Supreme Court Allows Secured Creditors to File Winding Up Petitions After DRT Decree: Swaraj Infrastructure vs. Kotak Mahindra Bank (29 January 2019)

Introduction

Date of the Judgment: 29 January 2019
Citation: 2019 INSC 106
Judges: R.F. Nariman, J. and Navin Sinha, J.

Can a secured creditor, after securing a decree from the Debts Recovery Tribunal (DRT) and a recovery certificate, still file a winding-up petition against a company? The Supreme Court of India recently addressed this critical question, clarifying the rights of secured creditors in insolvency proceedings. This judgment clarifies the interplay between the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, and the Companies Act, 1956.

The core issue before the Supreme Court was whether a secured creditor, having obtained a decree and recovery certificate from the DRT, is barred from initiating a winding-up petition under the Companies Act, 1956. The Court also examined whether a secured creditor must relinquish their security before filing a winding-up petition.

The judgment was delivered by a two-judge bench comprising Justice R.F. Nariman and Justice Navin Sinha. The majority opinion was authored by Justice R.F. Nariman.

Case Background

Kotak Mahindra Bank Ltd. (the respondent) had provided various loans to several companies (the appellants). When the companies defaulted on their payments, the bank approached the Debts Recovery Tribunal (DRT), Mumbai, to recover the outstanding debts, which amounted to approximately INR 48 crores. The DRT ruled in favor of the bank on 16 January 2015, and recovery certificates were issued on 12 August 2015 under Section 19(19) of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993. Despite attempts to auction the secured properties, no successful bids were received.

Subsequently, the bank issued statutory notices on 15 April 2015 under Sections 433 and 434 of the Companies Act, 1956, and filed a company petition before the Bombay High Court on 3 July 2015, seeking the winding up of the companies due to commercial insolvency. The Bombay High Court admitted the petition on 26 July 2017. The companies appealed, arguing that the DRT had exclusive jurisdiction and that the bank could not file a winding-up petition without relinquishing its security. The Division Bench of the Bombay High Court dismissed the appeals.

Timeline

Course of Proceedings

The Bombay High Court admitted the winding-up petition, finding the companies to be commercially insolvent. The companies then appealed to the Division Bench of the Bombay High Court, arguing that the Recovery of Debts Act is a special act that vests exclusive jurisdiction in the DRT. They also contended that a secured creditor could only file a winding-up petition by giving up their security, which the bank had not done. The Division Bench dismissed the appeals, upholding the admission of the winding-up petition.

Legal Framework

The Supreme Court considered the following key legal provisions:

• Section 434(1) of the Companies Act, 1956: This section defines when a company is deemed unable to pay its debts.
  
  
  “434. Company when deemed unable to pay its debts.—(1) A company shall be deemed to be unable to pay its debts—
  (a)if a creditor, by assignment or otherwise, to whom the company is indebted in a sum exceeding one lakh rupees then due, has served on the company, by causing it to be delivered at its registered office, by registered post or otherwise, a demand under his hand requiring the company to pay the sum so due and the company has for three weeks thereafter neglected to pay the sum, or to secure or compound for it to the reasonable satisfaction of the creditor;
  (b)if execution or other process issued on a decree or order of any Court or Tribunal in favour of a creditor of the company is returned unsatisfied in whole or in part; or
  (c)if it is proved to the satisfaction of the Tribunal that the company is unable to pay its debts, and, in determining whether a company is unable to pay its debts, the Tribunal shall take into account the contingent and prospective liabilities of the company.”
  
• Section 439(1)(b) and (2) of the Companies Act, 1956: These sections specify who can apply for winding up, including creditors, and clarify that secured creditors are considered creditors for this purpose.
  
  
  “439. Provisions as to applications for winding up .—(1) An application to the Tribunal for the winding up of a company shall be by petition presented, subject to the provisions of this section—
  (b)by any creditor or creditors, including any contingent or prospective creditor or creditors; or
  (2) A secured creditor, the holder of any debentures (including debenture stock), whether or not any trustee or trustees have been appointed in respect of such and other like debentures, and the trustee for the holders of debentures, shall be deemed to be creditors within the meaning of clause ( b) of sub-section (1).”
  
• Section 441 of the Companies Act, 1956: This section deals with the commencement of winding up by the Tribunal.
  
