IBC| Time-Barred Recovery Certificate Can Be Segregated From Composite Claim Under Section 7 : Supreme Court

The Supreme Court has held that in a composite application filed under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) based on several Recovery Certificates issued by Debt Recovery Tribunal, if any of the Recovery Certificate(s) is barred by limitation, then the same can be segregated from composite claim. However, as the decree (Recovery Certificate) would still be alive, it can be treated as a claim made in Corporate Insolvency Resolution Process (CIRP) in view of Public Announcement.

In 2019, a composite application under Section 7 of IBC was filed based on three recovery certificates, one of which dated back to 2015 and was hence barred by limitation.

The Bench comprising Justice Aniruddha Bose and Justice Vikram Nath has held, “The application with respect to the two recovery certificates issued in the year 2017 is maintainable. In the event the Appellate Tribunal is of opinion that the CIRP could not lie so far as the recovery certificate of 2015 is concerned, as the decree would be still alive, the claim based on the said recovery certificate could be segregated from the composite claim and the Committee of Creditors shall, in that event, treat the sum reflected in the said recovery certificate as part of the claims made in pursuance of the public announcement. This direction we are issuing in exercise of our jurisdiction under Article 142 of the Constitution of India.”

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.

Section 19(22A) of the Recovery of Debts and Bankruptcy Act, 1993 (“1993 Act”) states, “Any recovery certificate issued by the Presiding Officer under sub­section (22) shall be deemed to be decree or order of the Court for the purposes of initiation of winding up proceedings against a company registered under the Companies Act, 2013 (18 of 2013) or Limited Liability Partnership registered under the Limited Liability Partnership Act, 2008 (6 of 2009) or insolvency proceedings against any individual or partnership firm under any law for the time being in force, as the case may be”

On 06.09.2019, the SBI filed a petition under Section 7 of 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.

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

SUPREME COURT VERDICT

The issue before the Bench was whether a recovery certificate issued in 2015 could form subject matter of an application under Section 7 of the IBC filed on 06.09.2019.

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.”

It was observed that the Section 7 proceedings filed before NCLT was a composite application based on three recovery certificates. Two recovery certificates were issued within 3 years limitation period as given in Article 137 of the Limitation Act, 1963. However, the third recovery certificate was issued beyond the said limitation period. But a recovery certificate under the 1993 Act is also clothed with the character of a deemed decree, which under Article 136 of the schedule of Limitation Act has a life of twelve years for enforcement.

The Court opined that under Section 19(22A) of 1993 Act, proceedings under IBC based on a recovery certificate can be initiated against companies incorporated under Companies Act, 2013 as well as Companies Act, 1956. It was held that a Recovery Certificate would retain the character of a decree to lodge a claim under IBC proceedings.

“In the event a financial creditor wants to pursue a recovery certificate as a deemed decree, he would get twelve years’ time. We are of this view as the extent of operation of a recovery certificate has been construed by this Court in Kotak Mahindra I (supra) to go beyond filing of winding­up petition alone. It would retain the character of a decree to lodge a claim in an IBC proceeding.”

The Section 7 petition under IBC was maintainable in respect of the two recovery certificates which fell within limitation. The Court while invoking its powers under Article 142 of the Constitution of India, has directed that in case if NCLAT decides that CIRP cannot lie in respect of third recovery certificate which is limitation barred, then the decree would still be alive. The claim under such limitation barred recovery certificate be treated as a claim submitted in view of public announcement.

“The application with respect to the two recovery certificates issued in the year 2017 is maintainable. In the event the Appellate Tribunal is of opinion that the CIRP could not lie so far as the recovery certificate of 2015 is concerned, as the decree would be still alive, the claim based on the said recovery certificate could be segregated from the composite claim and the Committee of Creditors shall, in that event, treat the sum reflected in the said recovery certificate as part of the claims made in pursuance of the public announcement. This direction we are issuing in exercise of our jurisdiction under Article 142 of the Constitution of India.”

The appeal has been dismissed.

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

Citation: 2023 LiveLaw (SC) 914

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