Judgments

Tottempudi Salalith Vs State Bank Of India :  Doctrine Of Election Will Not Apply In Case Of Insolvency Proceedings Initiated On The Basis Of Recovery Certificate

The Supreme Court in Tottempudi Salalith Vs State Bank of India (Civil Appeal 2348 of 2021 ) has held that recovery certificate issued by DRT creates a fresh cause of action and doctrine of election will not apply in initiating insolvency proceedings. The Supreme Court has also held that specific pleadings are required for acknowledgement or admission of claim in the Application for initiating insolvency proceedings.

Brief Facts

Several banks i.e. The State Bank of Hyderabad, State Bank of Mysore, State Bank of Travancore, State Bank of Bikaner, Jaipur and State Bank of Patiala and other banks had extended credit facilities to the Totem Infrastructures Ltd. The State Bank of Hyderabad, State Bank of Mysore, State Bank of Travancore, State Bank of Bikaner and Jaipur and State Bank of Patiala merged with the State Bank of India on 01.04.2017. State Bank of India initiated proceedings under Section 7 IBC.

Prior to initiating Section 7 IBC proceedings, the SBI issued 13 (2) notices under SARFAESI Act and thereafter filed Original Applications before DRT. Two Applications were filed before DRT Hyderabad and one before DRT Bengaluru.  Two recovery certificates were issued by DRT Hyderabad on  08.09.2015 and 17.10.2017.  In another application Recovery Certificate was issued on 04.08.2017.

State Bank of India filed Application under Section 7 IBC based on these three recovery certificates. By order dated 12.01.2021 the Adjudicating Authority admitted the Application. The admission was challenged before the NCLAT, which was dismissed by the NCLAT.

Aggrieved by the same, Mr. Tottempudi Salalith, the Managing Director of Totem Infrastructures Ltd filed Appeal before the Supreme Court of India mainly on procedural grounds.

Issues

Following grounds were raised before the Supreme Court.

  • Whether SBI having approached DRT  was barred under doctrine of election to approach NCLT ?
  • Whether the Application was barred by limitation before NCLT ?

Supreme Court Findings

The Supreme Court findings on the aforesaid issues are as under.

On the Aspect of Doctrine of Election

Doctrine of election is a doctrine of law of evidence which bars prosecution before two different fora for same cause of action. It was submitted before the Supreme Court that SBI had already initiated proceedings before the DRT and as such proceeding under Section 7 IBC was not maintainable before NCLT.

The Supreme Court rejected this argument relying on Kotak  Mahindra   Bank   Limited   ­vs­  A. Balakrishnan  and  Another (2022) 9 SCC 186.  In this judgment the Supreme Court had held that recovery certificate would give a fresh cause of action entitling financial creditor to initiate Corporate Insolvency Resolution Process.  The enforcement of recovery certificate is an independent course of action and the Financial Creditor can opt for proceedings under IBC rather than chasing mechanism under 1993 Act.  The Supreme Court also observed that IBC is not really a debt recovery mechanism but a mechanism for revival of a company fallen in debt, but the procedure envisaged in the IBC substantially relates to ensuring recovering of debts in the process of applying such mechanism.

On The Aspect of Limitation

The Application for initiation of insolvency proceedings had been filed based on three recovery certificates.  The Supreme Court relying on Vashdeo R. Bhojwani ­vs­ Abhyudaya Co­operative Bank  Limited  and  Another  (2019) 9 SCC 158 has held that limitation would start ticking from date of  issuance of recovery certificate.

Relying on Kotak   Mahindra  (Supra ) the Supreme Court held that in  case of recovery certificates, the limitation period is guided by Article 137 of Limitation Act.

Out of three recovery certificates two were within limitation and one was time barred. There were  no averments regarding limitation in the Application before NCLT.

State Bank of India had relied on letter dated 29.01.2020 as an acknowledgement of debt. The same has been contested by the Appellant on the ground that any valid acknowledgment must be within period of limitation. State Bank had pressed for treating the letter under 25 (3) of the Contract Act.

 Supreme Court relying on Reliance   Asset   Reconstruction   Company   Limited   ­vs­   Hotel Poonja   International   Private   Limited  (2021)   7   SCC   352 and Babulal Vardharji Gurjar Vs. Veer Gurjar Aluminium Industries Private Ltd (2020) 15 SCC 1 observed that specific pleading regarding on facts constituting acknowledgement or admission of claim has to be given, which has not been done in this case.

Finally Supreme Court held that the application with respect to the two recovery certificates issued in the year 2017 are maintainable. In the event the Appellate Tribunal is of the opinion that the CIRP could not lie so far as the recovery certificate barred by limitation  is concerned, as the decree would still be alive, the claim based on the said recovery certificate could be segregated form the composite claim and the Committee of Creditors shall, in that event, treat the sum reflected in the said recovery certificate as part of the claims made in pursuance of the public announcement. This direction was issued by the Supreme Court under Article 142 of the Constitution.

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Mukesh Kumar Suman is an advocate and legal author based at Delhi. He regularly appears before various Judicial Forums including NCLT, NCLAT, High Courts and the Supreme Court. He can be approached at mukesh_suman@outlook.com or +91 9717864570.

Mukesh Kumar Suman

Mukesh Kumar Suman

Mukesh Kumar Suman is an advocate based at Delhi. He has rich experience in civil, criminal, commercial, arbitration and corporate insolvency matters. He regularly appears before District Courts, NCLT, NCLAT, High Court and the Supreme Court. He can be approached at mukesh_suman@outlook.com or +91 9717864570.

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