideration in the present case subtly differed from the issue in Jignesh Shah. The Court distinguished the issue in this case from Jignesh Shah by delineating that a claim which is fructified in a decree would give a “fresh cause of action” to file an application under section 7 of the IBC within a period of three years from such decree, instead of a mere right to sue within a period of three years from date of default as held in Jignesh Shah.

Similarly, in Gaurav Hargovindbhai the Court held that the time began to run from the date when the default was declared as NPA and the application under section 7 of the IBC, which was filed beyond the period of three years, was barred by limitation. The question, as to whether a person would be entitled to file an application for initiation of CIRP within a period of three years from the date on which the decree was passed or a recovery certificate was granted did not fall for consideration in this case.

Moving on to the decision in Dena Bank, the Court examined whether the two-judge bench rightly applied the two earlier decisions of the Court to arrive at a conclusion that once a claim fructifies into a decree and a recovery certificate is issued, a fresh right accrues to the creditor to recover the amount specified in the decree and recovery certificate. The bench in Dena Bank comprehensively considered all relevant provisions of the IBC and cogently applied the reasoning in earlier decisions such as Jignesh Shah and Gaurav Hargovindbhai to persuasively hold that a “fresh cause of action” arises with the financial creditor to initiate proceedings under section 7 of the IBC.

Ultimately, after duly scrutinising the reasoning in Dena Bank, the Court upheld that the issuance of a recovery certificate in favour of a financial creditor would give rise to a fresh cause of action for initiating CIRP proceedings under section 7 within three years from the date of issuance of the recovery certificate. Accordingly, the Court found the contention that the decision in Dena Bank was per incuriam as unsustainable and therefore, warranted no particular interference.

Recovery Certificate- A Fresh “claim” for Initiating CIRP?

The Court, while analysing the scope of the term “financial creditor” under section 5(7) of the IBC though, did not neglect but, rather, fleetingly discussed the relevant provisions. While dealing with the question of whether the holder of a recovery certificate under the DRA would be treated as a financial creditor entitled to file a petition for CIRP under the IBC or not, it becomes apposite to lay emphasis on the jurisprudential framework and scheme of the IBC.

The definition of ‘financial creditor’ provides that a financial creditor is a person to whom a financial debt is owed or has been legally assigned.  Further, section 5(8) of the IBC provides the definition of the term “financial debt”. First among two limbs of this definition states that a financial debt is a debt along with interest which is disbursed against time value and money. If we closely examine the meaning of the term “debt”, in respect of IBC, we find that a debt is a kind of obligation or liability in respect of a claim which is due to either the financial creditor or operational debtor.

Therefore, it becomes necessary to ascertain as to what constitutes a claim? Section 3(6) of the IBC provides that a claim means a right to payment, such right may either be reduced in judgement or not. Such right of payment does not depend whether or not it is fixed, disputed, legal, equitable, secured or unsecured.

In Dena Bank, the Court fittingly stressed that once a claim is fructified into a final decree and a recovery certificate, a fresh right accrues to creditors to recover the amount specified in the recovery certificate. Speaking jurisprudentially, this fresh right of recovery is in the nature of claim, which, in turn, falls under the definition of claim as provided under section 5(6) of the IBC.

Mr.  Vishwanathan, counsel for corporate debtor, contended that the court in Dena Bank missed the relevant provisions of DRA i.e., section 19(22) and 19(22A). He contended that the limited deeming fiction under the said provisions is restricted only to holding a recovery certificate, only for the purpose of initiation of winding up proceedings and other proceedings specified under the DRA. This submission was categorically rejected by the Court since it lacked substantive justification, and if this contention is accepted, it would necessarily defeat the purpose of the DRA. Justice BR Gavai in the present case correctly observed that when the language of statute is plain and simple it is not permissible for judges to add or subtract words. Therefore, as a natural corollary, the Recovery Certificate can possibly be considered as a decree of the court for purposes other than those specified under section 19(22A) of the DRA.

However, it is pertinent to note that the question of whether a recovery certificate is a decree or not is unimportant. What is important is ascertaining whether a recovery certificate is in the nature of a claim regarding default credit payment or not. On the perusal of jurisprudence developed in this regard, it can safely be concluded that even if a recovery certificate is not considered as decree, it is still a claim in respect of defaulted payment, as the word “claim” defined under the IBC means a right to payment whether reduced in a decree or otherwise. If so, it comes under the ambit of the term “debt” and the consequential definitional framework, that is of, financial debt and financial creditor. As noted earlier, once a recovery certificate is issued, it obligates the judgment-debtor to pay their debt against which an application is filed. This gives rise to a fresh claim entitling creditors to initiate CIRP.

Comments

The Court rightly held that it could not give countenance to the fact that a recovery certificate could not be used for initiation of CIRP, which would preclude the creditor from claiming his due against the corporate debtor. However, the authors are of the opinion that the Court, while discussing the nature of claims under the IBC, could have delved deeper into the nature of a recovery certificate issued under the DRA vis-à-vis the IBC to provide definite clarity on the nature of such a document. This nuance could have arguably made the decision more compelling in its considerable reasoning.

– Abhyudaya Yadav & Adhiraj Lath

About the author

Add comment

Subscribe to Blog via Email

Enter your email address to subscribe to this blog and receive notifications of new posts by email.

Top Posts & Pages

Topics

Recent Comments

Archives

web analytics

Social Media