Recovery Certificate Holder Can Initiate CIRP As Financial Creditor Under IBC : Supreme Court

The Supreme Court, on Monday, 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. It further held that a person would be entitled to initiate Corporate Insolvency Resolution Process (CIRP) within a period of three years from the date on which such Recovery Certificate is issued."..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 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" A three-judge Bench comprising Justices L. Nageswara Rao, B.R. Gavai and A.S. Bopanna affirmed the following view taken by a two-Judge Bench of the Apex Court in Dena Bank v. C. Shivakumar Reddy And Anr. - "136. A final judgment and order/decree is binding on the judgment debtor. Once a claim fructifies into a final judgment and order/decree, upon adjudication, and a certificate of recovery is also issued authorising the creditor to realise 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. [...] 141. Moreover, a judgment and/or decree for money in favour of the financial creditor, passed by the DRT, or any other tribunal or court, or the issuance of a certificate of recovery in favour of the financial creditor, would give rise to a fresh cause of action for the financial creditor, to initiate proceedings under Section 7 IBC for initiation of the corporate insolvency resolution process, 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, if the dues of the corporate debtor to the financial debtor, under the judgment and/or decree and/or in terms of the certificate of recovery, or any part thereof remained unpaid." The Bench allowed the appeal filed by Kotak Mahindra Bank Ltd. assailing the order of the National Company Law Appellate Tribunal (NCLAT), which had set aside the order of National Company Law Tribunal, Chennai (NCLT), admitting the application filed under Section 7 of the IBC and initiated CIRP, as time-barred. It held that the application was filed within a period of three years from the date on which the Recovery Certificate was issued and was thus within limitation. Factual Background Between 1993-1994, Ind Bank Housing Limited (IBHL) sanctioned credit facilities to three companies for which the Corporate Debtor herein stood as the Corporate Guarantor. The borrowers defaulted and consequently all their facilities were classified as Non-Performing Asset. Three recovery suits were filed before the Madras High Court against the three borrowers and the Corporate Debtor. In the meanwhile Kotak Mahindra Bank Ltd. (KMBL) entered into a Deed of Assignment with IBHL on 13.10.2006. Pursuantly, KMBL entered into a compromise with the borrowers. Recording the compromising in its order dated 26.03.2007, the High Court noted that the Corporate Debtor was jointly and severally liable to pay Rs. 29,00,96,918 to KMBL. The borrowers failed to hold up their end of the bargain and demand notices were issued to them along with the Corporate Debtor by KMBL under Section 13(1) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), which was followed by possession notice. KMBL further issued a winding up notice to the Corporate Debtor, on 06.05.2008. It filed three applications under Section 31(A) of the Recovery of Debts and Bankruptcy Act, 1993 (Debt Recovery Act) before the Debt Recovery Tribunal. These applications were allowed and recovery certificates were issued on 07.06.2017 and 20.10.2017. On 05.10.2018, KMBL filed an application under Section 7 of the IBC before the NCLT seeking initiation of the CIRP against the Corporate Debtor claiming an amount of Rs 835,93,52,369. It was admitted by the NCLT on 20.09.2019. An appeal was filed by the Director of the Corporate Debtor before NCLAT on the ground that the application under Section 7 was filed after the expiry of the limitation period. The appeal was allowed by NCLAT. Contention raised by the parties Senior Advocate, Mr. Guru Krishna Kumar, appearing on behalf of KMBL relied on Dena Bank v. C. Shivakumar Reddy And Anr. wherein the Apex...

Recovery Certificate Holder Can Initiate CIRP As Financial Creditor Under IBC : Supreme Court

Sohini Chowdhury

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