2023 (10) TMI 895 - SC - Insolvency and Bankruptcy

SC Affirms Application's Validity; Tribunal to Review 2015 Recovery Certificate as Deemed Decree; CIRP Limitation Clarified

The SC dismissed the appeal, affirming the maintainability of the application concerning the two recovery certificates issued in 2017. It directed the ... Application under Section 7 IBC - financial debt and financial creditor - recovery certificate as a deemed decree under Section 19(22A) of the Recovery of Debts Act - limitation governed by Article 137 of the Limitation Act - acknowledgement in writing under Section 18 of the Limitation Act - promise to pay under Section 25(3) of the Contract Act - moratorium under Section 14 IBC - doctrine of electionApplication under Section 7 IBC - financial debt and financial creditor - moratorium under Section 14 IBC - Validity of the Section 7 admission and declaration of moratorium insofar as the composite application based on recovery certificates was concerned. - HELD THAT: - The NCLT admitted the Section 7 application and declared moratorium; the Appellate Tribunal upheld that admission. The Court found no material irregularity or patent illegality in admitting the application on the basis of recovery certificates which established debt and default, and recognised that a holder of a recovery certificate is a financial creditor entitled to initiate CIRP. Consequently, the admission and the declaration of moratorium were sustained. [Paras 3, 15, 16]Admission under Section 7 and declaration of moratorium were upheld in respect of the claims based on the recovery certificates that were found to establish financial debt and default.Limitation governed by Article 137 of the Limitation Act - recovery certificate as a deemed decree under Section 19(22A) of the Recovery of Debts Act - Whether the Section 7 application was time barred in respect of the recovery certificates relied upon by the financial creditor. - HELD THAT: - This Court applied Kotak Mahindra I: a recovery certificate gives rise to a fresh cause of action and a holder may initiate CIRP within three years from issuance of the recovery certificate. Two recovery certificates dated 2017 fell within that three year period and thus those parts of the composite application were maintainable. The 2015 recovery certificate raised a distinct question because a recovery certificate is also a deemed decree and a decree has a twelve year life under Article 136; the Appellate Tribunal had not considered whether the 2015 certificate, as a deemed decree, attracted the longer period. That discrete legal question was therefore left to be examined afresh by the Appellate Tribunal. [Paras 5, 12, 13, 14, 15]Claims based on the 2017 recovery certificates are within the limitation period and maintainable; the question whether the 2015 recovery certificate must be treated as a deemed decree attracting a twelve year limitation was remitted to the Appellate Tribunal for determination.Acknowledgement in writing under Section 18 of the Limitation Act - promise to pay under Section 25(3) of the Contract Act - Legal effect of the corporate debtor's letter dated 29.01.2020 on limitation and whether it revived or extended the limitation period for the Section 7 application. - HELD THAT: - The letter of 29.01.2020 was construed as a request for one time settlement and not a clear, unconditional promise to pay within the meaning of Section 25(3); more importantly, it was executed after the Section 7 proceedings had already been instituted. An acknowledgement under Section 18 can only revive limitation if made before the prescribed period expires and must be specifically pleaded. Since the purported acknowledgement occurred post institution and was not pleaded as averment to extend limitation, it could not be relied upon to cure any limitation defect in the Section 7 application; it could, at best, constitute an independent cause of action. [Paras 6, 8, 9]The 29.01.2020 letter did not revive or extend limitation for the Section 7 application and could not be used to compute limitation in the present proceedings.Doctrine of election - Whether the banks' prior pursuit of recovery before the DRT barred them by the doctrine of election from initiating CIRP under the IBC. - HELD THAT: - The doctrine of election does not preclude a decreeholder from initiating CIRP after a recovery certificate has been issued. The IBC provides a different remedy and, following Kotak Mahindra I, a recovery certificate generates a fresh cause of action permitting the financial creditor to choose the insolvency route. The reliefs under the recovery regime and the IBC are distinct, and a creditor may opt to enforce dues by initiating CIRP even after pursuing remedies under the Recovery of Debts Act or SARFAESI. [Paras 11]Doctrine of election did not bar the financial creditors from approaching the NCLT to initiate CIRP on the strength of recovery certificates.Recovery certificate as a deemed decree under Section 19(22A) of the Recovery of Debts Act - limitation governed by Article 136 of the Limitation Act - Remand for consideration whether the 2015 recovery certificate, being a deemed decree, is governed by the twelve year period for execution and thus affects maintainability of the composite Section 7 application. - HELD THAT: - The Court