A Liability Arising Out Of A Recovery Certificate Would Constitute A "Financial Debt" As Defined In Clause (8) Of Section 5 Of The IBC

By - Deepak Panwar on June 30, 2022

Recovery Certificate Constitutes Debt - Section 5(8) IBC

Ind Bank Housing Limited (hereinafter referred to asIBHL”) granted loans to three entities between 1993 and 1994, with the Corporate Debtor serving as the Corporate Guarantor. Because the borrowers defaulted, all of their loans were classified as non-performing assets. The Madras High Court has been served with three recovery suits. Meanwhile, on October 13, 2006, Kotak Mahindra Bank Ltd. (hereinafter referred to as “KMBL”) entered into a Deed of Assignment with IBHL. As a result, KMBL entered into an agreement with the borrowers. The High Court remarked that the Corporate Debtor was jointly and severally responsible to pay Rs. 29,00,96,918 to KMBL in its judgement of March 26, 2007. When the borrowers defaulted, KMBL issued demand notices to them and the Corporate Debtor under Section 13(1) of the SARFAESI Act, followed by a possession notice. On May 6, 2008, KMBL issued a winding up notice to the Corporate Debtor. It filed three applications under the provisions of the Recovery of Debts and Bankruptcy Act of 1993 and Section 31(A). In 2017, these applications were approved, and recovery certificates were issued.

On October 5, 2018, KMBL filed an application with the NCLT under Section 7 of the IBC, requesting that the CIRP be initiated against the Corporate Debtor for a sum of Rs 8,35,93,52,369. The NCLT accepted it on September 20, 2019. The Director of the Corporate Debtor filed an appeal with the NCLAT, claiming that the application under Section 7 was lodged after the limitation period had expired. The NCLAT upheld the appeal.

Contentions

The appellants cited Dena Bank vs. C. Shivakumar Reddy & Anr., in which the Hon’ble Supreme Court of India held that when a claim becomes a final judgement and a certificate of recovery is issued authorizing the creditor to realize the decretal amount, the creditor gains a new right to recover the amount specified in the Recovery Certificate. They claimed that KMBL's application under Section 7 of the IBC was filed within three years of the certifications' issuing dates. Furthermore, the borrower who had failed to comply with the compromise reached with KMBL should not be allowed to object to the application for CIRP initiation being accepted.

According to the respondents, the cause of action had merged into the order of issuing the recovery certificate, and the debt no longer exists. They argued that the application under Section 7 of the IBC would be a second process for the same cause, citing the cases of State of UP vs. Nawab Hussain and GulabchandChhotalal Parikh vs. the State of Bombay. They maintained that under Section 19(22A) of the Debt Recovery Act, recovery certificates cannot be construed to constitute as a “decree,” and hence, KMBL cannot be considered a decree-holder to begin proceedings against the Corporate Debtor, citing the Apex Court's decision in Paramjeet Singh Patheja v. ICDS Ltd. They further cited the judgement given in Subhankar Bhowmik v. Union of India & Anr. to argue that even decree holders are barred from initiating CIRP. The Dena Bank’s case decision was said to be per incuriam since it disregarded several aspects of the relevant status and broader bench decisions. Finally, they claimed that the decree-holder could not be regarded as a financial creditor and hence could not apply Section 7 of the IBC. They argued that the NCLAT's decision on how the application was time-barred was incorrect.

Analysis & Observations of the Supreme Court

The Court was inclined to approve the appeal after considering the Dena Bank case judgement. However, because Mr Vishwanathan had questioned Dena Bank's legality, the Court decided to consider his arguments, based on the statute's provisions and the decisions of the three-judge Bench of the Apex Court in Jignesh Shah & Anr. v. Union of India & Anr. and Gaurav Hargovindbhai Dave v. Asset Reconstruction Company (India) Limited & Anr. When a Corporate Debtor commits a default, a financial creditor, an operational creditor, or the Corporate Debtor itself might begin CIRP, according to various sections of the IBC. Furthermore, 'default' has been defined as 'non-payment of debt'; 'debt' has been defined as 'liability or obligation in respect of a claim due from any person, including financial debt and operational debt'; and 'claim' has been defined as 'a right to payment, whether or not such right is reduced to judgement.'

As a result, the Court reasoned that it should consider whether liability in respect of a 'claim' arising out of a Recovery Certificate falls within the definition of 'financial debt,' which is defined as a ‘debt, together with interest, if any, which is disbursed against the consideration for the time value of money and includes...under Section 5(8) of the IBC’. The Court highlighted that inserting the word "including" would have the effect of broadening the scope of the legislation, citing a slew of decisions on the subject. The Court determined that a debt that has crystallized in the form of a decree would be covered under Section 5(8), based on the statute's goal and purpose.

As a result, a liability arising out of a Recovery Certificate would constitute a "financial debt" as defined in clause (8) of Section 5 of the IBC, and the holder of such certificate would be a financial creditor as defined in Section 5(7) of the IBC.

In the instance of Dena Bank, the Court held that all relevant provisions of the IBC and earlier judgements were relied upon and that it was not inconsistent with the Apex Court's earlier judgments. The Court determined that the decisions on res-judicata and cause of action estoppel would be irrelevant in the facts of this case. The Court did not agree with the submission made concerning Section 19(22A) of the Debt Recovery Act.


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