IBC | Doctrine Of Election Can't Prevent Financial Creditor From Initiating CIRP Against Corporate Debtor: Supreme Court

The Supreme Court has held that the 'Doctrine of Election' cannot be applied to prevent a Financial Creditor from approaching the National Company Law Tribunal (NCLT) for initiation of Corporate Insolvency Resolution Process (“CIRP”) against a Corporate Debtor, under the Insolvency and Bankruptcy Code, 2016 (IBC).

The Doctrine of Election is embodied in the law of evidence, which bars prosecution of the same right in two different fora based on the same cause of action.

The Bench comprising Justice Aniruddha Bose and Justice Vikram Nath, has observed, “The question of election between the fora for enforcement of debt under the 1993 Act and initiation of CIRP under the IBC arises only after a recovery certificate is issued. The reliefs under the two statutes are different and once CIRP results in declaration of moratorium, the enforcement mechanism under the 1993 Act or the SARFAESI Act gets suspended. In such circumstances, after issue of recovery certificate, the financial creditor ought to have option for enforcing recovery through a new forum instead of sticking on to the mechanism through which recovery certificate was issued.

BACKGROUND FACTS

Several banks including the State Bank of India (“Financial Creditor/SBI”) had extended credit facilities to Totem Infrastructures Limited (“Borrower/Corporate Debtor”). When the Corporate Debtor failed to repay the loans, three recovery proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”) were instituted against it before the Debt Recovery Tribunal (“DRT”).

In 2015, the DRT issued a Recovery Certificate against the Corporate Debtor and subsequently two more Recovery Certificates were issued in 2017. The SBI had stake in each one of them.

On 06.09.2019, the SBI filed a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”), seeking initiation of Corporate Insolvency Resolution Process (“CIRP”) against the Corporate Debtor, for defaulting in payment towards the three Recovery Certificates.

On 12.01.2021, the National Company Law Tribunal (“NCLT”) initiated CIRP against the Corporate Debtor. Mr. Tottempudi Salalith (“Appellant”) is the Managing Director of Corporate Debtor. The Appellant challenged the NCLT order before the National Company Law Appellate Tribunal (“NCLAT”).

The Appellant contended that the petition under Section 7 of IBC was barred by limitation since one of the Recovery Certificates dated back to 2015 and the Section 7 petition was filed in 2019. Moreover, the date of default should be the date when the Corporate Debtor's account was declared Non Performing Asset (NPA). The date of default cannot commence from the date of Recovery Certificate. Further, banks having approached the DRT, were barred under the doctrine of election from approaching the NCLT for recovery of same set of debts.

The NCLAT dismissed the appeal. Consequently, the Appellant filed an appeal before the Supreme Court.

SUPREME COURT VERDICT

On the issue of applicability of Doctrine of Election, the Court opined that the said doctrine is embodied in the law of evidence, which bars prosecution of the same right in two different fora based on the same cause of action. However, in the case under consideration, the recovery proceedings before the DRT commenced in 2014 when IBC had not come into existence.

Reliance was placed on Kotak Mahindra Bank Limited vs A. Balakrishnan and Anr., 2022 LiveLaw (SC) 534, wherein it was held as under:

“To conclude, we hold that a 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 IBC. Consequently, the holder of the recovery certificate would be a financial creditor within the meaning of clause (7) of Section 5 IBC. As such, the holder of such certificate would be entitled to initiate CIRP, if initiated within a period of three years from the date of issuance of the recovery certificate.”

The Court noted that in Kotak Mahindra Bank Limited vs A. Balakrishnan and Anr., the right of the Financial Creditor to invoke the mechanism under the IBC after issue of recovery certificate stood acknowledged as a valid legal course.

While differentiating between the mechanisms under Recovery of Debts and Bankruptcy Act, 1993 (“1993 Act”) and the IBC, it was observed as under:

“The enforcement mechanism for a recovery certificate is an independent course, which a financial creditor may opt for realisation of its dues crystalised under the 1993 Act, instead of chasing the mechanism under the 1993 Act. The IBC itself is not really a debt recovery mechanism but a mechanism for revival of a company fallen in debt, but the procedure envisaged in the IBC substantially relates to ensuring recovery of debts in the process of applying such mechanism.”

The Court held that the doctrine of election cannot be applied to prevent the Financial Creditors from approaching the NCLT for initiation of CIRP.

“The question of election between the fora for enforcement of debt under the 1993 Act and initiation of CIRP under the IBC arises only after a recovery certificate is issued. The reliefs under the two statutes are different and once CIRP results in declaration of moratorium, the enforcement mechanism under the 1993 Act or the SARFAESI Act gets suspended. In such circumstances, after issue of recovery certificate, the financial creditor ought to have option for enforcing recovery through a new forum instead of sticking on to the mechanism through which recovery certificate was issued. Thus, the doctrine of election cannot be applied to prevent the financial creditors from approaching the NCLT for initiation of CIRP.”

The appeal has been dismissed.

Case Title: Tottempudi Salalith v State Bank Of India & Ors.

Citation: 2023 LiveLaw (SC) 914

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