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Synopsis

The Supreme Court has said that the question of election between the fora for enforcement of debt under the 1993 Recovery of Debts and Bankruptcy Act and initiation of CIRP (Corporate Insolvency Resolution Process) under the IBC arises only after a recovery certificate is issued. 

It said that the reliefs under the two statutes are different and once CIRP results in declaration of moratorium, the enforcement mechanism under the 1993 Act or the SARFAESI Act gets suspended. 

A bench of Justices Aniruddha Bose and Vikram Nath said that the Insolvency and Bankruptcy Code itself is not really a debt recovery mechanism but a mechanism for the revival of a company fallen in debt, but the procedure envisaged therein substantially relates to ensuring recovery of debts in the process of applying such mechanism.

"In such circumstances, after issue of recovery certificate, the financial creditor ought to have option for enforcing recovery through a new forum instead of sticking on to the mechanism through which recovery certificate was issued," the bench said.

Referring to the top court's judgment in case of 'Transcore vs Union of India and Another' (2008), the application of the SARFAESI mechanism was held permissible even though the subject proceeding was instituted under the 1993 Act. 

"Thus, the doctrine of election cannot be applied to prevent the financial creditors from approaching the NCLT for initiation of CIRP," the bench said.

The court dismissed an appeal by one Tottempudi Salalith, managing director of Totem Infrastructures Limited (corporate debtor) against the NCLT and NCLAT's orders, which admitted State Bank of India's application under Section 7 of the IBC and declared moratorium primarily on the ground of limitation. The total claim on account of default as made before the National Company Law Tribunal (NCLT) was for a sum of Rs 613,27,01,598.23.

Prior to bringing the action under the IBC, notice under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) was issued to the corporate debtor and recovery proceedings were instituted against them before the Debt Recovery Tribunal (DRT). Three recovery certificates, one in 2015 and two in 2017, were issued by the respective Tribunals covering the claims of the lending banks.

The NCLAT had treated a letter of the corporate debtor issued on January 29, 2020, to be an acknowledgment of debt and on that basis proceeded to compute the limitation period. "In our opinion, this reasoning was procedurally wrong," the bench said.

But so far as the present appeal is concerned, the recovery proceedings before the DRT had commenced in the year 2014. At that point of time, the IBC had not come into existence. Moreover, it has been held by this Court in Kotak Mahindra I (2022) that the recovery certificate itself would give rise to a fresh cause of action entitling a financial creditor to initiate Corporate Insolvency Resolution Process (CIRP), the bench said.

"What has been filed before the NCLT is a composite application based on three recovery certificates, two of which have been instituted within the three-year period as postulated in Article 137 of the Limitation Act. The third recovery certificate was issued in the year 2015. Thus, there is more than three years gap between the date of issue thereof and the date of filing of the application before the NCLT. But a recovery certificate under the 1993 Act is also clothed with the character of a deemed decree," the bench said.

"In the event a financial creditor wants to pursue a recovery certificate as a deemed decree, he would get twelve years’ time. We are of this view as the extent of operation of a recovery certificate has been construed by this Court in Kotak Mahindra I to go beyond filing of winding up petition alone. It would retain the character of a decree to lodge a claim in an IBC proceeding," the bench added.

Using its power under Article 142 of the Constitution, the bench held that the application with respect to the two recovery certificates issued in the year 2017 was maintainable. 

"In the event, the Appellate Tribunal (NCLAT) is of opinion that the CIRP could not lie so far as the recovery certificate of 2015 is concerned, as the decree would be still alive, the claim based on the said recovery certificate could be segregated from the composite claim and the Committee of Creditors shall, in that event, treat the sum reflected in the said recovery certificate as part of the claims made in pursuance of the public announcement," the bench said.

Case Title: Tottempudi Salalith Vs State Bank of India & Ors