RECOVERY CERTIFICATE ISSUED BY DEBT RECOVERY TRIBUNAL – A FINANCIAL DEBT?

[Mr. M. GOVINDARAJAN]

Financial Debt

Section 5(8) of the Insolvency and Bankruptcy Code, 2016 (‘Code’ for short) defines the expression ‘financial debt’ as a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes-

1. money borrowed against the payment of interest;
2. any amount raised by acceptance under any acceptance credit facility or its de-materialized equivalent;
3.  any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument;
4. the amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may be prescribed;
5. receivables sold or discounted other than any receivables sold on non-recourse basis;
6. any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing;
7. any derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price and for calculating the value of any derivative transaction, only the market value of such transaction shall be taken into account;
8. any counter-indemnity obligation in respect of a guarantee, indemnity, bond, documentary letter of credit or any other instrument issued by a bank or financial institution;
1. the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clauses (a) to (h) of this clause.

Recovery Certificate

Section 19(1) of the Recovery of Debts and Bankruptcy Act, 1993 provides that where a bank or a financial institution has to recover any debt from any person, it may make an application to the Tribunal.  After observing due process of law the Tribunal passes its final order.  The Tribunal shall send a copy of its final order and the recovery certificate, to the applicant. The Presiding Officer shall issue a certificate of recovery along with the final order, for payment of debt with interest under his signature to the Recovery Officer for recovery of the amount of debt specified in the certificate.  Any recovery certificate issued by the Presiding Officer shall be deemed to be decree or order of the Court for the purposes of initiation of winding up proceedings against a company registered under the Companies Act, 2013 or Limited Liability Partnership registered under the Limited Liability Partnership Act, 2008 or insolvency proceedings against any individual or partnership firm under any law for the time being in force, as the case may be.

The Recovery Officer shall, on receipt of the copy of the certificate proceed to recover the amount of debt specified in the certificate by one or more of the following modes-

• attachment and sale of the movable or immovable property of the defendant;
• taking possession of property over which security interest is created or any other property of the defendant and appointing receiver for such property and to sell the same;]
• arrest of the defendant and his detention in prison;
• appointing a receiver for the management of the movable or immovable properties of the defendant;
• any other mode of recovery as may be prescribed by the Central Government.

Section 31A provides that where a decree or order was passed by any court before the commencement of the Recovery of Debts Due to Banks and Financial Institutions (Amendment) Act, 2000 and has not yet been executed, then, the decree-holder may apply to the Tribunal to pass an order for recovery of the amount.   On receipt of an application the Tribunal may issue a certificate for recovery to a Recovery Officer.  On receipt of a certificate the Recovery Officer shall proceed to recover the amount as if it was a certificate in respect of a debt recoverable under this Act.

Recovery certificate – financial debt?

Section 7(1) of the Code provides that a financial creditor either by itself or jointly with ¹ther financial creditors, or any other person on behalf of the financial creditor, as may be notified by the Central Government, may file an application for initiating corporate insolvency resolution process against a corporate debtor before the Adjudicating Authority when a default has occurred. 

The issue to be discussed in this article is whether the recovery certificate issued amounts to financial debt and the recovery certificate holder can initiate corporate insolvency resolution process. 

Section 5(8) of the Code defines the term ‘financial debt’.  The said section further provides that the items in (a) to (i) are included in the definition of ‘financial debt’.  These included items are not exhausted.  They are only examples.  More items may be included in the definition of ‘financial debt’ if the said debt has the qualification as the financial debt.

The Supreme Court in ‘KOTAK MAHINDRA BANK LIMITED VERSUS A. BALAKRISHNAN & ANR.  [2022 (6) TMI 13 - SUPREME COURT] held that the recovery certificate is a financial debt and the holder of said certificate is financial creditor and he is entitled to initiate corporate insolvency resolution process against the corporate debtor under section 7 of the Code.

In the said appeal before the Supreme Court, Ind Bank Housing Limited sanctioned separate credit facilities to these companies during the period between the years 1993 - 1994 –

• Green Gardens (P) Ltd,
• Gemini Arts (P) Ltd. and
• Mahalakshmi Properties & Investments (P) Ltd.

