Recovery Certificate would Qualify as a “Financial Debt” under the Insolvency and Bankruptcy Code, 2016 and Give Rise to a Fresh Cause of Action
In a recent judgment in Kotak Mahindra Bank Limited versus A. Balakrishnan & Anr [Civil Appeal No. 689 of 2021], the Hon’ble Supreme Court settled the position w.r.t. the holder of recovery certificate issued under the Recovery of Debts and Bankruptcy Act, 1992 (“RDB Act”) who shall be a ‘Financial Creditor’ under Insolvency and Bankruptcy Code, 2016 (“IBC/Code”) and shall have a fresh cause of action to initiate CIRP under section 7 of the Code.
In the present matter, Kotak Mahindra Bank, which procured a recovery certificate from Debt Recovery Tribunal, filed an application under section 7 of the Code on the basis of the recovery certificate. The application was admitted but immediately challenged before the Hon’ble NCLAT which set aside the order of the NCLT on the basis of the cause of action being time barred.
The order of NCLAT was challenged before the Hon’ble Supreme Court on the ground that the application before NCLT was made well within the period of three years from the date on which the recovery certificates were issued and therefore the application under section 7 was within limitation.
The Court set aside the order of NCLAT. The Court upheld the decision in Dena Bank (now Bank of Baroda) vs. C. Shivakumar Reddy & Anr, 2021 SCC OnLine SC 543 which inter alia held that the a fresh period of limitation period would accrue for an application under Section 7 from the date of a recovery certificate. The Court reasoned that a recovery certificate is a “financial debt” within the unexhausted definition provided under Section 5 (8) of the Code. While an application under section 7 of the IBC may be filed in respect of a ‘default’ which means non-payment of a debt as per section 3 (12) of the Code, “debt” is defined as a “liability in respect of a claim as per Section 3 (11) of the Code, and “claim” in turn, as per section 3(6) of the IBC, means a right to payment, whether or not such right has been reduced to judgment. In this case, the claim has been reduced to judgment by way of a recovery certificate. The Court also went into interpreting Sections 19 (22) and 19 (22A) of the RDB Act and held that they do not restrict initiation of CIRP based on a recovery certificate.
