The Supreme Court in the case of Kotak Mahindra Bank Limited Vs. A. Balakrishnan and Others has held that the liability of a claim arising out of a recovery certification under the provisions of the Debt Recovery act would constitute as a financial debt under Clause (8) of Section 5 of the Insolvency and Bankruptcy Code (hereinafter after IBC) and consequently that the holder of the recovery certification would be a financial creditor within the meaning of Clause 7 of Section 5 of the IBC. The court also held that the holder of such a recovery certificate would be entitled to initiate a Corporate Insolvency Resolution Process (hereinafter) under Section 7 of the IBC provided it is initiated within 3 years from the date of issuance of the recovery certificate. The Supreme Court in this case also upheld the validity of the Dena case law.

The present case was brought before the Supreme Court by Kotak Mahindra Bank Limited in form of an appeal being aggrieved by the judgement of the Hon’ble NCLAT. The current case revolves around the issue of scope, limitation period etc after the issuance of the recovery certificate. The appellant had filed an application under Section 7 of the IBC, which was held to be time barred by the NCLAT. The appellant contended in the Supreme Court that a fresh right accrues to the creditor to recover the amount specified in the Recovery Certificate and in this regard, reliance was placed on the Judgment of Dena Bank (Now Bank of Baroda) vs. C. Shivakumar Reddy and others. The learned counsel for the appellant argued that if the underlying transactions are such that they constitute a financial debt and the creditor as such is a financial creditor, then that would determine the maintainability of the CIRP application.

The counsel of the opposite party contended on the opposite lines that the cause of action had merged into the order of issuance of the recovery certificate by the Debt Recovery Tribunal and, therefore, by application of the doctrine of merger, the debt no longer survived and, subsequently, that the initiation of CIRP by the KMBT would amount to the filling of second proceedings for the very same cause of action. So naturally, the holder of a recovery certificate granted under Section 19 (22) of the Debt Recovery Act is may not initiate CIRP under the Insolvency bankruptcy laws as financial creditor or decree holder. The learned counsel also contended that the deeming fiction contained in the recovery certificate applied only for the purposes of the initiation of the winding up proceeding.

The court thoroughly discussed the Dena Bank case as it was contended by the respondents that aforementioned judgement is per in curium. The court in the judgement had observed that the period of limitation for making an application under Section 7 or 9 of the IBC is upto three years from the date of accrual of the rights to sue, i.e., the date of the default. That is to say, once a claim fructifies into a final judgement and a certificate of recovery is issued authorising the creditor to realise its decretal dues, fresh right accrues to the creditor to recover the amount as specified in the recovery certificate and/or final judgment. With the harmonious construction of both these observations, it can be concluded that in ordinary cases the right to sue would arise in case of a default but for initiation of an application under Section 7 or 9, the date of issuance of Recovery Certification would be date of consideration for the limitation period, if that is to apply.

Thus the issuance of a certificate of recovery in favour of the financial creditor, would give rise to a fresh cause of action for the financial creditor, to initiate proceedings under Section 7 IBC for the initiation of the corporate insolvency resolution process, within three years from the date of the judgement and/or decree or three years from the date of the issuance of the certificate of recovery if the dues of the corporate debtor to the financial debtor, under the judgement and/or decree and/ or in terms of certificate of recovery, or any part thereof, was unpaid.

The court further delved into the issue of whether liability in respect of a claim arising out of a recovery certificate would constitute financial debt. The court observed that the legislative intent could not have been to exclude a liability in respect of a “claim” that arises out of a recovery certificate when such liability in respect of a “claim” ought to be included in the definition of the term “financial debt”. As far as the object of IBC is concerned, the legislature could never have intended to keep a crystallised debt as a decree, outside the ambit of clause (8) of Section 5 of the Insolvency and Bankruptcy Code. Therefore, the holder of such a recovery certificate would be a financial creditor within the meaning of Section 5(7) of the IBC.

The court clarified that once CIRP is initiated, there shall be a prohibition on the institution of suits and furtherance of pending suits against the corporate debtor, including execution of any judgment, or order in any court of law, tribunal, arbitration panel, or other authority. However, this would not mean that a decree holder is also prohibited from initiating CIRP, if he is otherwise entitled to do so in law. The effect would be that the applicant, who is a decree holder, would be prohibited from executing the decree in his favour.