The respondent no.2 in the present appeal Prasad Properties and Investments Private Limited  (‘Corporate Debtor’) stood as the Corporate Guarantor/mortgagor and mortgaged its immovable property, situated in Guttala Begampet Village in Ranga Reddy District of Andhra Pradesh, by deposit of title deeds to secure the aforesaid credit facilities sanctioned to the borrower entities.   These borrower entities defaulted in repayment of the due.  The same were declared as Non Performing Assets.  The Ind Bank Housing Limited filed three civil suits before the High Court of Madras, against the borrower entities and the Corporate Debtor, for recovery of the amounts due.

The appellant Kotak Mahindra Bank Limited, during the pendency of civil suits, assigned all its rights, title, interest, estate, claim and demand to the debts due from borrower entities, to the appellant.  The appellant and the borrowing entities entered into a compromise on 07.08.2006.  According to the said compromise the Corporate Debtor was jointly and severally liable to pay the amount of Rs. 29,00,96,918/- due from the borrower entities to the appellant.

The borrower entities failed to pay the dues.  Therefore the appellant issued demand notice to all the borrower entities and the corporate debtor, as a guarantor under Section 13(2) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (‘SARFAESI Act’ for short) on 26.09.2007.  The said notice was followed by a Possession Notice dated 10.01.2008 issued under Section 13(4) of the SARFAESI Act, by the appellant.  The appellant further issued a Winding up Notice dated 06.05.2008 under sections 433 and 434 of the Companies Act, 1956 to the Corporate Debtor.

The appellant filed three applications under Section 31(A) of the Recovery of Debts and Bankruptcy Act, 1993 before the Debt Recovery Tribunal for issuance of Debt Recovery Certificates in terms of the said compromise entered into between the parties.  The Debt Recovery Tribunal issued separate Recovery Certificates dated 7th June, 2017 and 20th October, 2017 came to be issued against each of the borrower entities and the Corporate Debtor.

The appellant filed an application before the Adjudicating Authority under Section 7 of the Insolvency and Bankruptcy Code, 2016 (‘Code’ for short) on the basis of above said recovery certificates against the corporate debtor claim an amount to the tune of Rs.835.94 crores.  The Corporate Debtor filed its preliminary objection, inter alia, contending that the said petition was barred by limitation. The said application was admitted by the Adjudicating Authority on 20.09.2019.  The Corporate Debtor filed an appeal before the National Company Law Appellate Tribunal (‘NCLAT’ for short) against the order of the Adjudicating Authority.  The Corporate Debtor contended before NCLAT that the application for initiating corporate insolvency resolution process against the Corporate Debtor being filed after the expiry of limitation period.  NCLAT allowed the said appeal vide their order dated 24.11.2020.  Against the order of NCLAT the appellant filed the present appeal before the Supreme Court.

The appellant submitted the following before the Supreme Court-

• 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 accrues to the creditor to recover the amount specified in the Recovery Certificate.
• The present appeal deserves to be allowed inasmuch as, the application under Section 7 of the Code, filed by the appellant on 05.10.2018 is within the period of three years from the dates of issuance of the Recovery Certificates being 07.06.2017 and 20.10. 2017.
• The conduct of the respondents is that of a dishonest borrower.
•  Having entered into the consent terms, which are decreed by the High Court of Madras vide order dated 26.03.2007 and having not complied with the terms contained in the compromise decree, it is now not open to the respondents to oppose the admission of application under Section 7 of the Code.

The respondents submitted the following before the Supreme Court-

• In view of the limited legal fiction under Section 19(22A) of the Debt Recovery Act, the Recovery Certificates cannot be treated as ‘decree’ for all purposes.
• A decree holder may initiate corporate insolvency resolution process  as a financial creditor, but the holder of a Recovery Certificate granted under Section 19(22) of the Debt Recovery Act is not entitled to initiate corporate insolvency resolution process  under the Code  as a financial creditor or a decree holder.
• subsections (22) and (22A) of Section 19 of the Debt Recovery Act were brought on the statute book by ‘The Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016’, which was enacted on 16.08.2016 and brought into force from 04.11. 2016. 
• The deeming fiction contained therein applies only for the purposes of initiation of winding up proceedings. The deeming fiction cannot be extended for any other purpose
• The Recovery Certificate holders lost their right to use their certificate as a ‘decree’ for initiating winding-up proceedings under the Companies Act.
• If the aforesaid provisions of the Code and the Debt Recovery Act are considered in correct perspective, the conclusion that would be inevitable is that a decree holder is not a ‘financial creditor’ and as such, is disentitled to invoke the provisions of Section 7 of the Code.
• The provisions of Section 14 of the Code would also amplify this position, inasmuch as, under clause (a) of sub-section (1) thereof, the institution of suits or continuation of pending suits or proceedings against the Corporate Debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority is specifically prohibited.
• The issuance of Recovery Certificate does not give rise to a fresh cause of action and the timeline for the purpose of limitation would start in the year 1997 when the accounts of the borrower entities were declared Non Performing Assets, and that no interference is warranted with the same.

The appellant in response to the submissions by the respondents submitted the following before the Supreme Court-

• The purpose of the Code  is to preserve the Corporate Debtor as an ongoing concern, while ensuring maximum recovery for all the creditors.
• The provisions of the Code have to be interpreted in such a manner as to advance the purpose of the Code and not in a manner in which they defeat the object of the Code.

The Supreme Court analyzed various provisions of the Code.  The Supreme Court observed that from the scheme of the Code, it could be seen that where any Corporate Debtor commits a default, a financial creditor, an operational creditor or the Corporate Debtor itself is entitled to initiate corporate insolvency resolution process  in respect of such Corporate Debtor.  A default would take place when a debt in respect of a claim is due and not paid. A claim would include a right to payment whether or not such a right is reduced to judgment.

The Supreme Court then considered the question as to whether a person, who holds a Recovery Certificate would be a financial creditor within the meaning of clause (7) of Section 5 of the Code. Therefore, the only question that would be required to be considered is as to whether a liability in respect of a claim arising out of a Recovery Certificate would be included within the meaning of the term ‘financial debt’ as defined under clause (8) of Section 5 of the Code.

It is a settled position of law that when the word ‘include’ is used in interpretation clauses, the effect would be to enlarge the meaning of the words or phrases occurring in the body of the statute. Such interpretation clause is to be so used that those words or phrases must be construed as comprehending, not only such things, as they signify according to their natural import, but also those things which the interpretation clause declares that they shall include. In such a situation, there would be no warrant or justification in giving the restricted meaning to the provision.

Clause (8) of Section 5 of the Code, it could clearly be seen 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. It is clear that by employing the words ‘and includes’, the Legislature has only given instances, which could be included in the term ‘financial debt’. 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’.

The Supreme Court held that the liability in respect of a claim arising out of a Recovery Certificate would be a ‘financial debt’ within the ambit of its definition under clause (8) of Section 5 of the Code, as a natural corollary thereof, the holder of such Recovery Certificate would be a financial creditor within the meaning of clause (7) of Section 5 of the Code. As such, such a ‘person’ would be a ‘person’ as provided under Section 6 of the Code who would be entitled to initiate the corporate insolvency resolution process.

In regard to limitation the Supreme Court observed that the suit for recovery, which is a separate and independent proceeding distinct from the remedy of winding up would, in no manner, impact the limitation within which the winding up proceeding is to be filed, by somehow keeping the debt alive for the purpose of the winding up proceeding.  In the present case, undisputedly, the application under Section 7 of the Code was filed within a period of three years from the date of issuance of the Recovery Certificate.

The Supreme Court came to a conclusion that a liability in respect of a claim arising out of a Recovery Certificate would be a ‘financial debt’ within the meaning of clause (8) of Section 5 of the Code and a holder of the Recovery Certificate would be a ‘financial creditor; within the meaning of clause (7) of Section 5 of the Code. We have also held that a person would be entitled to initiate Corporate Insolvency Resolution Process within a period of three years from the date on which the Recovery Certificate is issued.

The Supreme Court allowed the appeal filed by the appellant and quashed the order passed by the NCLAT.  The Supreme Court further held that they decided only legal issues and not on merits.  The parties would be at their liberty to raise issues before the Adjudicating Authority.   The Adjudicating Authority would decide the case in accordance with the law.