10 June 2022

Recovery certificate holder can initiate CIRP as financial creditor within three years of issuance of certificate

Holding that liability in respect of a claim arising out of a recovery certificate would be a ‘financial debt’, the 3-Judge Bench of the Supreme Court has held that a person who holds a recovery certificate would be a ‘financial creditor’ within the meaning of clause (7) of Section 5 of the Insolvency and Bankruptcy Code, 2016.

The Court was hence of the view that the holder of the recovery certificate would be a financial creditor and entitled to initiate CIRP, within a period of three years from the date of issuance of the recovery certificate.

Considering the fact that the clause (8) of Section 5 of the Insolvency and Bankruptcy Code, 2016 uses the word ‘includes’, which means that the list is not exhaustive, the Court was of the view that the legislative intent could not have been to exclude a liability in respect of a ‘claim’ arising out of a recovery certificate, when such a liability in respect of a ’claim’ simpliciter would be included in ‘financial debt’.

The Court declined to accept the view that merely on a ‘claim’ being fructified in a decree, the same would be outside the ambit of clause (8) of Section 5 of the IBC.

The Supreme Court in this regard affirmed the 2-Judge decision of the Court in the case of Dena Bank v. C. Shivakumar Reddy [(2021) 10 SCC 330] which had held that issuance of a certificate of recovery in favour of the financial creditor would give rise to a fresh cause of action to the financial creditor, to initiate proceedings under Section 7 of the IBC for initiation of the CIRP, within three years from the date of the judgment and/or decree or within three years from the date of issuance of the certificate of recovery.

It may be noted that the Apex Court in this case, Kotak Mahindra Bank Limited v. A. Balakrishnan [Judgement dated 30 May 2022], also rejected the contention that the recovery certificate is for the limited purpose of initiation of winding up proceedings. The Court observed that there is nothing in sub­-section (22A) of Section 19 of the Debt Recovery Act to imply that the Legislature intended to restrict the use of the recovery certificate limited for the purpose of winding-­up proceedings. 

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