The Supreme Court (“SC”) has in its judgment dated May 30, 2022, in the matter of Kotak Mahindra Bank Limited v. A. Balakrishna and Another [Civil Appeal No. 689 of 2021] held that a liability in respect of a claim arising out of a recovery certificate under the Recovery of Debts and Bankruptcy Act, 1993, would be a “financial debt” within the meaning of Section 5(8) of the Insolvency and Bankruptcy Code, 2016 (“IBC”) and a holder of such recovery certificate would be a “financial creditor” under Section 5(7) of the IBC.

Facts
The appeal challenged the judgment and order dated November 24, 2020 passed by the National Company Law Appellate Tribunal, New Delhi (“NCLAT”), thereby allowing the appeal filed by the respondent no. 1, director of the corporate debtor, and reversing the order dated September 20, 2019 passed by the National Company Law Tribunal, Chennai (“NCLT”), whereby the application filed by the appellant, Kotak Mahindra Bank Limited (“KMBL”), under Section 7 of the IBC was admitted. The NCLAT while allowing the appeal held that the application filed by KMBL, was time barred and that issuance of recovery certificate would not trigger the right to sue.

During the years 1993 and 1994, Ind Bank Housing Limited (“IBHL”) sanctioned separate credit facilities to three companies (“Borrower Entities”). The respondent no. 2, M/s. Prasad Properties and Investments Private Limited (“Corporate Debtor”), stood as the corporate guarantor/ mortgagor and mortgaged its immovable property to secure the aforesaid credit facilities sanctioned to the Borrower Entities.

The Borrower Entities defaulted in repayment of the dues and subsequently IBHL classified all the facilities availed by them as non-performing asset (“NPA”) in November, 1997. Pursuant thereto, IBHL filed three civil suits before the High Court of Madras, against the Borrower Entities and the Corporate Debtor, for recovery of the amounts due. During the pendency of the suits, KMBL and IBHL entered into a deed of assignment dated October 13, 2006, wherein IBHL assigned all its rights, title, interest, estate, claim and demand to the debts due from Borrower Entities, to KMBL. Pursuant to the said deed, KMBL and the Borrower Entities entered into a compromise on August 7, 2006 (“Compromise”).

It was claimed by KMBL that the Borrower Entities failed to make payments as per the Compromise and thus, KMBL issued a demand notice dated September 26, 2007 to them and the Corporate Debtor under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI”). The said notice was followed by a possession notice dated January 10, 2008 issued under Section 13(4) of the SARFAESI, by KMBL due to default in payment by the Corporate Debtor of the amount demanded. KMBL further issued a winding up notice dated May 6, 2008 under the Companies Act, 1956 to the Corporate Debtor.

Aggrieved by the continuous default of payment by the Corporate Debtor and the Borrower Entities, KMBL filed three applications under Section 31(A) of the erstwhile Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (now known as the Recovery of Debts and Bankruptcy Act, 1993) (“Debt Recovery Act”) before the Debt Recovery Tribunal (“DRT”) for issuance of debt recovery certificates in terms of the Compromise entered into between the parties. The applications came to be allowed by the DRT and separate recovery certificates came to be issued against each of the Borrower Entities and the Corporate Debtor.

On the basis of the aforementioned recovery certificates, on October 5, 2018, KMBL, claiming to be a financial creditor, filed an application under Section 7 of the IBC before the NCLT and sought initiation of corporate insolvency resolution process (“CIRP”) against the Corporate Debtor, which was admitted. Respondent no.1, director of the Corporate Debtor filed an appeal which was allowed by the NCLAT. Aggrieved with the judgment of the NCLAT, KMBL filed the present appeal with the SC.

Issue
Whether the issuance of a recovery certificate in favour of the financial creditor would give rise to a fresh cause of action to initiate proceedings under Section 7 of the IBC.

