Summary
Credit facilities sanctioned in 1993–94 and guaranteed by the corporate debtor through a mortgage were classified as non-performing in 1997; suits were compromised by consent decree of the Madras High Court in 2007, and after further default the assignee bank obtained recovery certificates from the Debt Recovery Tribunal in June and October 2017. Within three years of those certificates, in October 2018, it applied under Section 7 of the Insolvency and Bankruptcy Code, 2016. The NCLT admitted the application but the NCLAT held it time-barred, reasoning that limitation ran from the 1997 default and that a recovery certificate did not create a fresh right to sue. The Supreme Court restored the admission. Affirming Dena Bank v. C. Shivakumar Reddy, it held that the holder of a recovery certificate is a financial creditor who may initiate CIRP within three years of its issue.
Issues
- Whether the holder of a recovery certificate issued by the Debt Recovery Tribunal is a 'financial creditor' entitled to initiate the corporate insolvency resolution process under Section 7 of the IBC, and whether issuance of the certificate gives a fresh cause of action with a three-year limitation period.
- Whether Dena Bank v. C. Shivakumar Reddy was decided per incuriam the provisions of the IBC and the Recovery of Debts Act or the three-Judge Bench decisions in Jignesh Shah and Gaurav Hargovindbhai Dave.
- Whether the deeming fiction in Section 19(22A) of the Recovery of Debts and Bankruptcy Act, 1993 confines the use of a recovery certificate to winding-up proceedings, and whether Section 14(1)(a) or the doctrines of merger and res judicata bar a decree-holder from invoking the IBC.
Provisions considered
- Sections 3(6), 3(10), 3(11), 3(12), 5(7), 5(8), 6, 7 and 14(1)(a), Insolvency and Bankruptcy Code, 2016'Claim' means a right to payment whether or not reduced to judgment, 'creditor' includes a decree-holder, and 'financial debt' is defined by 'means ... and includes', an inclusive formula (Dilworth; Pioneer Urban) that cannot exclude a debt crystallised into a recovery certificate when the underlying liability simpliciter would be a financial debt. The holder is therefore a financial creditor under Section 6; Section 14(1)(a) only bars execution of the decree after admission, not initiation of CIRP by the decree-holder. (¶¶ 29, 30, 31, 32, 33, 34, 38, 44, 47, 51, 52, 53, 54, 84)
- Section 19(22) and (22A), Recovery of Debts and Bankruptcy Act, 1993A recovery certificate is deemed a decree or order of the court for initiating winding-up or insolvency proceedings; reading in the word 'limited' would do violence to the plain language, and it would be incongruous for the legislature to allow the certificate to found the severer remedy of winding up but not CIRP, which preserves the debtor as a going concern. (¶¶ 70, 71, 72, 73, 75, 77, 78)
- Article 137, Limitation Act, 1963Limitation for a Section 7 application runs three years from accrual of the right to sue; once a claim fructifies into a judgment or recovery certificate a fresh right accrues, and an application within three years of the certificate's issue is in time (Dena Bank, following Vashdeo R. Bhojwani and Balakrishna Savalram Pujari Waghmare). (¶¶ 24, 25, 26, 63, 64, 65, 66, 85)
Held
- A liability in respect of a claim arising out of a recovery certificate is a 'financial debt' within Section 5(8) of the IBC; the holder of the certificate is a financial creditor under Section 5(7) and a person entitled under Section 6 to initiate CIRP, provided the application is made within three years of the certificate's issuance. (¶¶ 51, 52, 53, 84)
- Dena Bank is not per incuriam: it considered the relevant provisions and earlier decisions; Jignesh Shah and Gaurav Hargovindbhai Dave decided only that limitation for winding-up or Section 7 petitions runs from default and did not consider whether a decree or recovery certificate gives a fresh cause of action, and a decision is authority only for its ratio (Dhanwanti Devi; Pawan Kumar Dubey). Vashdeo R. Bhojwani itself recognised that issuance of a recovery certificate triggers limitation. (¶¶ 56, 57, 59, 60, 61, 62, 63, 66, 67, 68, 69)
- Section 19(22A) of the Recovery of Debts Act contains nothing restricting the recovery certificate to winding-up proceedings; a court cannot add words to a plain and unambiguous provision (Mohd. Shahabuddin; Nasiruddin), and Paramjeet Singh Patheja, concerning the fiction in Section 36 of the Arbitration Act, is inapplicable. The pleas of merger and res judicata founded on Nawab Hussain, Gulabchand Chhotalal Parikh and Thoday were not even remotely applicable. (¶¶ 72, 73, 77, 78, 79, 80, 83)
- The Section 7 application filed on 05.10.2018 was within three years of the recovery certificates of 07.06.2017 and 20.10.2017 and therefore within limitation; the NCLAT erred in holding otherwise. The merits are left open for the NCLT. (¶¶ 27, 85, 86, 87)
Result
Appeal allowed; the NCLAT's judgment of 24.11.2020 in Company Appeal (AT)(Insolvency) No. 1406 of 2019 set aside and the Section 7 application against Prasad Properties and Investments Pvt. Ltd. held to be within limitation, with all other issues left open before the NCLT. No order as to costs.