SUPREME COURT UPHOLDS THAT A RECOVERY CERTIFICATE ISSUED BY A DEBT RECOVERY TRIBUNAL IS TREATED AS A DEEMED DECREE

A two-Judge Bench of the Supreme Court comprising of Justice Aniruddha Bose and Justice Vikram Nath passed a Judgment dated 18-10-2023 in the matter of Tottempudi Salalith Vs. State Bank Of India & Ors, Civil Appeal No. 2348 / 2021 and observed that a recovery certificate issued by the Debt Recovery Tribunal (DRT) is deemed to be a decree or order of the court for various purposes, including for initiating Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (IBC).

FACTS:

i) That the aforesaid Appeal was filed before the Apex Court by one, Tottempudi Salalith (Appellant) against the State Bank of India, Totem Infrastructure Limited and, one G. Satyanarayana Murty (Respondents), who challenged the decision of the Hon’ble National Company Law Appellate Tribunal, Chennai (NCLAT) which affirmed the decision of the Ld. National Company Law Tribunal, Hyderabad (NCLT), in favor of admitting the Application filed by the Financial Creditor under Section 7 of the Insolvency and Bankruptcy Code, 2016, (Initiation of corporate insolvency resolution process by financial creditor).

ii) That Totem Infrastructure Limited (Corporate Debtor) was facing insolvency proceedings due to its default in repaying loans and bank guarantees to several banks. Several banks, including Union Bank of India, IDBI, Oriental Bank of Commerce, Bank of Baroda, Karnataka Bank, Syndicate Bank, Punjab National Bank, and State Bank of India, had extended financial facilities to the Corporate Debtor.

iii) Thereafter, the State Bank of India subsidiaries, such as State Bank of Hyderabad, State Bank of Mysore, State Bank of Travancore, State Bank of Bikaner and Jaipur, and State Bank of Patiala, had also extended financial facilities, and thereafter, they merged with the State Bank of India.

iv) The State Bank of India filed an Application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) against the Corporate Debtor in the NCLT. Prior to initiating the IBC action, the Banks had issued notices under Section 13(2)[1] of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI), (Enforcement of security interest) and recovery proceedings were instituted before the Debt Recovery Tribunals (DRT). Recovery certificates were issued by the respective DRTs.

v) That the Ld. NCLT admitted the State Bank of India’s Application and declared a moratorium in January 2021, thereby, appointing an Interim Resolution Professional. The Managing Director of the Corporate Debtor appealed against the NCLT’s decision primarily on the grounds of limitation, arguing that the debt was time-barred.

vi) The Appellant argued that the Corporate Debtor’s Letter dated 29.01.2020 constituted an acknowledgment of the debt, but this was procedurally wrong and it lacked specific pleading.

vii) The Appellant relied on Section 25(3)[2] of the Contract Act, 1872 and the Limitation Act, 1963, to support the argument that the acknowledgment was insufficient to extend the limitation period.

NCLT FINDINGS:

I) That, the Ld. NCLT considered a Letter issued by the Corporate Debtor on 29.01.2020 as an acknowledgment of debt. This acknowledgment was a crucial factor in determining the limitation period for debt recovery.

II) Furthermore, the Ld. NCLT found that there was a “Financial Debt” due and payable by the Corporate Debtor and that it had committed a default. This was based on orders passed by the Debt Recovery Tribunals (DRTs) and the issuance of recovery certificates.

III) The NCLT recognized the importance of the Adjudicating Authority disclosing its reasons for decisions. It emphasized that providing reasons for decisions guarantees consideration and clarity and enables superior authorities to evaluate the orders passed.

IV) The Ld. NCLT concluded that there were no material irregularities or patent illegalities in the admission of the Section 7 Application against the Corporate Debtor. Therefore, the Application was considered valid.

NCLAT FINDINGS:

Aggrieved by the Order dated 12.01.2021 passed by the Ld. NCLT, the Appellant filed an Interlocutory Application No. 04 / 2021 before the Hon’ble NCLAT, (Chennai). The Hon’ble NCLAT vide Order dated 25.06.2021 made the following observations:

a) The Hon’ble NCLAT, following the judgment in the case of Dena Bank v. C. Shivakumar Reddy,(2021) 10 SCC 330], recognized that when a recovery certificate is issued, a fresh right to recover the amount specified in the certificate accrues to the creditor. Therefore, the issuance of the recovery certificate gave rise to a fresh cause of action, allowing the financial creditor to initiate proceedings under the IBC within three years from the date of the certificate’s issuance.

b) The Hon’ble NCLAT clarified that while Clause (a) of subsection (1) of Section 14 of IBC prohibits the institution of suits or continuation of pending suits or proceedings against the Corporate Debtor, it does not prevent a decree holder from initiating Corporate Insolvency Resolution Process (CIRP) if they are entitled to do so.

c) The Hon’ble NCLAT emphasized the importance of including specific pleadings regarding acknowledgment or admission of a claim to overcome the limitation issue. It pointed out that specific facts constituting an acknowledgment or admission of the claim should be pleaded in the application.

d) The Hon’ble NCLAT recognized that Section 238A of the IBC, 2016 (Limitations) states that the Limitation Act, 1963 provisions apply to proceedings before the NCLT and NCLAT.