Arguments

Contentions raised by KMBL:

KMBL submitted that the issue involved in the present proceedings is no more res integra. It was submitted that the SC has, in the case of Dena Bank (Now Bank of Baroda) v. C. Shivakumar Reddy and another [(2021) 10 SCC 330] (“Dena Bank Judgment”), 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 accrues to the creditor to recover the amount specified in the recovery certificate. It is submitted that in view of the law laid down by the SC in the Dena Bank Judgment, the present appeal deserves to be allowed inasmuch as, the application under Section 7 of the IBC filed by KMBL was within the period of three years from the dates of issuance of the recovery certificates.

It was further submitted that the conduct of the respondents is that of a dishonest borrower. Having entered into the consent terms, which were decreed by the High Court of Madras and having not complied with the terms contained in the compromise decree, it is now not open to the respondents to oppose the admission of the application under Section 7 of the IBC.

In rejoinder, KMBL submitted that the Dena Bank Judgment correctly lays down the position of law. If the relevant provisions of the IBC are construed in correct perspective, the only conclusion that would be arrived at is that KMBL is a “financial creditor”. It was submitted that the correct approach would be to consider the underlying transaction forming the basis of the proceedings initiated by the creditor culminating in a recovery certificate. If the underlying transactions are such that they constitute a financial debt and the creditor is a financial creditor, then that would be the determining factor for deciding the maintainability of the CIRP application. KMBL further submitted that the judgment debt does not lose its legal essence or character solely because it has fructified into a recovery certificate.

Lastly, KMBL submitted that the purpose of the IBC is to preserve the corporate debtor as an ongoing concern, while ensuring maximum recovery for all the creditors and that the provisions of the IBC have to be interpreted in such a manner as to advance the purpose of the IBC and not in a manner in which they defeat the object of the IBC.

Contentions raised by the respondents:

The respondents submitted that the 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. It was also submitted that the 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.

It was further submitted that recovery certificates cannot be treated as “decree” for all purposes. It was submitted that a decree holder may initiate CIRP as a financial creditor, but the holder of a recovery certificate granted under Section 19(22) of the Debt Recovery Act is not entitled to initiate CIRP under the IBC as a financial creditor or a decree holder. Sub-sections (22) and (22A) of Section 19 of the Debt Recovery Act were brought on the statute book by ‘The Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016 (Act No. 44 of 2016)’, which was enacted on August 16, 2016 and brought into force from November 4, 2016. The respondents submitted that the deeming fiction contained therein applies only for the purposes of initiation of winding up proceedings. The deeming fiction cannot be extended for any other purpose.

Further, after November 15, 2016, that is, the date on which Section 255 of the IBC (which omitted the application of the insolvency procedure under the Companies Act, 2013) was brought into force, the recovery certificate holders lost their right to use their certificate as a “decree” for initiating winding-up proceedings under the Companies Act, 2013.

It was also submitted that the Dena Bank Judgment is per incuriam, and that it is rendered without considering the provisions of sub-sections (22) and (22A) of Section 19 of the Debt Recovery Act as well as certain provisions of the IBC. If the aforesaid provisions of the IBC and the Debt Recovery Act are considered in correct perspective, the conclusion that would be inevitable is that a decree holder is not a “financial creditor” and as such, is disentitled to invoke the provisions of Section 7 of the IBC. Further, the provisions of Section 14 of the IBC (which deals with the imposition of moratorium on the corporate debtor) would also amplify this position as the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority is specifically prohibited.

Therefore, the NCLAT has correctly held that the application filed by KMBL under Section 7 of the IBC was beyond the period of limitation since issuance of recovery certificate does not give rise to a fresh cause of action and the timeline for the purpose of limitation would start in the year 1997 when the accounts of the Borrower Entities were declared NPA, and that no interference is warranted with the same.

