Navigating the Doctrine of Election under the IBC

[Akshita Shrivastava is a IV year B.A.LL.B. (Hons.) student at National Law Institute University in Bhopal (M.P.)]

The doctrine of election, a fundamental principle in evidentiary law, has been a subject of extensive discussion and legal interpretation in recent times, particularly in its application within the intricate landscape of insolvency and bankruptcy proceedings. This doctrine comes into play when an aggrieved party has multiple available remedies for the same cause of action and has discretion in choosing one. The recent spotlight cast by the Supreme Court on the doctrine of election in the context of the Insolvency and Bankruptcy Code, 2016 (IBC) brings a fresh perspective to this legal principle. This post delves into the nuances of this doctrine within the IBC and examines its implications, drawing insights from the recent Supreme Court judgment in Tottempudi Salalith v. SBI and the previous judgments of subordinate courts and tribunals

Understanding the Doctrine of Election

The doctrine of election is a pivotal principle of evidentiary law, which is applicable in the instance where there is more than one remedy available to the aggrieved party for same cause of action and the party has a discretion to choose one remedy. This can be availed of only when the remedies are concurrent. There are essentially three elements of this doctrine, (i) the existence of two or more remedies, (ii) inconsistencies in the remedies and (iii) a choice to utilise one of the remedies. It was held that the fulfilment of all of these elements is essential to apply this doctrine. When a person chooses one remedy, he or she loses the right to exercise the other remedy simultaneously.  Further, it is not attractedwhen the ambit and scope of the two remedies is different, as doing so may increase the chances of injustice and inconsistent results. It is also based on the principle of equitable estoppel, meaning that the person will be prevented from asserting a right if he or she chooses to remain silent by their conduct or silence when it was their duty to speak.

Application in the Insolvency Landscape

Recently, the Supreme Court clarified its stance on applying the doctrine of election in the context of IBC. However, prior to this judgment the subordinate tribunals and courts have discussed this doctrine in similar context, but it was never discussed in relation to Recovery of Debts and Bankruptcy Act 1993 (DRT Act). Although both the IBC and the DRT Act deal with financial matters, they have distinct purposes. For instance, in Imperia Infrastructure Ltd. v. Anil Patni, the Supreme Court while applying the doctrine categorically mentioned that a person can approach the forums under the Consumer Protection Act, 1986/2019 or Real Estate Regulatory Authority Act, 2016 or the National Company Law Tribunal (NCLT) under the IBC. The Court estopped the complainants who had previously approached the Consumer Forum from approaching any other forums. This judgment has been reiterated in various subsequent judgments dealing with this doctrine and the IBC. In Vivek Chopra v. ORRIS Infrastructure (P) Ltd, the National Consumer Dispute Resolution Commission disposed off the execution applications in question, while stating this principle. Also, in Mamta Maurya v. Jai Prakash Associates Ltd, the Commission applied the doctrine in holding that the complaint is not maintainable.

While dealing with the application of this doctrine in the case concerning the IBC and Arbitration and Conciliation Act, 1996, the NCLT held in L&T Finance Ltd v. Meka Dredging Company India Ltd, 2018 SCC OnLine NCLT 10870, that both of these statutes operate independently and there is no repugnancy and inconsistency between them, in the case in hand. Furthermore, in Angre Port (P) Ltd. v. TAG 15, the Bombay High Court refused to apply the doctrine, even though the plaintiff already filed the claim before the liquidator of Tag Offshore Ltd. when it filed the suit in question and they both arose from the same cause of action

One key takeaway from these judgments is that the application of doctrine of election is carried out on case-by-case basis, considering the facts and circumstances in each situation. It is also imperative to do so as there cannot be a blanket rule or law in this regard as each and every statute operates independently and to do so would cause severe inconsistencies and may also lead to miscarriage of justice.

Recent Supreme Court Intervention

In the recent judgment in Tottempudi Salalith, the Supreme Court dealt with the contention that, after approaching the Dispute Resolution Tribunal (DRT), banks are barred under the doctrine of election from approaching NCLT under the IBC for the same set of debts. In this case, several banks extended their financial assistance to the corporate debtor, i.e., Totem Infrastructures Limited. Upon a failure to repay the loan, the banks filed three applications under the DRT Act, two before DRT, Hyderabad and one in Bengaluru, which led to the issuance of three recovery certificates by the respective tribunals. They also initiated proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (SARFAESI Act). Subsequently, the State Bank of India initiated proceedings before the NCLT under section 7 of the IBC, which admitted the application. This was challenged by the managing director of the corporate debtor before the Appellate Tribunal and later before the Supreme Court on the grounds of doctrine of election and limitation.

While acknowledging that the recovery certificate itself give rise to a fresh cause of action, the Supreme Court held that the doctrine of election cannot be used to prevent a financial creditor from initiating the corporate insolvency resolution process (CIRP) under the IBC. It is because the two statutes provide different reliefs and, once a moratorium is declared after the initiation of CIRP, the mechanisms under the DRT Act and SARFAESI Act get suspended. Further, it was stated that the aggrieved party is given the choice to elect between the DRT Act and the IBC only after a recovery certificate is issued. The Court also mentioned the differences between the two statutes; the IBC is not considered a debt recovery mechanism but rather it is for the revival of the company after it has fallen in debt. However, in doing so, the procedure mentioned in the IBC pertains to the recovery of debts.

Various precedents were also referred by the Supreme Court. Similar to the facts of the instant case, in Kotak Mahindra Bank Limited v. A. Balakrishnan, the Court held that a recovery certificate arising from the proceedings of DRT paves the way for a fresh cause of action, even allowing the financial creditor to initiate CIRP and invoke the mechanism under the IBC. The judgment in Transcore ­vs­ Union of India was referred to the extent that even though the proceedings were instituted under DRT Act, the application under SARFAESI Act was allowed.

Conclusion

Under the ever-evolving insolvency and bankruptcy law, the doctrine of election has emerged as a crucial and dynamic legal principle. Its application, especially within the context of the IBC, has been a matter of both complexity and significance. Previously, there were few instances when the courts have discussed this doctrine in the context of the IBC. However, the recent Supreme Court judgment in Tottempudi Salalith has clarified that seeking redress under the IBC, after initiating proceedings under the DRT Act, is not barred by this doctrine. The judgment recognizes the distinct purposes of these two legal frameworks and the different reliefs they offer. By explicitly excluding the applicability of the doctrine of election from IBC and DRT resolutions, the decision represents a pivotal shift in the legal landscape, bringing clarity and coherence to the insolvency and bankruptcy process. The exclusion of the doctrine of election streamlines the resolution process, allowing for greater efficiency and effectiveness in addressing the financial distress of individuals and businesses, thus aligning with the overarching objectives of the IBC. Furthermore, this judgment will have profound implications on the strategies employed by creditors, debtors, and resolution professionals involved in insolvency cases under the IBC, and it will foster a more predictable and consistent legal framework for these proceedings.

– Akshita Shrivastava