Holder of a recovery certificate issued under RDB Act is a ‘Financial Creditor’ under Section 5(7) of IBC

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Submissions of KMBL (Appellant):

The application under section 7 of the IBC was filed by the Appellant well within the period of three years from the date on which the recovery certificates were issued and therefore within limitation.  In view of the decision in Dena Bank (supra), it is settled a fresh period of limitation is available from the date of the recovery certificate.

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Submissions of Respondents:

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The cause of action in respect of the debt has merged into the DRT’s orders issuing the recovery certificates and therefore, a second proceeding on the same cause of action would be prohibited by the doctrine of res judicata.

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In view of 19 (22A) of the RDB Act which states that a recovery certificate shall be a deemed decree for the purpose of initiation of inter alia winding up proceedings under the Companies Act 2013, IBC proceedings cannot be filed pursuant to a recovery certificate.

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The judgment in Dena Bank (supra) is per incuriam, ie rendered without considering the correct position of law as it does not correctly consider sections 19 (22) and 19 (22A) of the RDB Act, as well as sections 5(7), 5(8), 6 and 14(1)(a) of IBC.

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The judgment in Dena Bank (supra) is also contrary to the judgments of the Supreme Court in Jignesh Shah and Anr. Vs. Union of India and Anr, (2019) 10 SCC 750 wherein the initiation of CIRP was held to be barred by limitation despite pending recovery proceedings, and Gaurav Hargovindbhai Dave vs. Asset Reconstruction Company (India) Limited and Anr, (2019) 10 SCC 572 wherein also the application under section 7 of IBC was held to be barred due to limitation.

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Recovery certificate is a “financial debt” within the meaning Section 5 (8) of IBC

An application under section 7 of the IBC may be filed in respect of a default as defined under section 3 (12) of IBC to mean non-payment of a debt. Section 3 (11) of the IBC defines “debt” as a “liability in respect of a claim, and section 3(6) of the IBC defines term “claim” to mean a right to payment, whether or not such right has been reduced to judgment. Therefore, if the submission on behalf of the Corporate Debtor is accepted, it would mean that a claim is excluded from being a financial debt even if reduced to judgment by way of a recovery certificate.

The list of arrangements that would qualify to be financial debt as mentioned in section 5(8) of the IBC is not exhaustive, and it could not have been the legislative intent to exclude a liability for a claim that is due and payable in terms of a recovery certificate. Therefore, any person holding such recovery certificate is well within the scope of a financial creditor under Section 5(7) of IBC.

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Judgment rendered in the case of Dena Bank (supra) is correct in law:

The decision in Dena Bank (supra) does not violate section 14 (1)(a) of the IBC, which only operates to prohibit a decree-holder from executing the decree against a corporate debtor undergoing CIRP.

Insofar as the judgments in Jignesh Shah (supra) and Gaurav Hargovindbhai Dave (supra), the Supreme Court observed that question as to whether a recovery certificate would give rise to a fresh period of limitation was not under consideration in either decision.

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Sections 19 (22) and 19 (22A) of the RDB Act do not restrict initiation of CIRP based on a recovery certificate

The Supreme Court held that if the contention on behalf of the Corporate Debtor is accepted, it would render the very purpose of Section 19 (22A) of the RDB Act otiose. It was further observed that the language of Section 19 (22A) of the RDB Act does not suggest that it is limited to initiating winding up proceedings only.