Kotak Mahindra Bank Limited v. A. Balakrishnan and Anr.
(A fifth year law student at School of Law, Narsee Monjee Institute of Management Studies, Bengaluru)
The National Company Law Tribunal, Chennai (“NCLT”) is the court of first instance in the case. The application of the Appellant was admitted under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”). Aggrieved by the order, an appeal was made by the Respondent to the National Company Law Appellate Tribunal, New Delhi (“NCLAT”). The NCLAT admitted the appeal and ruled in favour of the Respondent. The Appellant filed an appeal against the order of the NCLAT before the Hon’ble Supreme Court of India.
Facts of the Case
In 1993, Ind Bank Housing Limited (“IBHL”) sanctioned three separate credit facilities to the following borrower entities: (i) M/s Green Gardens (P) Ltd, (ii) M/s Gemini Arts (P) Ltd. and (iii) M/s Mahalakshmi Properties & Investments (P) Ltd. The Corporate Debtor, M/s Prasad Properties and Investments Pvt. Ltd. became the corporate guarantor to the borrowing entities and also mortgaged its immovable property as a collateral against the sanctioned credit facilities. The credit facilities were declared as Non-Performing Assets by the IBHL following the default in the repayment of the dues. IBHL filed separate civil suits in the High Court of Madras against the borrowing entities and the Corporate Debtor. Kotak Mahindra Bank Ltd. (“KMBL”), the Appellant, and IBHL entered into a Deed of Assignment during the pendency of the lawsuits, whereby IBHL assigned to KMBL all of its rights, title, interest, estate, claim, and demand with respect to the debts owed by the borrower entities.
Pursuant to the abovementioned deed, there was a compromise between KMBL and the borrower entities which was hereby recorded by the High Court of Madras. On the execution of such compromise, the Corporate Debtor would be made jointly and severally liable for the payment of the outstanding amount of Rs. 29,00,96,918/- to KMBL. On account of continuing default by the Corporate Debtor, KMBL issued a Demand Notice followed by Possession Notice to the Corporate Debtor and the borrowing entities under Section 13(2) and Section 13(4) of the SARFAESI Act. A Winding Up Notice was also issued by KMBL to the Corporate Debtor as per Sections 433 and 434 of the Companies Act, 1956.
KMBL filed three applications under Section 31(A) of the Recovery of Debts and Bankruptcy Act, 1993 (“RDB”) on account of continuous failure for the payment of dues, which was allowed by the Debt Recovery Tribunal (“DRT”) and separate Recovery Certificates were thereby issued against all the Respondents. Post the issuance of the Recovery Certificates, the Appellant filed an application under Section 7 of the IBC before the NCLT, Chennai for initiating the Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor on account of the due amount of Rs. 835,93,52,369/-.
The NCLT admitted the said application for the CIRP, and the Corporate Debtor preferred an appeal before NCLAT contending that the limitation period of filing such application has expired. The NCLAT acceded the contention of the Corporate Debtor by allowing the appeal and subsequently, the appellant, KMBL approached the Hon’ble Supreme Court challenging such order of the learned NCLAT.
Issues before the Court
- The focal issue being that whether the issuance of Recovery Certificates would give rise to the fresh cause of action to the financial creditor for the initiation of the CIRP?
- Another central issue is that does clause (7) of Section 5 of the IBC includes a person holding a Recovery Certificate?
- Whether the liability of the claim arising out of the Recovery Certificate will form part of the ‘financial debt’ as defined in the Code?
Arguments by the Appellant
- The counsel for the appellant relied on the case of Dena Bank (Now Bank of Baroda) v. C. Shivakumar Reddy and Another (2021) ibclaw.in 69 SC in which it was held by the Hon’ble Supreme Court that a fresh right would be accrued to the creditor and he would be entitled to recover the decretal dues as per amount specified in the Recovery Certificate when a claim is fructified into a final judgement or an order/decree, and the creditor is issued a Recovery Certificate. Therefore, the application should be admitted as it was initiated within the limitation period i.e., three years from the date on which the Recovery Certificate was issued.
Arguments by the Respondent
- The counsel for the respondent submitted that on applying the doctrine of merger, the debt no longer exists as the cause of action has merged with the order of the DRT for issuing the Certificate.
- The counsel for the respondent relying on the judgement of State of U.P. v. Nawab Hussain and Gulabchand Chhotalal Parikh v. State of Bombay contended that the commencement of CIRP would correspond to the filing of subsequent suits on the same cause of action and therefore, is prohibited by the doctrine of res judicata.
- The counsel relying on the judgment of the Hon’ble Court in the case of Paramjeet Singh Patheja v. ICDS Ltd. argued that the scope of Section 19(22A) of the Debt Recovery Act is limited to the initiation of the winding up proceedings and thus, does not extend to the initiation of the CIRP. It was further argued that due to the limited scope of Section 19(22A), the Recovery Certificates cannot be treated as a decree in the present matter.
- The counsel claimed that in line with Section 255 of the IBC, the Recovery Certificates cannot be regarded as a decree for the purpose of initiating winding-up proceedings under the Companies Act by citing the decision of the Tripura High Court in the case of Subhankar Bhowmik v. Union of India and Another (2022) ibclaw.in 75 HC.
- The counsel submitted that the judgement of the Hon’ble court in the case of Dena Bank is per incuriam and that it was rendered without considering the correct perspective of the relevant provisions of the Debt Recovery Act and IBC.
