2022 (6) TMI 13 - SC - Insolvency and Bankruptcy

Initiation of CIRP - period of limitation - whether the issuance of Recovery Certificate would not trigger the right to sue. - time limitation - HELD THAT - From the scheme of the IBC, it could be seen that where any Corporate Debtor commits a default, a financial creditor, an operational creditor or the Corporate Debtor itself is entitled to initiate CIRP in respect of such Corporate Debtor in the manner as provided under the said Chapter. The default has been defined to mean non-payment of debt. The debt has been defined to mean a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt. A claim means a right to payment, whether or not such right is reduced to judgment, fixed, disputed, etc. It is more than settled that the trigger point to initiate CIRP is when a default takes place. A default would take place when a debt in respect of a claim is due and not paid. A claim would include a right to payment whether or not such a right is reduced to judgment. It is a settled principle of law that the provisions of a statue ought to be interpreted in such a manner which would advance the object and purpose of the enactment. Whether a person, who holds a Recovery Certificate would be a financial creditor within the meaning of clause (7) of Section 5 of the IBC? - HELD THAT - A person to be entitled to be a financial creditor has to be owed a financial debt and would also include a person to whom such debt has been legally assigned or transferred to. Therefore, the only question that would be required to be considered is, as to whether a liability in respect of a claim arising out of a Recovery Certificate would be included within the meaning of the term financial debt as defined under clause (8) of Section 5 of the IBC - It is thus clear that it is a settled position of law that when the word include is used in interpretation clauses, the effect would be to enlarge the meaning of the words or phrases occurring in the body of the statute. Such interpretation clause is to be so used that those words or phrases must be construed as comprehending, not only such things, as they signify according to their natural import, but also those things which the interpretation clause declares that they shall include. In such a situation, there would be no warrant or justification in giving the restricted meaning to the provision. The trigger point for initiation of CIRP is default of claim. Default is nonpayment of debt by the debtor or the Corporate Debtor, which has become due and payable, as the case may be, a debt is a liability or obligation in respect of a claim which is due from any person, and a claim means a right to payment, whether such a right is reduced to judgment or not. It could thus be seen that unless there is a claim , which may or may not be reduced to any judgment, there would be no debt and consequently no default on nonpayment of such a debt . When the claim itself means a right to payment, whether such a right is reduced to a judgment or not, we find that if the contention of the respondents, 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, is accepted, then it would be inconsistent with the plain language used in the IBC - the definition is inclusive and not exhaustive. Taking into consideration the object and purpose of the IBC, the legislature could never have intended to keep a debt, which is crystallized in the form of a decree, outside the ambit of clause (8) of Section 5 of the IBC. Having done the exercise of considering the relevant provisions of the IBC afresh and come to a conclusion that a liability in respect of a claim arising out of a Recovery Certificate would be a financial debt within the meaning of clause (8) of Section 5 of the IBC and a holder of the 54 Recovery Certificate would be a financial creditor within the meaning of clause (7) of Section 5 of the IBC - It is more than well settled that when the language of a statutory provision is plain and unambiguous, it is not permissible for the Court to add or subtract words to a statute or read something into it which is not there. It cannot rewrite or recast legislation. From the plain and simple interpretation of the words used in subsection (22A) of Section 19 of the Debt Recovery Act, it would be amply clear that the Legislature provided that for the purposes of winding-up proceedings against a Company, etc., a Recovery Certificate issued by the Presiding Officer under subsection (22) of Section 19 of the Debt Recovery Act shall be deemed to be a decree or order of the Court. It is thus clear that once a Recovery Certificate is issued by the Presiding Officer under subsection (22) of Section 19 of the Debt Recovery Act, in view of subsection (22A) of Section 19 of the Debt Recovery Act it will be deemed to be a decree or order of the Court for the purposes of initiation of winding-up proceedings of a Company, etc. However, there is nothing in subsection (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. A liability in respect of a claim arising out of a Recovery Certificate would be a financial debt within the meaning of clause (8) of Section 5 of the IBC. Consequently, the holder of the Recovery Certificate would be a financial creditor within the meaning of clause (7) of Section 5 of the IBC. As such, the holder of such certificate would be entitled to initiate CIRP, if initiated within a period of three years from the date of issuance of the Recovery Certificate. 85 - the application under Section 7 of the IBC was within limitation and the learned NCLAT has erred in holding that it is barred by limitation. The appeal is allowed.

