Conundrum of Limitation Period under IBC and Inapplicability of the Doctrine of Election

25th January, 2024 - 7:05 am Categories: IBC 0 Comments

Recently the Supreme Court in the case of Tottempudi Salalith v State Bank of India & Ors.[1] (Tottempudi Salaith) held that the doctrine of election cannot be applied to prevent a financial creditor to approach the National company law tribunal (NCLT) for initiating a Corporate Insolvency Resolution Process (CIRP) against the corporate debtor under Section 7 of the  Insolvency and Bankruptcy code 2016 (IBC). In this post, the author elucidates the rationale employed by the court and critically analysis the judgement given by the court.

Background of the Case

The appellant was the managing director of Totem infrastructures limited (corporate debtor) to which several banks including State Bank India (Financial creditor) had given financial facilities in form of loans and bank guarantees. On account of default in repayment of such financial facilities a notice under Section 13(2) Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (SARFAESI act) was issued in and three recovery proceedings were initiated against the corporate debtor before the Debt recovery Tribunal (DRT) in 2014.

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Three recovery certificates were issued by the DRT, out of these one recovery certificate was issued in 2015 and subsequently the other two certificates were issued in 2017. On  06.09.2019 State Bank of India filed application under Section 7 of the IBC before the NCLT for initiating CIRP against the corporate debtor for default of payment with regard to the three recovery certificates. NCLT admitted the application and initiated against the corporate debtor and also declared moratorium under Section 14 of the IBC.

Salaith appealed before the National Company Law Appellate Tribunal (NCLAT) against order of the NCLT on the grounds that firstly, Section 7 application was beyond the period of Limitation as the date of limitation should be calculated from the period in which the corporate debtor was declared NPA which was February 2012 – March 2013 and further stated that Recovery Certificate issued by the Debt Recovery Tribunal cannot extend the period of limitation and secondly, that the application filed by the financial creditors filed before NCLT was barred by the Doctrine of election as they first choose the mechanism under the SARFAESI act and had applied before the DRT. The NCLAT dismissed the appeal and Salaith filed an appeal before the Supreme Court.

Ruling of the Court

The Supreme Court after going through the facts and contention raised by the appellant, dismissed the appeal. The court gave extensive reasoning on the issue of limitation period with respect to the recovery certificate, while referring to various judgments the Court held that a financial creditor can file application under Section 7 of the IBC to initiate CIRP within 3 years from the date of issuance recovery certificate. The Court rejected the contention of Tottempudi Salaith (appellant) that banks were barred from approaching the NCLT for recovery of same set of debts under the doctrine of election while emphasizing on different enforcement mechanism under the Recovery of Debts and Bankruptcy Act 1993 (RDB act) and the IBC.

Analysis

Can a Recovery certificate have the effect of creating a fresh start of limitation period ?

At the outset, the Court while dealing with the issue of period of limitation referred to its judgement in case of Kotak Mahindra Bank Limited v. A. Balakrishnan and Anr.[2] (Kotak Mahindra) in which the court examined the question of limitation with respect to the issue of recovery certificate under the RDB act. The Supreme Court in Kotak Mahindra concurred with the its decision in Dena Bank v. C. Shivakumar Reddy (Dena Bank) where it held that when a recovery certificate is issued in the favour of the financial creditor it gives rise to a fresh cause of action to initiate proceedings under Section 7 of the IBC within 3 years from the date of issuance recovery certificate for initiation of CIRP, if the dues by corporate debtor are unpaid[3]. The court in Dena bank also held that “when a recovery certificate is issued to the creditor and authorizes to realise its decretal dues, a fresh right accrues to the creditor to recover the amount due stated in the recovery certificate”.

The Supreme Court concluded that if in a recovery certificate there exists a liability with respect to any unpaid amount then it would be a ‘financial debt’ within Section 5(8) of IBC, and consequently the person in whose favour the certificate is issued would be a ‘financial creditor’  Section 5(7) of IBC and will be entitled to initiate CIRP within a period of three years from the date of issuance of the recovery certificate.

Moreover the Supreme court in Kotak Mahindra held that after issuing of recovery certificate, the right of financial creditor to invoke mechanism under IBC would be a valid legal course. The Supreme court further referred to the case of Vashdeo R. Bhojwani ­vs­ Abhyudaya Co­operative Bank  Limited  and  Another[4] (Vashdeo R. Bhojwan), ), where it was held that “the date of recovery certificate was treated to be the date on which the time of limitation began to tick”.

Inapplicability of Doctrine of Election on initiation of CIRP

With respect to the contention doctrine of election, the Supreme Court opined that this doctrine is embodied in the law of evidence under which prosecution of the same right in two different fora is barred if it is based on the same cause of action  but in the present matter the proceedings were initiated before the DRT in 2014 when IBC did not came into existence.

The Supreme Court noted that the enforcement mechanism to obtain a recovery certificate is an independent course that the financial creditor may adopt for recovering the unpaid dues as specified under RDB Act. The court devised that IBC is not primarily designed as debt recovery mechanism rather it is a mechanism for reviving a company which is under debt but the procedure which is given in IBC to an extent relates to ensuring recovery of debts while applying such mechanism. This ruling sanctions the financial creditors to initiate CIRP against the corporate debtors after the issue of recovery certificate in circumstances where CIRP results in declaration of moratorium.

It was further observed that the question as to the election of the fora for the enforcement of debt arises when a recovery certificate is issued. The reliefs stated under the two statute are different and when a CIRP is initiated under IBC and a moratorium is declared then the enforcement mechanism under RDB act and SARFAESI act are suspended as per Section 14 of IBC. And after the issue of recovery certificate the financial creditor has the option to use any enforcement mechanism for the recovery of the debt it is not necessary that a financial creditor has to stick to the mechanism through which recovery certificate was issued. So the court held that “doctrine of election cannot be applied to prevent the financial creditors from approaching the NCLT for initiation of CIRP.”

The Supreme Court has extensively employed its reasoning in the present case by ruling that a recovery certificate issued to the financial creditor it gives rise to a fresh cause of action to file application under Section 7 of IBC within three years from the date of issuance of recovery certificate. The court while concurring with its judgement in Vashdeo R. Bhojwan and Dena bank  has correctly held that limitation period starts ticking “when a recovery certificate is issued as it gives a fresh right to the financial creditor to recover the debt as mentioned in the certificate from the corporate debtor”. A corporate debtor cannot use fault in limitation period as ground when a Financial creditor approaches NCLT to initiate CIRP after the recovery certificate is issued. With respect to the inapplicability of doctrine of election the court has rightly held that the mechanism under the RDB act and IBC are different that is recovery of debt and reviving the company which is under debt respectively. This ruling strengthens the position of the financial creditors and emphasizes on the right of financial creditors to recover their debts by enforcing any mechanism mentioned under the RDB act or IBC. While the court mentioned the different enforcement mechanisms it could have provided a comprehensive distinction making its reasoning more substantial.

Author: Manit Sharma, in case of any queries please contact/write back to us via email chhavi@khuranaandkhurana.com or at Khurana & Khurana, Advocates and IP Attorney.

[1] Tottempudi Salalith v. State Bank of India & Ors., (2023) 13 SCC 57

[2] Kotak Mahindra Bank Limited v. A. Balakrishnan and Anr., (2022) 9 SCC 186

[3] Dena Bank v. C. Shivakumar Reddy., (2021) 10 SCC 330

[4]  Vashdeo R. Bhojwani v. Abhyudaya Co­operative Bank  Limited  and  Another., (2019) 9 SCC 158