The Supreme Court has observed that holder of the recovery certificate would be entitled to initiate CIRP, if initiated within a period of three years from the date of issuance of such Certificate.
The full-judge bench of Justice L Nageshwara Rao, Justice B.R. Gavai and Justice A.S. Bopanna in view of above allowed appeal of Kotak Mahindra Bank against NCLAT order allowing appeal by the respondent holding that the application filed by the appellant was timebarred and that issuance of Recovery Certificate would not trigger the right to sue.
Facts of the Case:
The Ind BANK Housing Limited (“IBHL”) sanctioned separate credit facilities to 3 borrower companies. Respondent 2 i.e., the Corporate Debtor, stood as the Corporate Guarantor by mortgaging its immovable property in lieu of the aforementioned credit facilities. Subsequently, the 3 borrower companies defaulted in the repayment and hence, they were classified as NPAs by the IBHL. The matter went to the Madras HC and the appellant, Kotak Mahindra Bank limited (“KMBL”), entered into a deed with IBHL and pursuant to it, the Corporate Debtor was jointly and severally liable to pay the amount due from the 3 borrower entities. After the 3 borrower entities failed to make payments according to the aforementioned compromise, the KMBL issued a demand notice and a possession notice to them and the Corporate Debtor under the SARFAESI Act. A winding up notice was also issued by KMBL under the Companies Act, 1956 to the Corporate Debtor.
On further failure of repayment, the KMBL approached the Debt Recovery Tribunal (“DRT”) which issued debt recovery certificates in terms of the repayment compromise entered by the parties previously. For several years certain proceedings, between the parties with regard to contempt petition and applications for the issuance of recovery certificate, went underway. Later, the KMBL claiming to be a “financial creditor” approached the NCLT for the initiation of Corporate Insolvency Resolution Process (“CIRP”) under Section 7 of the IBC against the Corporate Debtor which was allowed.
In response, Respondent 1 i.e., Director of the Corporate Debtor filed an appeal against the said order of the NCLT before the NCLAT on the grounds that the initiation of CIRP against the Corporate Debtor was filed after the expiry of limitation period. The NCLAT allowed the appeal and the KMBL approached the Supreme Court appealing the impugned judgment by the NCLAT.
Observations of the Court:
Relying on the case of Dena Bank (now Bank of Baroda) Vs. C. Shivakumar Reddy, 2021 Latest Caselaw 310 SC, the court observed 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 IBC. Consequently, the holder of the Recovery Certificate would be a financial creditor within the meaning of Clause (7) of Section 5 of the IBC. As such, the holder of such certificate would be entitled to initiate CIRP, if initiated within a period of three years from the date of issuance of the Recovery Certificate. In the present case, the application under Section 7 of the IBC was filed within a period of three years from the date on which the Recovery Certificate was issued.
The appeal was allowed and the impugned judgment and order passed by the NCLAT was quashed and set aside.
Case Title: KOTAK MAHINDRA BANK LIMITED ...APPELLANT(S) vs A. BALAKRISHNAN & ANR.
Case Details: CIVIL APPEAL NO.689 OF 2021
Coram: Justice L Nageshwara Rao, Justice B.R. Gavai and Justice A.S. Bopanna
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