Explore the position of a Recovery Certificate Holder under the Insolvency and Bankruptcy Code, 2016. Learn about the Supreme Court’s interpretation in the Kotak Mahindra Bank vs. A. Balakrishnan case, addressing issues of maintainability, applicability of limitation, and the widened scope of financial debts and creditors.
The Insolvency and Bankruptcy code, 2016 (IBC) has been quite evolving since its inception. The purpose of the code is to recover the defaulted debt given to a debtor by a creditor in an unequivocal manner, but there is still some ambiguity with regards to its initiation u/s 7 which deals with the capacity of a “financial creditor” to initiate corporate insolvency resolution process (“CIRP”). In the case of Kotak Mahindra Bank Limited vs. A. Balakrishnan & Anr., the Supreme Court quashed the decision of National Company Law Appellate Tribunal (“NCLAT”), and through its own interpretation widened the scope of the section 5(7) of the IBC, 2016. The ambit was widened in terms of maintainability of recovery certificate holders as financial creditors under section 5(7) and the applicability of limitation period on the issuance of recovery certificates by the Debt recovery tribunal (“DRT”).
FACTUAL TIMELINE
In 1993-1994, M/s Green Gardens (P) Ltd, M/s Gemini Arts (P) Ltd. and M/s Mahalakshmi Properties & Investments (P) Ltd (“borrower entities”) were provided with separate credit facilities of Rs 3, 50, 00,000 each by Ind Bank Housing Limited (“IBHL”). Prasad Properties and Investments Pvt. Ltd. mortgaged its properties in order to secure the loan sanctioned to the borrower entities and stood as the Corporate Guarantor as well as the Corporate Debtor. In 1997, the borrower entities failed to repay the loan and hence their accounts were declared as Non-Performing Assets by IBHL. In order to recover the defaulted amount, three civil proceedings were started before the Madras High Court by IBHL. On 13th October 2006, Kotak Mahindra Bank Ltd (“KMBL”) and IBHL entered into a Deed of Assignment through which the rights, interest and claims pertaining to the debts due from the borrower entities were transferred to KMBL.
The borrower entities further defaulted the repayment of loan which led to KMBL initiating a suit u/s 13(2) and 13(4) of the SARFAESI Act, 2002 and also issued winding up notice u/s 433 and 434 of the Companies Act, 1956. Due to constant default in payments, three applications u/s 31(A) of Recovery of Debts Due to Banks and Financial Institutions Act, 1993 by KMBL to get Debt Recovery Certificate against the borrowing entities and corporate debtor. The aforementioned applications were allowed and separate recovery certificates were issued against the same by DRT on 7th June 2017 and 20th October 2017.
On 5th October 2018, KMBL on the basis of recovery certificate registered an appeal u/s 7 of IBC, 2016 against the “Corporate Debtor” and claimed an amount of Rs. 835,93,52,369/-. In 2018, the National Company Law Tribunal, Chennai (“NCLT”) was approached by KMBL and the NCLT was of the opinion that the financial creditor (KBHL) has fulfilled all the requirements of law, and hence in 2019 initiated the CIRP. Unsatisfied by the order of NCLT, the defaulting parties approached the NCLAT and in 2020 the order of NCLT was overruled by NCLAT due to the fact that the application was time barred. Challenging this, KMBL approached the Supreme Court.
ISSUES IN QUESTION
1. Whether the issuance of a recovery certificate by the DRT permits the recovery certificate holder to initiate CIRP under section 7 of IBC?
2. Whether the limitation period will be triggered by the issuance of a recovery certificate by the DRT?
JUDGMENT
In its judgment, the Supreme Court disregarded the contentions entertained by the NCLAT and gave a different interpretation to the subject matter pertaining to the issues involved in the case. The Supreme Court held that any claim arising out of the recovery certificate issued by the DRT would be considered as financial debt u/s 5(8)(i) and the recovery certificate holder would be considered a financial creditor u/s 5(7) of the IBC. Hence, the recovery
certificate permits the “financial creditor” to start CIRP u/s 7 of IBC.
On the second issue, the court was of the opinion that the issuance of the recovery certificate would trigger the limitation period as the recovery certificate injured the rights of the appellants and as a result, the restriction would commence on the day the recovery certificate was issued.
CRITICAL ANALYSIS
The Supreme Court through this judgment has actively tried to solidify its stance pertaining to the question of law dealing with initiation of CIRP by recovery certificate holder and bring about a fresh cause of action for the “financial creditor” to start CIRP u/s 7 of the IBC.
In Dena Bank vs. C. Shivakumar Reddy & Anr, the court held that:
A fresh right to collect the sum mentioned in the Recovery Certificate accrues to the creditor if a claim resulted into a final judgement and order/decree, following adjudication, and a certificate of recovery is also granted permitting the creditor to realise its decretal dues. If the corporate debtor’s dues to the financial debtor remain unpaid, CIRP can begin three years after the date of the judgement and/or decree, or three years after the certificate of recovery is issued.
However, in Jignesh Shah & Anr. vs. Union of India & Anr and B.K. Educational Services v. Parag Gupta and Associates, The court ruled that the time restriction for submitting an application u/s 7 or 9 of the IBC is three years from the date of default, and that article 137 of the Limitation Act applies. The date of default in the present case was 1997 and as per the arguments of the defaulting parties, the limitation would start in 1997 when the accounts of the borrowing entities were declared NPAs and thus the court in its reference to the judgment of Dena Bank case is per incuriam (through lack of due regard to the law) as it did not consider the provisions of Debt Recovery Act and Limitation Act. But the Supreme Court disregarded this contention by saying that the question for consideration in the present case is pertaining to fresh cause of action to file an appeal u/s 7 of IBC and this question has not been answered in the cases cited by the defaulting parties.
Section 5(8) of the IBC defines “Financial debt” and provides a list of obligations that can be termed as financial debt. The supreme court pointed out that section 5(8) of the IBC contains the words “and include” which means that the list provided under the section is not exhaustive but inclusive. Hence, as per the court’s interpretation a claim arising out of a recovery certificate would be included in the definition of “financial debt”. It is a settled principle of law that the object and purpose of an enactment should be considered during its interpretation. The Apex Court in Swiss Ribbons Private Limited & Anr vs. Union of India & Ors ruled that the objective of IBC is to ensure maximum recovery for all the creditors.
In the author’s opinion, the interpretation of the court is progressive as it clarifies that it is not necessary for a claim to be a part of the list of obligations provided u/s 5(8) of the IBC.
CONCLUSION
The interpretation of the word “and include” u/s 5(8) of the IBC by the Supreme Court has efficaciously enlarged the ambit of financial debt which indirectly widens the scope of the term “financial creditor” u/s 5(7) of IBC. The Apex Court by overruling the decision of NCLAT has tried to eradicate some of the ambiguities which were in nexus with the terms “financial debts”, “financial creditors”, and section 7 of the IBC.
By elucidating the maintainability of recovery certificate holder as a “financial creditor” u/s 5(7) of the IBC, and providing for a fresh cause of action for the “financial creditor” to start CIRP u/s 7 after the existing limitation period (article 137 of the Limitation Act), the court has widened the ambit of IBC.
The author firmly believes that the said judgement by the Supreme Court not only protects the rights of the creditors, but also serves the purpose and objective of this code.
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Vishesh Bhardwaj and Bhabesh Satapathy are 2nd year students at National Law University, Odisha.
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