Supreme Court clarifies limitation for IBC application based on recovery certificates: Totempudi Salalith vs. State Bank of India (2023)

Introduction

Date of the Judgment: 18 October 2023
Citation: 2023 INSC 923
Judges: Aniruddha Bose, J. and Vikram Nath, J.

Can a financial creditor initiate insolvency proceedings against a corporate debtor based on a recovery certificate issued by the Debt Recovery Tribunal, and what is the limitation period for such an action? The Supreme Court of India addressed this crucial question in the case of Totempudi Salalith vs. State Bank of India & Ors. The court clarified the interplay between the Recovery of Debts and Bankruptcy Act, 1993, the Insolvency and Bankruptcy Code, 2016, and the Limitation Act, 1963, in determining the validity of such proceedings. This judgment clarifies the rights of financial creditors holding recovery certificates and the time frame within which they can initiate CIRP under the IBC.

The judgment was delivered by a two-judge bench comprising Justice Aniruddha Bose and Justice Vikram Nath.

Case Background

The appellant, Totempudi Salalith, was the managing director of Totem Infrastructures Limited (corporate debtor). The corporate debtor had defaulted on repaying financial facilities extended by several banks, including the State Bank of India (SBI) and its merged entities. The total claim against the corporate debtor amounted to Rs. 613,27,01,598.23.

Prior to initiating proceedings under the IBC, the banks had issued a notice under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) and instituted recovery proceedings before the Debt Recovery Tribunal (DRT). Three applications were filed by the lending banks before the DRT, Hyderabad and Bengaluru, resulting in three recovery certificates.

The State Bank of India, as the primary financial creditor, filed an application under Section 7 of the IBC before the National Company Law Tribunal (NCLT) based on these recovery certificates. The NCLT admitted the application, leading to the present appeal before the Supreme Court.

Timeline

Course of Proceedings

The State Bank of India filed an application under Section 7 of the IBC before the NCLT, Hyderabad, based on three recovery certificates issued by the DRT. The NCLT admitted the application and declared a moratorium.

The appellant, being the managing director of the corporate debtor, appealed the NCLT’s decision before the National Company Law Appellate Tribunal (NCLAT). The appellant primarily argued that the application was barred by limitation and that it was initiated based on the Reserve Bank of India (RBI) circular dated 12.02.2018, which was later held to be ultra vires. The NCLAT upheld the decision of the NCLT, leading to the present appeal before the Supreme Court.

Legal Framework

The judgment discusses several key legal provisions:

• Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC): This section allows a financial creditor to initiate the Corporate Insolvency Resolution Process (CIRP) against a corporate debtor who has defaulted on a financial debt.
• Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act): This provision allows secured creditors to issue a notice to the borrower to recover their dues.
• Section 18 of the Limitation Act, 1963: This section deals with the effect of acknowledgment of debt in writing, which can extend the limitation period. It states:
  
  “18. Effect of acknowledgment in writing.—(1) Where, before the expiration of the prescribed period for a suit or application in respect of any property or right, an acknowledgment of liability in respect of such property or right has been made in writing signed by the party against whom such property or right is claimed, or by any person through whom he derives his title or liability, a fresh period of limitation shall be computed from the time when the acknowledgment was so signed.”
• Section 238A of the IBC: This section stipulates that the provisions of the Limitation Act, 1963, shall apply to proceedings or appeals before the Adjudicating Authority, the National Company Law Appellate Tribunal, the Debt Recovery Tribunal, or the Debt Recovery Appellate Tribunal.
• Section 25(3) of the Contract Act, 1872: This provision deals with a promise to pay a time-barred debt, which can create a new contract.
• Section 19(22A) of the Recovery of Debts and Bankruptcy Act, 1993: This section specifies that a recovery certificate issued by the Presiding Officer is deemed to be a decree or order of the Court for the purposes of initiating winding-up proceedings against a company.
  
