Recently, the Hon'ble Supreme Court in the case of Kotak Mahinda Bank
Limited vs A. Balakrishnan & another
(Civil Appeal No.689 of 2021) has held
that any liability arising out of a recovery certificate needs to be treated as
financial debt within vis-ą-vis clause (8) of Section 5 of the Insolvency and
Bankruptcy Code, 20161 and the holder of recovery certificate would be a
financial creditor within the meaning of clause (7) of Section 5 of IBC. As
such, the holder of such a certificate would be entitled to initiate the
Corporate Insolvency Resolution Process if initiated within a period of three
years from the date of issuance of the Recovery Certificate.
Ind Bank Housing Limited 2 sanction various credit facilities to three borrower
entities namely, M/s. Green Gardens Private Limited, M/s. Gemini Arts Private
Limited, M/s. Mahalakshmi Properties & Investments Private Limited 3 during the
period of 1993-1994.
M/s. Prasad Properties and Investments Private Limited4 stood as
guarantor/mortgagor by mortgaging its immovable property to secure the credit
facilities sanctioned to Borrower Entities.
The Borrower Units defaulted on the repayment of dues, in response to which IBHL
declared them to be Non-performing Assets (NPA) in 1997. IBHL filed three
recovery suits before the High Court of Madras against the Borrower Units and
the Corporate Debtor. While the suits were pending, IBHL entered into a Deed of
Assignment with Kotak Mahindra Bank Limited5 in 2006, assigning all its title,
rights, interests, claims and demands to KMBL.
KMBL and Borrower Units subsequently entered into a compromise agreement in the
year 2006. However, Borrower Units allegedly failed to make payments as per the
compromise agreement. Owing to the said default, KBML issued a demand notice
followed by a possession notice under Section 13(2) and Section 13(4) of the
SARFAESI Act, 2002.
Subsequently, KBML issued a winding up notice under Section 433 and 434 of the
Companies Act, 1956. KBML also filed applications under Section 31(A) of the
RDDBFI Act, 1993 and the same was allowed by a Debts Recovery Tribunal6 in the
year 2016. Pursuant to which DRT also issued separate recovery certificates
against each of the Borrower Units and Corporate Debtor.
KBML based on the aforesaid recovery certificates filed an application under
Section 7 of IBC to initiate Corporate Insolvency Resolution Process7. The
National Company Law Tribunal8 admitted the application vide order dated
20.09.2019 which was reversed by National Company Law Appellate Tribunal9 (NCLAT)
on the grounds of limitation vide order dated 24.11.2020. An appeal was filed
before the Hon'ble Supreme Court.
Issues for consideration:
- Whether a person, who holds a Recovery Certificate would be a financial
creditor within the meaning of clause (7) of Section 5 of the IBC?
- Whether the petition under Section 7 of the IBC was barred by
A contention was raised before Hon'ble Supreme Court that 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
and initiation of 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 and particularly, per rem judicial.
The Hon'ble Supreme Court upheld the contentions of the precedent in the Dena
Bank (Now Bank of Baroda) vs C. Shivakumar Reddy and another where it was 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 allows the creditor to
recover the amount specified in the Recovery Certificate. However, it has
decided to analyze the circumstances and decision of the case as to whether it
is per incuriam.
The Hon'ble Supreme Court while analysing the doctrine of per incuriam explained
that the term per incuriam applies only when a judgement is in contravention of
any existing statute, rule or regulation, or when a judgement/order has been
given without paying heed to existing precedents on the matter and rejected the
contention that the Dena Bank judgement is per incuriam.
The Hon'ble Supreme Court while evaluating clause (8) of Section 5 and other
provisions of the IBC observed 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. That by employing the words "and includes", the
legislature has only given instances, which could be included in the term
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".
Accordingly, Hon'ble Supreme Court concluded that liabilities arising out of
recovery certificates would be financial debt and the holder of such a
certificate is entitled to initiate CIRP under the IBC within three (3) years
from the date on which the recovery certificate was issued.
Another contention was put forth before Hon'ble Supreme Court that the recovery
certificate is for the limited purpose of initiation of winding up proceedings
in terms of sub-sections (22) and (22A) of Section 19 of the Recovery of Debts
and Bankruptcy Act, 199310.
The Hon'ble Supreme Court while rejecting the contention held that the plain and
simple interpretation of the words used in subsection (22A) of Section 19 of
the Debt Recovery Act makes it amply clear that the Legislature provided that
for the purposes of windingup proceedings against a Company, etc., a recovery
certificate issued by the Presiding Officer under subsection (22) of Section 19
of the Debt Recovery Act shall be deemed to be a decree or order of the court
and there is nothing is subsection (22A) of Section 19 of the Debt Recovery Act
to imply that the Legislature intended to restrict the use of the recovery
certificate limited for the purpose of windingup proceedings.
Finally, the Hon'ble Supreme Court held that the application under Section 7 of
the IBC was filed within a period of three years from the date on which the
recovery certificate was issued and NCLAT had erred in holding that it is barred
The judgement is a boon for creditors who can initiate claim as financial
creditors under IBC based on a recovery certificate issued under Debt Recovery
Act even if the period of limitation from the date of original default has
expired so long as they have initiated recovery proceedings in time and pursue
it to get the adjudication of their claim along with issuance of recovery
certificate by the DRT.