Pre-2016 DRT Recovery Certificates Cannot Form Basis For Insolvency Notice Under Presidency Towns Insolvency Act: Supreme Court

The Supreme Court on Monday (July 13) held that a recovery certificate issued by a Debts Recovery Tribunal (DRT) before the 2016 amendment to the Recovery of Debts and Bankruptcy Act (RDB Act) could not be treated as a "decree or order" for initiating insolvency proceedings under Section 9(2) of the Presidency Towns Insolvency Act, 1909. “A claim which was untenable on the date the suitor entered the portals of the Court cannot become tenable simply because a fortuitous event during the pendency of the trial has made it so. The lis must be decided based on rights and liabilities as they stood on the date of institution, unless the statute or equity of the case otherwise requires.”, observed a bench of Justice Dipankar Datta and Justice Satish Chandra Sharma, while dismissing the HDFC Bank's appeal against the Bombay High Court's 2007 judgment which endorsed the position that a “decree or order” would not include a recovery certificate issued by a DRT under the pre-amended RDB Act. The dispute arose from credit facilities extended by a consortium of 15 banks, including HDFC Bank, to Beautiful Diamonds Ltd. The loans were secured by mortgages and personal guarantees executed by the company's directors. Following the default by the borrower, HDFC Bank initiated proceedings before the Debts Recovery Tribunal (DRT), Mumbai. In October 2004, the DRT directed the issuance of a recovery certificate for approximately Rs. 14.74 crore, which was issued the following month. Relying on the recovery certificate, the Bank served an insolvency notice upon the Respondent's director under Section 9(2) of the Presidency Towns Insolvency Act. Respondent challenged the notice before the Bombay High Court, contending that a DRT recovery certificate was not equivalent to a decree or order capable of sustaining insolvency proceedings. Both the Single Judge and the Division Bench accepted the contention and quashed the insolvency notice, prompting HDFC Bank to approach the Supreme Court. Refusing to interfere with the impugned judgment, a judgment authored by Justice Dipankar Datta held that the appellant's reliance on Section 19(22A) of the Recovery of Debts and Bankruptcy Act, introduced by the 2016 amendment, was misconceived. The Court observed that the provision operates prospectively and cannot be applied to proceedings initiated prior to its enactment. Consequently, the DRT recovery certificate issued before the amendment could not be treated as a "decree or order" for the purpose of initiating insolvency proceedings under Section 9(2) of the Presidency Towns Insolvency Act, 1909. “Insertion of sub-section (22A) in Section 19 of the RDB Act, we are inclined to the view, instead of supporting the Appellant-Bank demolishes its case. Section 19(22A), as it now stands, aids in settling the issue. The fact that Parliament found it necessary in 2016 to insert sub-section (22A) in Section 19 of the RDB Act for the express purpose of equating a recovery certificate with a 'decree or order' is clear legislative recognition that such equivalence did not exist earlier. By necessary implication, a recovery certificate issued prior to the 2016 amendment could not form the basis for initiating insolvency proceedings. To hold otherwise would be to supply what the legislature omitted – a clear casus omissus. That apart, it is significant that the amendment has not been given retrospective effect. Matters would perhaps have been simpler, had the amendment been made earlier.”, the Court observed. In terms of the aforesaid, the appeal was dismissed.HeadnoteInsolvency Law – Presidency-Towns Insolvency Act, 1909 – Recovery of Debts and Bankruptcy Act, 1993 – Interplay and Equivalence – Recovery of Debts and Bankruptcy Act, 1993; Section 19(22) & 19(22A) – Recovery Certificate issued by the Debts Recovery Tribunal (DRT) prior to the 2016 Amendment – Whether an Insolvency Notice can be issued based on a DRT Recovery Certificate – Held - Strict Construction of Insolvency Statutes - The Presidency-Towns Insolvency Act, 1909 is a statute fraught with the grave consequence of “civil death” for an individual sought to be adjudged an insolvent - its provisions must be subjected to strict judicial interpretation - Recovery Certificate is not a "Decree" or "Order" - In terms of Section 9(2) of the Insolvency Act, an act of insolvency is committed only when a creditor obtains a “decree or order” for the payment of money against the debtor - The expressions "decree" and "order" must be understood in the light of the definitions contained in Section 2(2) and Section 2(14) of the Code of Civil Procedure, 1908 - A recovery certificate issued by the DRT under the pre-amended RDB Act cannot be strictly equated to a civil court's "decree" or "order" for the purposes of issuing an insolvency notice - Prospective Nature of the 2016 Amendment - The insertion of sub-section (22A) into Section 19 of the RDB Act via the 2016 Amendment which explicitly deems a...

Pre-2016 DRT Recovery Certificates Cannot Form Basis For Insolvency Notice Under Presidency Towns Insolvency Act: Supreme Court

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Pre-2016 DRT Recovery Certificates Cannot Form Basis For Insolvency Notice Under Presidency Towns Insolvency Act: Supreme Court

Yash Mittal

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