  
  “441. Commencement of winding up by Tribunal .—(1) Where, before the presentation of a petition for the winding up of a company by the Tribunal, a resolution has been passed by the company for voluntary winding up, the winding up of the company shall be deemed to have commenced at the time of the passing of the resolution, and unless the Tribunal, on proof of fraud or mistake, thinks fit to direct otherwise, all proceedings taken in the voluntary winding up shall be deemed to have been validly taken.
  (2) In any other case, the winding up of a company by the Tribunal shall be deemed to commence at the time of the presentation of the petition for the winding up.”
  
• Section 529(1) of the Companies Act, 1956: This section applies insolvency rules in the winding up of insolvent companies.
  
  
  “529. Application of insolvency rules in winding up of insolvent companies .—(1) In the winding up of an insolvent company, the same rules shall prevail and be observed with regard to—
  (a) debts provable;
  (b)the valuation of annuities and future and contingent liabilities; and
  (c)the respective rights of secured and unsecured creditors;
  as are in force for the time being under the law of insolvency with respect to the estates of persons adjudged insolvent:”
  
• Section 47 of the Provincial Insolvency Act, 1920: This section deals with the rights of secured creditors in insolvency proceedings.
  
  
  “47. Secured creditors .—(1) Where a secured creditor realises his security, he may prove for the balance due to him, after deducting the net amount realised.
  (2) Where a secured creditor relinquishes his security for the general benefit of the creditors, he may prove for his whole debt.
  (3) Where a secured creditor does not either realise or relinquish his security, he shall, before being entitled to have his debt entered in the schedule, state in his proof the particulars of his security, and the value at which he assesses it, and shall be entitled to receive a dividend only in respect of the balance due to him after deducting the value so assessed.
  (4) Where a security is so valued, the Court may at any time before realisation redeem it on payment to the creditor of the assessed value.
  (5) Where a creditor, after having valued his security, subsequently realises it, the net amount realised shall be substituted for the amount of any valuation previously made by the creditor, and shall be treated in all respects as an amended valuation made by the creditor.
  (6) Where a secured creditor does not comply with the provisions of this section, he shall be excluded from all share in any dividend.”
  
• Sections 17, 18, 19(19), and 34 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993: These sections define the jurisdiction of the DRT, bar other courts’ jurisdiction, and provide for the distribution of sale proceeds of secured assets of a company under liquidation.
  
  
  “17. Jurisdiction, powers and authority of Tribunals .—(1) A Tribunal shall exercise, on and from the appointed day, the jurisdiction, powers and authority to entertain and decide applications from the banks and financial institutions for recovery of debts due to such banks and financial institutions.
  (1-A) Without prejudice to sub-section (1),—
  (a)the Tribunal shall exercise, on and from the date to be appointed by the Central Government, the jurisdiction, powers and authority to entertain and decide applications under Part III of Insolvency and Bankruptcy Code, 2016;
  (b)the Tribunal shall have circuit sittings in all district headquarters.
  (2) An Appellate Tribunal shall exercise, on and from the appointed day, the jurisdiction, powers and authority to entertain appeals against any order made, or deemed to have been made, by a Tribunal under this Act.
  (2-A) Without prejudice to sub-section (2), the Appellate Tribunal shall exercise, on and from the date to be appointed by the Central Government, the jurisdiction, powers and authority to entertain appeals against the order made by the Adjudicating Authority under Part III of the Insolvency and Bankruptcy Code, 2016.”
  “18. Bar of jurisdiction .—On and from the appointed day, no court or other authority shall have, or be entitled to exercise, any jurisdiction, powers or authority (except the Supreme Court, and a High Court exercising jurisdiction under Articles 226 and 227 of the Constitution) in relation to the matters specified in Section 17:
  Provided that any proceedings in relation to the recovery of debts due to any multi-State co-operative bank pending before the date of commencement of the Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2012 under the Multi-State Co-operative Societies Act, 2002 ((39 of 2002) shall be continued and nothing contained in this section shall, after such commencement, apply to such proceedings.”
  “19. Application to the Tribunal .—
  (19) Where a certificate of recovery is issued against a company as defined under the Companies Act, 2013 (18 of 2013) and such company is under liquidation, the Tribunal may by an order direct that the sale proceeds of secured assets of such company be distributed in the same manner as provided in Section 326 of the Companies Act, 2013 or under any other law for the time being in force.”
  “34. Act to have overriding effect .—(1) Save as provided under sub-section (2), the provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in any instrument having effect by virtue of any law other than this Act.”
  