  “Any recovery certificate issued by the Presiding Officer under sub-section (22) shall be deemed to be decree or order of the Court for the purposes of initiation of winding up proceedings against a company registered under the Companies Act, 2013 (18 of 2013) or Limited Liability Partnership registered under the Limited Liability Partnership Act, 2008 (6 of 2009) or insolvency proceedings against any individual or partnership firm under any law for the time being in force, as the case may be.]”
• Article 136 of the Limitation Act, 1963: This article provides a limitation period of twelve years for the execution of any decree of a civil court.
  
  “For the execution of any decree (other than a decree granting a mandatory injunction) or order of any civil court. Twelve years. [When] the decree or order becomes enforceable or where the decree or any subsequent order directs any payment of money or the delivery of any property to be made at a certain date or at recurring periods, when default in making the payment or delivery in respect of which execution is sought, takes place”
• Article 137 of the Limitation Act, 1963: This article provides a limitation period of three years for any other application for which no period of limitation is provided elsewhere.

Arguments

The appellant raised several arguments against the initiation of CIRP:

• Limitation: The appellant argued that the application under Section 7 of the IBC was barred by limitation. The date of default should be considered the date on which the loan account was declared a Non-Performing Asset (NPA), and the application was filed more than three years after this date.
• RBI Circular: The appellant contended that the application was initiated based on the RBI circular dated 12.02.2018, which was later quashed by the Supreme Court in Dharani Sugars and Chemicals Ltd. vs. Union of India [(2019) 5 SCC 480].
• Doctrine of Election: The appellant argued that the banks, having chosen the SARFAESI mechanism and applied before the DRT, were barred from approaching the NCLT for the same set of debts.
• Acknowledgment of Debt: The appellant argued that the letter dated 29.01.2020, which the NCLT and NCLAT treated as an acknowledgment of debt, was sent after the expiry of the limitation period and could not revive the right to sue. The letter was merely a request for a one-time settlement (OTS) and did not constitute an unconditional promise to pay.

The respondent, State Bank of India, argued that:

• Recovery Certificates: The recovery certificates issued by the DRT provided a fresh cause of action for initiating CIRP under the IBC. The limitation period should be calculated from the date of issuance of the recovery certificates, not from the date of the initial default.
• Kotak Mahindra Bank Ltd. vs. A. Balakrishnan [(2022) 9 SCC 186]: The respondent relied on this case, which held that the issuance of a recovery certificate gives rise to a fresh cause of action for initiating CIRP within three years from the date of the certificate.
• No Bar on IBC: The respondent argued that there is no legal bar on initiating CIRP even after pursuing recovery proceedings before the DRT. The IBC is a mechanism for revival of a company, not just debt recovery.
• Letter of 29.01.2020: The respondent argued that the letter from the corporate debtor was an acknowledgment of debt, which extended the limitation period.

Summary of Arguments

Issues Framed by the Supreme Court

The Supreme Court considered the following key issues:

1. Whether the application under Section 7 of the IBC was barred by limitation.
2. Whether the letter dated 29.01.2020 could be considered an acknowledgment of debt under Section 18 of the Limitation Act, 1963, and if so, whether it could extend the limitation period.
3. Whether the doctrine of election bars the financial creditor from initiating CIRP after pursuing recovery proceedings before the DRT.
4. Whether a recovery certificate issued by the DRT can be the basis for initiating CIRP under the IBC, and what is the limitation period for such an action.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

The Supreme Court relied on the following authorities:

On the point of limitation and recovery certificates:

• Kotak Mahindra Bank Limited vs. A. Balakrishnan and Another [(2022) 9 SCC 186] – Supreme Court of India: This case (referred to as Kotak Mahindra I) established that a recovery certificate gives rise to a fresh cause of action for initiating CIRP within three years from the date of the certificate.
• Dena Bank v. C. Shivakumar Reddy [(2021) 10 SCC 330] – Supreme Court of India: This case held that a fresh right accrues to the creditor to recover the amount of the final judgment and/or order/decree and/or the amount specified in the recovery certificate.
• Vashdeo R. Bhojwani vs. Abhyudaya Co-operative Bank Limited and Another [(2019) 9 SCC 158] – Supreme Court of India: This case held that the date of the recovery certificate is the date on which the time of limitation begins to tick.