- It was also contended that on correct interpretation of the relevant provisions of the Debt Recovery Act and the IBC, it can be concluded that the decree holder is not a financial creditor and is thus disentitled to make an application for CIRP under Section 7 of the IBC.
- Lastly, it was finally submitted that it was rightly held by the NCLAT that the application by KMBL was barred by the law of limitation as there was no fresh cause of action resulting from the issuance of the Recovery Certificates and that the institution of suits or continuation of pending proceedings against the Corporate Debtor is prohibited under Section 14 of IBC which includes execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority.
The appeal was allowed and the judgement and order of the learned NCLAT was quashed and set aside.
Whether the judgement in the case of Dena Bank is per incuriam?
The learned counsel for Respondent submitted that the Dena Bank judgement is per incuriam, and that the Hon’ble court has pronounced the judgement without examining the relevant provisions of the Debt Recovery Act and IBC. The Hon’ble court had erred in applying the judgement of the Dena Bank in the cases of Jignesh Shah and another v. Union of India and Another  ibclaw.in 19 SC and Gaurav Hargovindbhai Dave v. Asset Reconstruction Company (India) Limited and Another  ibclaw.in 16 SC and hence, the judgement should be rendered per incuriam. It was thus held that KMBL is a financial creditor in this matter and that the issuance of the Recovery Certificates does give rise to a fresh cause of action to the creditor.
The court denied the contention of the counsel of the respondent by examining the ratio decidendi of these cases. The court in Jignesh Shah case reiterated that the limitation period was three years for making an application under Section 7 or 9 of IBC from the date of default. This case dealt with the filing of the winding up petition after the expiry of the limitation period and whether the limitation period can be extended in pursuance of Section 238A of the IBC. Since, the issue at hand in the current matter is different from that in the Jignesh Shah case, the learned counsel erred in relying on this judgement.
Further, on delving into the case of Gaurav Hargovindbhai Dave, it was held that the cause of action arose when the Respondent was declared a Non-Performing Asset and the application under Section 7 was filed after three years and hence was barred by the limitation period. Since, the issue at hand in relation to Recovery Certificates does not arise for consideration in the case relied upon by the learned counsel, this judgement cannot be considered for declaring the Dena Bank judgement per incuriam.
Thus, after analysing the above judgements, the Hon’ble Court was of the view that the two-judge bench in the Dena case was correct in law and hence the claim of the learned counsel stands unsustainable.
Whether the debt is a financial debt under Section 5(8) of IBC?
The Hon’ble Court held that on perusal to the definition of financial debt, 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”. The Court enunciated that the legislation has provided with some of the instances which falls within the purview of financial debt and thus, the list provided under the Section is not exhaustive. Pursuant to the purpose and object of IBC, it is clear that the legislature did not intend to maintain the debt fructified to a decree outside the scope of the definition of financial debt. Therefore, the claim emanating from the Recovery Certificate would be classified as a ‘financial debt’.
Whether the financial creditor includes the holder of Recovery Certificate?
Since it has been established that the debt on account of which the Recovery Certificate has been issued is a ‘financial debt’, thus, on drawing a natural corollary, it is settled that the holder of such Recovery Certificate would be a ‘financial creditor’ within the meaning of Section 5(7) of the IBC.
Whether the person is prohibited to initiate CIRP under Section 14(1)(a)?
With regard to the above question, the Hon’ble court clarified that upon plain reading of the Section, it is clear that on the initiation of CIRP, the institution of the fresh proceedings or continuance of the pending proceedings or the execution of any judgement, order or decree before the court or tribunal or any authority is prohibited. However, such prohibition does not imply that the decree holder is prohibited from initiating CIRP.
The Court further held that Section 19(22A) of the Debt Recovery Act, is not only limited to the winding up proceedings. Therefore, the submission of the counsel of the respondent cannot be sustained as limiting the extent of Section 19(22A) would undermine the intent of the Legislature in enacting such provision.
Analysis of the Judgement
In light of the aforementioned arguments and rationale addressed by the Hon’ble Court, the question of capacity to make an application under Section 7 of the IBC was explored. In doing so, the Court construed the IBC in a way that advanced the object of the IBC rather than defeating its purpose. In addition to upholding the positions of Recovery Certificate and limitation established in the Dena Bank case, the decision maintains that a Recovery Certificate issued under the RDB Act is a separate financial liability giving rise to a fresh cause of action to initiate a CIRP in accordance with Section 7 of the IBC.
The stance of the creditors under the RDB Act to act as financial creditors in order to initiate CIRP even after the limitation period has been strengthened via this judgement, provided that they initiate DRT proceedings within the prescribed time limit for the adjudication of their claim besides the issuance of a Recovery Certificate by the DRT. A plethora of NCLT/NCLAT decisions have made the observation that insolvency proceedings cannot be initiated with an intent to avoid execution proceedings and that a creditor cannot produce an order or decree of the Tribunal or Court as evidence of unpaid debt to commence insolvency proceedings. With the recent Supreme Court ruling, it is clear that a creditor may opt to initiate insolvency proceedings on the basis of the order or decree rather than making an application of the execution of such decree.
 (1977) 2 SCC 806.
 (1965) 2 SCR 547.
 (2006) 13 SCC 322.
 Supra 1.
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