Arguments

The appellants argued that the Recovery of Debts Act is a special statute that overrides the Companies Act, 1956, and that the DRT has exclusive jurisdiction over debt recovery. They contended that once the DRT is approached, a winding-up petition for the same debt is barred under Sections 17 and 18 of the Recovery of Debts Act. They also argued that a secured creditor must choose between relinquishing their security to participate in the winding-up process or realizing their security outside of it. Since the bank had already initiated action to realize its security, they could not file a winding-up petition without giving up the security. Additionally, they claimed that Section 434(1)(b) of the Companies Act, 1956, should apply, not Section 434(1)(a), and that the winding-up petition was not maintainable because the security had not yet been realized.

The respondent argued that Section 439 of the Companies Act, 1956, allows a secured creditor to maintain a winding-up petition. They distinguished the case of Allahabad Bank v. Canara Bank, (2000) 4 SCC 406, stating that it only dealt with the need for leave from the Company Court to pursue debt recovery under the Recovery of Debts Act. The respondent contended that the election for a secured creditor to give up security occurs at the stage of proving claims, after a winding-up order. They also argued that the petition was filed due to the company’s inability to pay debts, and the statutory presumption under Section 434(1)(a) of the Companies Act, 1956, should lead to winding up.

Issues Framed by the Supreme Court

The Supreme Court considered the following issues:

1. Whether a secured creditor, after obtaining a decree and recovery certificate from the Debts Recovery Tribunal (DRT), can file a winding-up petition against the company under the Companies Act, 1956.
2. Whether a secured creditor is required to relinquish their security before filing a winding-up petition.
3. Whether Section 434(1)(b) of the Companies Act, 1956, is applicable in this case, and if so, whether it bars the winding-up petition.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

The Supreme Court held that a secured creditor can initiate a winding-up petition even after obtaining a decree and recovery certificate from the DRT. The Court clarified that winding-up proceedings are not for the recovery of debt and hence the bar under Section 18 of the Recovery of Debts Act does not apply. The Court also held that a secured creditor is not required to relinquish their security at the time of filing a winding-up petition. The relinquishment of security is required only at the stage of proving claims, after a winding-up order is passed. The Court further held that Section 434(1)(b) does not bar the application of Section 434(1)(a). The petition was validly filed under Section 434(1)(a) as the recovery certificate was issued after the petition was filed.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the understanding that winding-up proceedings under the Companies Act, 1956, are not for the direct recovery of debts but rather a collective remedy to address a company’s inability to pay its debts. The Court emphasized that the Recovery of Debts Act, 1993, only overrides the Companies Act, 1956, to the extent of inconsistencies related to debt recovery by banks and financial institutions. The Court also noted that Section 439 of the Companies Act, 1956, explicitly allows a secured creditor to file a winding-up petition, and there is no requirement to relinquish the security at the time of filing. The Court also considered that the secured creditor had not been able to recover the debt despite all efforts.

Fact:Law Ratio Analysis

The Court’s reasoning was primarily based on legal interpretation and statutory analysis, with less emphasis on the specific facts of the case.

Implications

This judgment has significant implications for secured creditors and companies facing insolvency.

• For Secured Creditors: Secured creditors now have a clear pathway to initiate winding-up proceedings even after obtaining a DRT decree and recovery certificate. This provides an additional avenue for them to protect their interests when other recovery methods fail. They can now pursue both DRT and winding-up proceedings simultaneously.
• For Companies: Companies facing financial distress need to be aware that secured creditors can initiate winding-up proceedings even if they have already approached the DRT. This highlights the importance of proactive debt management and timely repayment.
• For Insolvency Law: The judgment clarifies the interplay between the Recovery of Debts Act, 1993, and the Companies Act, 1956, providing clarity on the rights and remedies available to secured creditors. It reinforces the view that winding-up proceedings are a collective remedy for insolvency and not just a debt recovery mechanism.

Conclusion

The Supreme Court’s judgment in Swaraj Infrastructure Pvt. Ltd. vs. Kotak Mahindra Bank Ltd. is a landmark decision that clarifies the rights of secured creditors in insolvency proceedings. The Court has unequivocally held that a secured creditor can initiate a winding-up petition even after obtaining a decree and recovery certificate from the DRT. This judgment provides much-needed clarity and ensures that secured creditors have multiple avenues to protect their interests. It also emphasizes that winding-up proceedings are a collective remedy for insolvency and not merely a debt recovery mechanism. This decision reinforces the importance of proactive debt management and highlights the potential consequences of financial distress for companies.