Alerts & Updates 25th Oct 2023

Supreme Court affirms non applicability of the Doctrine of Election under the Insolvency and Bankruptcy Code, 2016

Authors

Mukesh Chand Senior Counsel | Mumbai

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The Supreme Court of India recently addressed the issue of the applicability of the doctrine of “election” under the Insolvency and Bankruptcy Code, 2016 (IBC). In a significant judgment, the Hon’ble Supreme Court ruled that financial creditors in possession of a decree from a civil court or a recovery certificate under the Recovery of Debts and Bankruptcy Act, 1993 (DRT Act), have the option to utilize the provisions of the IBC in addition to the normal recourse for execution of such decree/recovery certificate. While this ruling enhances the legal options available to banks and financial institutions and also other such creditors, it also raises the question of whether such recourse, in the hands of a decree holder, really aligns with the primary objective of the IBC -the intent of which is resolution.[1]

  • By way of background

    In the case brought before the Supreme Court, the banks extended financial assistance to the corporate debtor. When the corporate debtor defaulted on repayment, the banks-initiated proceedings under the Recovery of Debts and Bankruptcy Act, 1993 (DRT Act), as well as the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). They filed three applications under the DRT Act, two before the DRT, Hyderabad and one before the DRT, Bengaluru. These applications eventually led to the issuance of three recovery certificates by respective Tribunals, covering the claims of the lending banks.

  • Transition to IBC

    Based on these recovery certificates, the State Bank of India filed an application under Section 7 of the IBC on September 6, 2019, before the National Company Law Tribunal, which was subsequently admitted on January 12, 2021. This decision was challenged by erstwhile Managing Director of the Corporate Debtor before the Appellate Tribunal and eventually reached the Hon’ble Supreme Court. The primary points of contention were the issues of limitation and the application of the doctrine of election.

  • Doctrine of Election- Clarification

    Regarding the application of the doctrine of election, the Court held that this doctrine cannot be employed to prevent a financial creditor from initiating the corporate insolvency resolution process under the IBC (CIRP). The Supreme Court emphasized that, following the Kotak Bank Judgment[2], the recovery certificate from the DRT was recognized as a valid legal recourse. It was also stressed that the enforcement mechanism of the recovery certificate under the DRT Act is an independent avenue, while the IBC serves a different purpose, focusing on resolution rather than mere debt recovery. To support this view, the Court referred to the case of Transcore vs. Union of India and Another[3], where proceedings under the SARFAESI Act were allowed concurrently with proceedings under the DRT Act.

  • Limitation Consideration

    On the issue of limitation, the Hon’ble Supreme Court, in line with the Kotak Bank Judgment, reaffirmed that the issuance of a recovery certificate to a financial creditor,  triggers a new cause of action for initiating proceedings under Section 7 of the IBC. The Court clarified that the CIRP must be initiated within three years of the judgment, decree, or the issuance of the recovery certificate. In this particular case, the application was based on three recovery certificates, with two falling within the three-year period prescribed by Article 137 of the Limitation Act, which applies to the initiation of proceedings under the IBC. The third recovery certificate dates to 2015, surpassing the three-year limitation under Article 137 of the Limitation Act. However, the Court noted that a recovery certificate issued under the DRT Act retains the characteristics of a decree as per Section 19(22A) of the DRT Act. This gives the certificate holder a twelve-year timeframe for execution. Notably, the Tribunals did not delve into this specific issue. Consequently, the Supreme Court deferred the matter of examining the legal standing of the 2015 certificate as a deemed decree to the Appellate Tribunal. The Supreme Court made clear that if the Appellate Tribunal determines that the Corporate Insolvency Resolution Process (CIRP) cannot proceed based on 2015 recovery certificate, the amount specified in the said certificate will remain valid and be considered as part of the claims submitted.

  • Conclusion

    The Hon’ble Supreme Court has definitively clarified that the IBC provides an independent recourse, supplementing the options available to financial/creditors under agreements or governing statutes concerning decree or recovery certificate enforcement. This clarification may empower decree holders to explore actions under the IBC. However, it is essential to note that such actions might not guarantee recovery, as the outcome depends largely on the decree holder’s status or position under the waterfall mechanism IBC. Moreover, since recovery certificates issued under the DRT Act are in the form of money decrees, they may not confer secured creditor status upon the certificate holder.

    We hope you have found this information useful. For any queries/clarifications please write to us at insights@elp-in.com  or write to our authors:

    Mukesh Chand, Senior Counsel – Email – MukeshChand@elp-in.com

  • References

    [1] Civil Appeal No.2348 OF 2021 Tottempudi Salaith Vs State Bank of India & Ors
    [2] Kotak   Mahindra   Bank   Limited   ­vs­   A. Balakrishnan  and  Another  [(2022) 9 SCC 186]
    [3] [(2008) 1 SCC 17 15

Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion or advice. This document is not intended to address the circumstances of any individual or corporate body. Readers should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein.