Recovery Certificate Under Debt Recovery Act Is Not Limited To Winding Up Proceedings Only But Extends To IBC: Clarifies Supreme Court

Short Facts:

• Ind Bank Housing Limited^[2] sanction various credit facilities to three borrower entities namely, M/s. Green Gardens Private Limited, M/s. Gemini Arts Private Limited, M/s. Mahalakshmi Properties & Investments Private Limited^[3] during the period of 1993-1994.
• M/s. Prasad Properties and Investments Private Limited^[4] stood as guarantor/mortgagor by mortgaging its immovable property to secure the credit facilities sanctioned to Borrower Entities.
• 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 Limited^[5] in 2006, assigning all its title, rights, interests, claims and demands to KMBL.
• 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 Tribunal^[6] in the year 2016. Pursuant to which DRT also issued separate recovery certificates against each of the Borrower Units and Corporate Debtor.
• KBML based on the aforesaid recovery certificates filed an application under Section 7 of IBC to initiate Corporate Insolvency Resolution Process^[7]. The National Company Law Tribunal^[8] admitted the application vide order dated 20.09.2019 which was reversed by National Company Law Appellate Tribunal^[9] (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:

• 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?
• Whether the petition under Section 7 of the IBC was barred by limitation?

Ruling:

• A contention was raised before Supreme Court that cause of action has merged into the order of issuance of the recovery certificate by the DRT and therefore, by application of the doctrine of merger, the debt no more 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 would be hit by the doctrine of res judicata and particularly, per rem judicatam.

• The Supreme Court upheld 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.

• The Supreme Court while analyzing 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.

• The Supreme Court while evaluating clause (8) of Section 5 and other provisions of the IBC observed that the words "means a debt along with interest, if any, which is disbursed against the consideration for the time value of money" are followed by the words "and includes". Thereafter various categories (a) to (i) have been mentioned. That by employing the words "and includes", the legislature has only given instances, which could be included in the term "financial debt". However, the list is not exhaustive but inclusive. The legislative intent could not have been to exclude a liability in respect of a "claim" arising out 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, 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.

• Another contention was put forth before Supreme Court that the recovery certificate is for the limited purpose of initiation of winding up proceedings in terms of sub-sections (22) and (22A) of Section 19 of the Recovery of Debts and Bankruptcy Act, 1993^[10]. The Supreme Court while rejecting the contention held that the plain and simple interpretation of the words used in sub­section (22A) of Section 19 of the Debt Recovery Act makes it amply clear that the Legislature provided that for the purposes of winding­ up proceedings against a Company, etc., a recovery certificate issued by the Presiding Officer under sub­section (22) of Section 19 of the Debt Recovery Act shall 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 to imply that the Legislature intended to restrict the use of the recovery certificate limited for the purpose of winding­ up proceedings.

• Finally, the Supreme Court held that the 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 and NCLAT 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 initiated recovery proceedings in time and pursue it to get the adjudication of their claim along with issuance of recovery certificate by the DRT.

Author: Ravi Charan Pentapati Partner At Link Legal (ravi.charan@linklegal.in). Views are personal.