On the point of acknowledgment of debt:

• Jignesh Shah and Another vs. Union of India and Another [(2019) 10 SCC 750] – Supreme Court of India: This case held that the limitation period provided in the Limitation Act applies to applications under the IBC as well.
• Reliance Asset Reconstruction Company Limited vs. Hotel Poonja International Private Limited [(2021) 7 SCC 352] – Supreme Court of India: This case emphasized the requirement of specific pleading on facts constituting acknowledgment or admission of claim.
• Babulal Vardharji Gurjar vs. Veer Gurjar Aluminium Industries Private Limited and Another [(2020) 15 SCC 1] – Supreme Court of India: This case also emphasized the necessity of averments to overcome the limitation question.
• Kotak Mahindra Bank Ltd. vs. Kew Precision Parts Private Limited and Others [(2022) 9 SCC 364] – Supreme Court of India: This case (referred to as Kotak Mahindra II) distinguished between acknowledgment under Section 18 of the Limitation Act and a promise under Section 25 of the Contract Act.

On the point of date of default:

• B.K. Educational Services Private Limited vs. Parag Gupta & Associates [(2019) 11 SCC 633] – Supreme Court of India: This case treated the date of default as the date on which the limitation period starts.
• Gaurav Hargovindbhai Dave vs. Asset Reconstruction Company (India) Limited and Another [(2019) 10 SCC 572] – Supreme Court of India: This case applied Article 137 of the Limitation Act for computing the period of limitation.

On the point of doctrine of election:

• Transcore vs. Union of India and Another [(2008) 1 SCC 125] – Supreme Court of India: This case held that the application of the SARFAESI mechanism was permissible even though the subject proceeding was instituted under the 1993 Act.

Legal Provisions:

• Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC)
• Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act)
• Section 18 of the Limitation Act, 1963
• Section 238A of the IBC
• Section 25(3) of the Contract Act, 1872
• Section 19(22A) of the Recovery of Debts and Bankruptcy Act, 1993
• Article 136 of the Limitation Act, 1963
• Article 137 of the Limitation Act, 1963

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

What weighed in the mind of the Court?

The Supreme Court’s reasoning was primarily influenced by the need to balance the rights of financial creditors with the principles of the IBC and the Limitation Act. The court emphasized that a recovery certificate issued by the DRT provides a fresh cause of action for initiating CIRP, aligning with the objective of the IBC to facilitate debt resolution and revival of companies. The court also clarified that the IBC is not merely a debt recovery mechanism but a process for corporate revival, allowing financial creditors to pursue CIRP even after initiating recovery proceedings before the DRT.

The Court also noted that the letter dated 29.01.2020 was not an unconditional promise to pay and could not extend the limitation period. The Court also gave importance to the fact that the letter was sent after the initiation of the IBC proceedings.

The Court’s reasoning was also influenced by the need to ensure that the IBC process remains effective and accessible to financial creditors, while also protecting the interests of corporate debtors.

Sentiment Analysis of Reasons Given by the Supreme Court

Ratio of Fact:Law

Logical Reasoning

The Court considered the alternative interpretation that the limitation period shouldbe calculated from the date of default, but it rejected this interpretation in favor of the date of the recovery certificate. This decision was based on the understanding that the recovery certificate is a deemed decree and provides a fresh cause of action for initiating CIRP.

Final Decision

The Supreme Court disposed of the appeal with the following directions:

• The Court upheld the validity of the application under Section 7 of the IBC to the extent that it was based on the recovery certificates issued in 2017.
• The Court held that the letter dated 29.01.2020 did not constitute an acknowledgment of debt under Section 18 of the Limitation Act, 1963, and could not extend the limitation period.
• The Court clarified that the doctrine of election does not bar a financial creditor from initiating CIRP after pursuing recovery proceedings before the DRT.
• The Court held that a recovery certificate issued by the DRT is a valid basis for initiating CIRP under the IBC, and the limitation period for such an action is three years from the date of issuance of the recovery certificate.
• The Court remanded the matter back to the NCLT to re-examine the application with respect to the recovery certificate issued in 2015, considering the principles laid down in the judgment.