Summary

Issues Involved:
1. Whether the application under Section 7 of the Insolvency and Bankruptcy Code (IBC) was time-barred.
2. Whether the issuance of a Recovery Certificate gives rise to a fresh cause of action for initiating Corporate Insolvency Resolution Process (CIRP).
3. Whether a Recovery Certificate holder qualifies as a "financial creditor" under the IBC.
4. Interpretation of relevant provisions of the IBC and the Debt Recovery Act.
5. Applicability of the doctrine of res judicata and per incuriam.

Issue-wise Detailed Analysis:

1. Whether the application under Section 7 of the IBC was time-barred:
The appeal challenges the judgment of the NCLAT, which held that the application filed by the appellant under Section 7 of the IBC was time-barred. The NCLAT ruled that the issuance of a Recovery Certificate does not trigger a fresh right to sue. The Supreme Court examined whether the application filed by KMBL on 5th October 2018 was within the three-year limitation period from the issuance of the Recovery Certificates dated 7th June 2017 and 20th October 2017. The Court concluded that the application was indeed filed within the permissible period, thereby reversing the NCLAT's decision.

2. Whether the issuance of a Recovery Certificate gives rise to a fresh cause of action for initiating CIRP:
The Supreme Court referred to the case of Dena Bank vs. C. Shivakumar Reddy, where it was held that once a claim fructifies into a final judgment and order/decree, and a certificate of recovery is issued, a fresh right accrues to the creditor to recover the amount specified in the Recovery Certificate. The Court affirmed that the issuance of a Recovery Certificate does indeed give rise to a fresh cause of action for initiating CIRP under Section 7 of the IBC within three years from the date of issuance of the Recovery Certificate.

3. Whether a Recovery Certificate holder qualifies as a "financial creditor" under the IBC:
The Court analyzed the definitions under the IBC, particularly "financial creditor" and "financial debt." It was held that a liability in respect of a claim arising out of a Recovery Certificate qualifies as a "financial debt," and therefore, the holder of such a certificate is a "financial creditor" entitled to initiate CIRP. The Court emphasized that the legislative intent was to include such liabilities within the scope of financial debt to advance the objectives of the IBC.

4. Interpretation of relevant provisions of the IBC and the Debt Recovery Act:
The Court examined various provisions of the IBC, including Sections 3(6), 3(10), 3(11), 3(12), 5(7), 5(8), 6, and 14. It also considered Section 19(22) and 19(22A) of the Debt Recovery Act. The Court concluded that the provisions should be interpreted in a manner that advances the purpose of the IBC, which is to preserve the corporate debtor as an ongoing concern while ensuring maximum recovery for creditors. The Court rejected the argument that the Recovery Certificate is limited only for winding-up proceedings, asserting that such a certificate can also be used for initiating CIRP.

5. Applicability of the doctrine of res judicata and per incuriam:
The respondents argued that the initiation of CIRP by KMBL would amount to filing second proceedings for the same cause of action, invoking the doctrine of res judicata. The Supreme Court, however, found that the doctrine did not apply in this context. The Court also addressed the argument that the judgment in Dena Bank was per incuriam. It held that Dena Bank correctly interpreted the law and was not inconsistent with previous judgments or statutory provisions. The Court affirmed that the judgment in Dena Bank was not per incuriam and upheld its legal principles.

Conclusion:
The Supreme Court allowed the appeal, quashing the NCLAT's judgment and order. It held that the application under Section 7 of the IBC was within the limitation period and that the issuance of a Recovery Certificate provides a fresh cause of action for initiating CIRP. The Court affirmed that a Recovery Certificate holder is a financial creditor under the IBC and that the provisions of the IBC should be interpreted to advance its objectives. The Court also clarified that the doctrines of res judicata and per incuriam did not apply to bar the CIRP initiation in this case.