SUPREME COURT:

Aggrieved by the Order dated 25.06.2021 passed by the Ld. NCLAT, the Appellant filed a Civil Appeal No. 2348 / 2021 before the Hon’ble Supreme Court on 05.07.2021. The Apex Court, in its observations, addressed the crucial issues which are as follows:

Issues:

A) Examining into pinpointing the exact moment when the Corporate Debtor defaulted on its loan obligations is a critical factor in the legal proceedings.

B) Whether the date of issuance of the recovery certificate by the Debt Recovery Tribunal holds significant implications.

C) Whether the doctrine of election, a legal principle preventing multiple courses of action based on the same cause, is applicable to the Bank’s efforts to recover the debt.

D) Making a clear distinction between recovery certificates issued within the stipulated limitation period and those issued earlier.

OBSERVATIONS:

1) The Supreme Court acknowledges that the letter mentioned was a request for a one-time settlement. However, the Court points out that such a request, in the absence of proper averments or pleading, cannot be used to overcome the issue of limitation. Instead, it is seen as an independent cause of action.

2) Further, the Apex Court discussed the argument regarding the date of default, specifically whether it should be determined from the date when the loan account of the Corporate Debtor was declared as a non-performing asset. The Supreme Court referred to K. Educational Services Private Limited vs Parag Gupta & Associates [(2019) 11 SCC 633] which treated the date of default as the starting point for the limitation period. It clarified that these cases do not contradict the legal precedents established by earlier Supreme Court judgments.

3) The Bench addressed the Doctrine of Election, which prohibits pursuing the same right in two different forums based on the same cause of action. The Apex Court emphasized that this Doctrine does not apply to bar financial creditors from approaching the NCLT to initiate CIRP after a recovery certificate is issued.

4) Further, the Supreme Court noted that a recovery certificate issued by DRT is treated as a deemed decree and that the limitation period for filing an application under Section 7 of the IBC is guided by Article 137 of the Limitation Act.

5) The Apex Court further emphasized that a recovery certificate issued by the DRT is deemed to be a decree or order of the court for various purposes, including initiating CIRP under the IBC. Further, the Court clarified that the scope of this provision is not limited to companies registered under the Companies Act, 2013, and extends to companies incorporated under earlier company laws.

6) The Bench suggested that if the Appellate Tribunal finds that CIRP cannot be initiated based on a recovery certificate issued in 2015, the claim related to that certificate should be segregated from the composite claim, and the Committee of Creditors should address it separately.

CONCLUSION:

Based on the aforementioned analysis, the Apex Court addressed critical legal aspects related to the initiation of CIRP under IBC and emphasized the significance of adhering to the limitation period based on Article 137 of the Limitation Act for filing CIRP under IBC and further, highlighted that a recovery certificate from DRT is treated as deemed decree.

As a result, the Supreme Court dismissed the Appeal, while providing directions for segregating claims related to a specific recovery certificate issued in 2015. This Judgment reaffirmed the legal principles regarding the initiation of CIRP and the role of recovery certificates in this process.

 

Sakshi Raghuvanshi

Legal Associate

The Indian Lawyer

 

 

[1] Section 13(2)^[1] of SARFAESI Act: (2) Where any borrower, who is under a liability to a secured creditor under a security agreement, makes any default in repayment of secured debt or any instalment thereof, and his account in respect of such debt is classified by the secured creditor as non-performing asset, then, the secured creditor may require the borrower by notice in writing to discharge in full his liabilities to the secured creditor within sixty days from the date of notice failing which the secured creditor shall be entitled to exercise all or any of the rights under sub-section (4).

 

1[Provided that—

 

(i) the requirement of classification of secured debt as non-performing asset under this sub-section shall not apply to a borrower who has raised funds through issue of debt securities; and

 

(ii) in the event of default, the debenture trustee shall be entitled to enforce security interest in the same manner as provided under this section with such modifications as may be necessary and in accordance with the terms and conditions of security documents executed in favour of the debenture trustee.]

[2] Section 25(3)^[2] of the Contract Act (3): It is a promise, made in writing and signed by the person to be charged therewith, or by his agent generally or specially authorized in that behalf, to pay wholly or in part a debt of which the creditor might have enforced payment but for the law for the limitation of suits.

In any of these cases, such an agreement is a contract.

Explanation 1.Nothing in this section shall affect the validity, as between the donor and donee, of any gift actually made.

Explanation 2.An agreement to which the consent of the promisor is freely given is not void merely because the consideration is inadequate; but the inadequacy of the consideration may be taken into account by the Court in determining the question whether the consent of the promisor was freely given.