observed that subsection (22A) treats a recovery certificate as a deemed decree for purposes including initiation of winding up and, as construed in Kotak Mahindra I, may be used to lodge a claim under the IBC. Given that a decree's life for enforcement is twelve years under Article 136, the legal character of the 2015 recovery certificate as a deemed decree and the consequent applicable limitation period was not examined by the NCLT or the Appellate Tribunal. The Court therefore directed that the Appellate Tribunal consider this question; if the Appellate Tribunal concludes CIRP cannot lie as to the 2015 certificate, that claim may be segregated from the composite petition and treated as a part of claims in the public announcement. [Paras 12, 13, 14, 15]The question whether the 2015 recovery certificate attracts the twelve year period as a deemed decree is remanded to the Appellate Tribunal for fresh consideration; if CIRP cannot be maintained on that certificate, the claim should be segregated and processed in the insolvency claims procedure.Final Conclusion: The appeal is dismissed. The admission of the Section 7 application and declaration of moratorium were upheld insofar as claims based on the 2017 recovery certificates are concerned; the corporate debtor's post filing letter of 29.01.2020 does not revive limitation; the doctrine of election does not bar initiation of CIRP on recovery certificates; and the discrete question whether the 2015 recovery certificate is a deemed decree attracting a twelve year limitation is remitted to the Appellate Tribunal for determination, with directions for segregation of that claim if CIRP cannot be sustained in respect thereof. Issues Involved:1. Limitation period for initiating proceedings under the IBC.2. Applicability of the doctrine of election.3. Validity of the RBI Circular dated 12.02.2018.4. Treatment of recovery certificates as deemed decrees.5. Acknowledgment of debt and its effect on limitation.Summary:1. Limitation Period for Initiating Proceedings under the IBC:The appellant challenged the NCLT's decision to admit the application under Section 7 of the IBC on the ground of limitation. The NCLT and the Appellate Tribunal treated a letter dated 29.01.2020 as an acknowledgment of debt, which extended the limitation period. However, the Supreme Court found this reasoning procedurally wrong, stating that acknowledgment beyond the period of limitation does not revive the right to sue. The Court reiterated that the limitation period for initiating CIRP starts from the date of default and is three years as per Article 137 of the Limitation Act. The Court cited the judgment in Kotak Mahindra Bank Limited vs A. Balakrishnan and Another [(2022) 9 SCC 186], affirming that a recovery certificate gives rise to a fresh cause of action to initiate CIRP within three years from its issuance.2. Applicability of the Doctrine of Election:The appellant argued that the banks were barred under the doctrine of election from approaching the NCLT after having initiated proceedings under the SARFAESI Act and before the DRT. The Supreme Court rejected this argument, stating that the recovery proceedings before the DRT had commenced before the IBC came into existence. The Court held that a financial creditor has the right to initiate CIRP even after obtaining a recovery certificate, as the reliefs under the two statutes are different.3. Validity of the RBI Circular Dated 12.02.2018:The appellant contended that the application under the IBC was initiated based on an RBI Circular dated 12.02.2018, which was later held ultra vires by the Supreme Court in Dharani Sugars and Chemicals Ltd. vs Union of India and Others [(2019) 5 SCC 480]. The Appellate Tribunal noted that the NCLT did not provide reasons for considering this issue. However, the Tribunal itself addressed and dismissed this contention, affirming the NCLT's decision.4. Treatment of Recovery Certificates as Deemed Decrees:The Supreme Court discussed the treatment of recovery certificates as deemed decrees under Section 19(22A) of the Recovery of Debts and Bankruptcy Act, 1993. The Court held that a recovery certificate is deemed to be a decree for the purpose of initiating CIRP and is enforceable for twelve years as per Article 136 of the Limitation Act. The Court directed the Appellate Tribunal to examine whether the debts related to the recovery certificate issued in 2015 could form the subject matter of the application filed in 2019.5. Acknowledgment of Debt and Its Effect on Limitation:The appellant argued that the letter dated 29.01.2020 was a request for a one-time settlement and not an acknowledgment of debt. The Supreme Court agreed, stating that any promise to pay made after the initiation of insolvency proceedings cannot revive the limitation period for a pre-existing action. The Court emphasized that a promise of this nature would constitute an independent cause of action.Conclusion:The Supreme Court dismissed the appeal, affirming the maintainability of the application with respect to the two recovery certificates issued in 2017. The Court directed the Appellate Tribunal to address the legality of the 2015 recovery certificate as a deemed decree and consider segregating the claim based on this certificate if necessary. The appeal was dismissed with no order as to costs.