The Supreme Court’s decision clarifies the legal position on the limitation period for initiating CIRP based on recovery certificates and provides important guidance for financial creditors and corporate debtors.

Implications

The judgment has several important implications for financial creditors and corporate debtors:

• For Financial Creditors:
  • Financial creditors holding recovery certificates can initiate CIRP under the IBC within three years from the date of issuance of the recovery certificate. This provides a clear and defined timeline for initiating insolvency proceedings.
  • The judgment clarifies that initiating recovery proceedings before the DRT does not bar the financial creditor from later initiating CIRP under the IBC. This provides flexibility to financial creditors in pursuing debt recovery and corporate revival.
  • Financial creditors must be careful in relying on an acknowledgment of debt to extend the limitation period. The acknowledgment must be unconditional and made before the expiry of the limitation period.
• For Corporate Debtors:
  • Corporate debtors should be aware that recovery certificates issued by the DRT can be the basis for initiating CIRP under the IBC.
  • Corporate debtors should avoid making any acknowledgment of debt after the expiry of the limitation period, as this could revive the right to sue.
  • Corporate debtors should be prepared to face CIRP proceedings even after the financial creditor has pursued recovery proceedings before the DRT.

Critical Analysis

The Supreme Court’s judgment in Totempudi Salalith vs. State Bank of India & Ors. provides much-needed clarity on the limitation period for initiating CIRP based on recovery certificates. The judgment has been well-received by the financial community for its clear articulation of the law and its emphasis on the IBC’s objective of corporate revival.

However, the judgment also raises some questions that may require further clarification in future cases:

• Interpretation of “Deemed Decree”: The judgment treats the recovery certificate as a “deemed decree” for the purposes of initiating CIRP. While this interpretation is supported by Section 19(22A) of the Recovery of Debts and Bankruptcy Act, 1993, it may be useful for future judgments to further clarify the extent to which a recovery certificate is equivalent to a decree of a civil court.
• Application of Article 136 of the Limitation Act: The judgment applies Article 136 of the Limitation Act, which provides a limitation period of twelve years for the execution of decrees of civil courts. However, the judgment also states that the limitation period for initiating CIRP based on recovery certificates is three years. This apparent contradiction could be clarified in future cases.
• Impact of OTS Negotiations: The judgment clarifies that a request for a one-time settlement (OTS) does not constitute an acknowledgment of debt. However, it may be useful for future judgments to further clarify the circumstances under which OTS negotiations may or may not extend the limitation period.

Despite these potential areas for further clarification, the judgment is a significant step forward in establishing a clear and predictable legal framework for initiating CIRP based on recovery certificates.

Conclusion

The Supreme Court’s judgment in Totempudi Salalith vs. State Bank of India & Ors. is a landmark decision that clarifies the limitation period for initiating CIRP based on recovery certificates. The judgment provides much-needed clarity for financial creditors and corporate debtors, and it reinforces the IBC’s objective of corporate revival.

The key takeaways from the judgment are:

• A recovery certificate issued by the DRT is a valid basis for initiating CIRP under the IBC.
• The limitation period for initiating CIRP based on a recovery certificate is three years from the date of issuance of the recovery certificate.
• The doctrine of election does not bar a financial creditor from initiating CIRP after pursuing recovery proceedings before the DRT.
• A request for a one-time settlement (OTS) does not constitute an acknowledgment of debt under Section 18 of the Limitation Act, 1963.

The judgment provides a clear and predictable legal framework for initiating CIRP based on recovery certificates, and it will likely have a significant impact on the way financial creditors and corporate debtors approach debt recovery and corporate revival.