Insolvency and Bankruptcy Code proceedings - a Substitute to Execution of Arbitral Award?
The Hon’ble Supreme Court of India (“Supreme Court”) had recently in the case of Kotak Mahindra Bank Limited v. A Balakrishnan dealt with the scope of whether issuance of Debt Recovery Certificate by Hon’ble Debts Recovery Tribunal (“DRT”) can considered to be a “financial debt” within the meaning of section 5(8) of the Insolvency and Bankruptcy Code, 2016 (“IBC”) and subsequently whether the holder of such recovery certificate can be treated as “financial creditor” who can initiate corporate insolvency resolution process (“CIRP”) proceedings under section 7 of the IBC.
In the present case, Kotak Mahindra Bank Limited (“KMBL”) executed a compromise deed with the borrower entities to ensure the payment of the specified amount. When such borrower defaulted in the payment of the said amount KMBL was constrained to approach DRT under the Debts Recovery Act for the recovery of the said amount from the borrower entities. DRT after considering the argument of both the parties allowed the application filed by the KMBL and issued a recovery certificates against each of the borrower entities.
On issuance of such recovery certificates against the borrower entities, KMBL filed a fresh application in the Hon’ble National Company Law Tribunal (“NCLT”) with the intent to initiate CIRP proceeding against one of the borrower entities. The NCLT accepted the application of KMBL and initiated CIRP proceeding against the said borrower entity.
However, the said order of NCLT was set aside by the Hon’ble National Company Law Appellate Tribunal (“NCLAT”) on the ground the issuance of recovery certificates does not authorize initiation of CIRP proceeding by the financial creditor against the corporate debtor. Subsequently, the said order of NCLAT was challenged by KMBL before the Hon’ble Apex court of the country.
Decision of Supreme Court
The Supreme Court observed that the definition of the term “financial debt” in the Code utilizes the word “includes” which thereby can be interpreted to be an inclusive definition. As a result of which the Supreme Court held that the claim of KMBL and the obligation to make payment against the said claim arising out of recovery certificate would be treated as “financial debt” falling within section 5(8) of the IBC. The Supreme Court by setting aside the order of NCLAT held that the issuance of recovery certificate by DRT leads conversion of the said claim into the final judgment which thereby enable the applicant with the fresh recourse to initiate CIRP proceeding against the defaulting debtor, if such an application is filed within a period of three years from the date of issuance of the recovery certificate by DRT.
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Analysis
While making a reference to an earlier judgment the Supreme Court had issued the term final before the terms judgment, decree or order. Therefore, it can be interpreted that in order to enable the creditors to initiate CIRP proceeding under IBC on the basis of any judgment, decree or order, the same should have been concluded. In the current scenario, the Supreme Court observed that an order has been passed by DRT thereby issuing recovery certificates in favour of KMBL for the recovery of the specified amount from borrower entities. Even though said order of DRT was appealable before Hon’ble Debts Recovery Appellate Tribunal (“DRAT”), the said order was not challenged by the borrower entities.
The Supreme Court, therefore, decided that the order of DRT had achieved finality before an application was made by the Creditors before NCLT. There are several judgment and order passed by NCLAT wherein it is concluded that initiation of insolvency proceeding by the creditor in substitution of execution proceedings against the corporate debtor, based on finality of judgment or order as of proof of debt to initiate insolvency proceeding is not within the any statutes of the country.
However, the Supreme Court in the present judgment made it evidently clear that a creditor can choose to initiate CIRP proceeding against the debtors using an judgment, decree or order as an alternative of execution proceeding through any judgment, decree or order.