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Kotak Mahindra Bank Limited vs. A. Balakrishnan & Anr.

Civil Appeal · 2022 INSC 630Decided 30 May 2022
Civil Appeal No. 689 of 2021
L. Nageswara Rao · B.R. Gavai · A.S. Bopanna · Hima Kohli

Background

In the 1990s, Ind Bank Housing Limited had sanctioned credit facilities to three borrower companies, with the respondent's company (the Corporate Debtor) standing as guarantor by mortgaging its property. After the loans turned bad and the debt was assigned to Kotak Mahindra Bank (KMBL), a compromise was recorded by the Madras High Court in 2007 fixing the Corporate Debtor's liability. When repayment still did not happen, KMBL obtained "Recovery Certificates" from the Debt Recovery Tribunal in 2017 and, on that basis, filed an application in 2018 under Section 7 of the IBC to initiate insolvency proceedings against the Corporate Debtor. The National Company Law Tribunal (NCLT) admitted the application, but the National Company Law Appellate Tribunal (NCLAT) reversed this, holding the application was time-barred because, in its view, a Recovery Certificate does not create a fresh right to sue. KMBL appealed to the Supreme Court, where the correctness of the Court's own earlier ruling in Dena Bank vs. C. Shivakumar Reddy (which had held that a Recovery Certificate does give rise to a fresh cause of action) was also challenged as wrongly decided.

Decision Breakdown

The three-Judge Bench held that a liability arising out of a Recovery Certificate issued by the Debt Recovery Tribunal qualifies as a "financial debt" under Section 5(8) of the IBC, making the certificate-holder a "financial creditor" under Section 5(7), entitled to initiate the Corporate Insolvency Resolution Process (CIRP) under Section 7. It reasoned that the statutory deeming fiction treating a Recovery Certificate as a decree (Section 19(22A) of the Debt Recovery Act) is not artificially confined only to winding-up proceedings, and that a fresh cause of action arises on the date the Recovery Certificate is issued, so a CIRP application filed within three years of that date is within limitation, regardless of when the underlying account was first declared a non-performing asset. The Bench expressly affirmed the earlier two-Judge decision in Dena Bank as correctly decided, rejecting the argument that it was rendered "per incuriam." Applying this, since KMBL's IBC application was filed within three years of its Recovery Certificates (issued in 2017), the NCLAT's finding of limitation was wrong, and the NCLAT's order was set aside, though the Court left the merits of the insolvency claim itself to be decided afresh by the NCLT.

Lesson Learnt

A bank or financial institution that has already won a Debt Recovery Tribunal case and obtained a formal "Recovery Certificate" gets a fresh three-year window from the date of that certificate to pursue insolvency proceedings against the defaulting company: the clock does not run only from the original date of default.

Official source (sci.gov.in)View Judgment (PDF)

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