Observations of the Supreme Court

The SC observed that in the Dena Bank Judgment, the court held in unequivocal terms 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 accrues to the creditor to recover the amount of the final judgment and/ or order/ decree and/ or the amount specified in the recovery certificate. Furthermore, the Dena Bank Judgment held that issuance of a certificate of recovery in favour of the financial creditor would give rise to a fresh cause of action to the financial creditor, to initiate proceedings under Section 7 of the IBC for initiation of the CIRP, within three years from the date of the judgment and/ or decree or within three years from the date of issuance of the certificate of recovery.

Applying principles of various judgments to the definition of “financial debt” under the IBC, it could clearly be seen 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 in the definition of financial debt. It is clear 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”.

Having held that a liability in respect of a claim arising out of a recovery certificate would be a “financial debt” within the ambit of its definition under clause (8) of Section 5 of the IBC, as a natural corollary thereof, the holder of such recovery certificate would be a financial creditor within the meaning of clause (7) of Section 5 of the IBC. As such, such a person would be a “person” as provided under Section 6 of the IBC who would be entitled to initiate the CIRP.

Insofar as the contention of the respondents with regard to Section 14(1)(a) of the IBC is concerned, the SC did not find that the words used therein could be read to mean that the decree holder is not entitled to invoke the provisions of the IBC for initiation of CIRP. The prohibition to institution of suit or continuation of pending suits or proceedings including execution of decree would not mean that a decree holder is also prohibited from initiating CIRP, if he is otherwise entitled to in law. The effect would be that the applicant, who is a decree holder, would himself be prohibited from executing the decree in his favour.

A perusal of the Dena Bank Judgment would reveal that the SC considered all the relevant provisions of the IBC and the earlier judgments of the court. The SC did not find any inconsistency in the Dena Bank Judgment with the earlier judgments of the SC on which reliance is placed by the respondents. The SC found that the contention that the Dena Bank Judgment being per incuriam to the statutory provisions and earlier judgments of the court, is wholly unsustainable.

It was sought to be argued by the respondents that the recovery certificate is for the limited purpose of initiation of winding up proceedings. If the contention is accepted, the word “limited” would be required to be inserted in Section 19(22A) of the Debt Recovery Act, between the words “shall be deemed to be decree or order of the Court” and “for the purposes of initiation of winding up proceedings”. It is more than well settled that when the language of a statutory provision is plain and unambiguous, it is not permissible for the court to add or subtract words to a statute or read something into it which is not there.

Further, when the Legislature itself has provided that any recovery certificate issued under sub-section (22) of Section 19 of the Debt Recovery Act will be deemed to be a decree or order of the court for initiation of winding-up proceedings, which proceedings are much severe in nature, it will be difficult to accept that the Legislature intended that such a recovery certificate could not be used for initiation of CIRP, which would enable the Corporate Debtor to continue as an ongoing concern and, at the same time, pay the dues of the creditors to the maximum.

Decision of the Supreme Court

With the aforesaid findings, the SC held 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 of the IBC. Consequently, the holder of the recovery certificate would be a financial creditor within the meaning of clause (7) of Section 5 of the 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.

Therefore, the SC allowed the present appeal and set aside the judgment and order of the NCLAT. Undisputedly, the application for initiation of CIRP under Section 7 of the IBC had been filed by KMBL within a period of three years from the date of issuance of the recovery certificate.

VA View:

In this judgment, the SC has rightly analysed the intention of the Legislature, by stating that the list provided in in the definition of “financial debt” of the IBC is not exhaustive but inclusive and thus, 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”. In doing so, the court interpreted the IBC in such a manner so as to advance the purpose of the IBC and not in a manner in which they defeat the object of the IBC.

The SC also relied and rightly upheld the decision in the Dena Bank Judgment and observed that issuance of a certificate of recovery in favour of the financial creditor would give rise to a fresh cause of action to the financial creditor, to initiate proceedings under Section 7 of the IBC for initiation of the CIRP. This judgment brings further clarity towards understanding the provisions of the IBC and would significantly contribute to interpretation of the definition of the term “financial debt”.

For any query, please write to Mr. Bomi Daruwala at [email protected]

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