Whether A Secured Creditor Can File A Winding-Up Petition Despite Obtaining A Recovery Certificate From DRT?

Introduction

There are several ways in which a secured creditor can claim his/her rights against the debtor. A secured creditor is usually a bank or asset-based lenders who hold a fixed charge over a business asset or assets. When the debtor is not able to repay the loan or becomes insolvent then the sale of a particular asset over which security is held provides the creditor repayment. This article will discuss the question of whether a secured creditor can file a winding-up petition after obtaining a recovery certificate from the debt recovery tribunal.

Observation of Indian Judiciary

In the case of Swaraj Infrastructure Pvt. Ltd. v. Kotak Mahindra Bank Ltd. (Civil Appeal No. 1291 of 2019) this issue was discussed. The facts of the case are that Kotak Mahindra Bank advanced loan to the appellant company. When the loan became overdue, the account became a non-performing asset. The applications were filed by the bank before DRT (Bombay) to recover its dues. The application was accepted and admitted by the DRT. After that, it passed a decree in favor of the bank. A statutory notice was served by the bank also to the borrower company under Sections 433 and 434 of the Companies Act 1956, still, the borrower did not step forward to make payments.

Subsequently, the bank filed a petition for winding-up before Bombay High Court and it was admitted by the court. In the proceeding before DRT, the recovery certificate was issued to the bank by the tribunal. The bank tried to set up the auction to realize its dues but this action failed. As to the proceedings before the Bombay High Court, the borrower company submitted an appeal before Division Bench of the High Court against the order admitting the winding-up petition of the bank. But the appeal was dismissed.

Afterward, the borrower company knocked the door of the Supreme Court and contended that after a secured creditor has obtained an order from DRT and a recovery certificate has been issued accordingly, such secured creditor cannot file a winding-up petition as RDB Act is a special Act which vests exclusive jurisdiction in the DRT to the exclusion of the Company Court. It also contended that in a case where a winding-up petition is filed, a secured creditor must be put to an election where it must either relinquish its security and stand in line in the winding-up proceedings or realize the security outside the winding-up proceedings.[1]

On the other hand, the contention of the Bank was that a secured creditor can maintain a winding-up petition even if the DRT has issued the recovery certificate. It was also contended by the bank that the election with regard to the relinquishment of security is to be made at the stage of proof of claim which is only after a winding-up order is passed.[2]

After taking into consideration Sections 17, 18, 19 and 34 of RDB Act and Sections 434, 439, 441 and 529 of the Companies Act, 1956 and its prior judgments, the Supreme Court held that as winding-up proceeding is not same as the proceedings for the realization of debts, the same would not be covered by the language of Section 17 read with Section 18 of RDB Act and the bar contained in Section 34 of the RDB Act would also not apply.[3]

The Supreme Court observed the court has stated that a winding-up petition is a form of equitable execution of a debt. But a winding-up order is not a common alternative to the ordinary procedure for realization of debts due to a creditor. The court observed that both the judgments held in Amalgamated Commercial Traders as well as in Harinagar Sugar Mills case acknowledge the fact that a winding-up proceeding is not a proceeding that can be described as a proceeding for the realization of debts.

Therefore, it cannot be covered by the ambit of Section 17 read with Section 18 of the Recovery of Debts Act. As far as a winding-up proceeding under the Companies Act, 1956 is concerned. Since such a proceeding is not ‘for recovery of debts’ due to banks, the prohibition contained in Section 18 read with Section 34 of the Recovery of Debts Act will not apply to winding-up proceedings under the Companies Act, 1956.[4]

The Court further consult edits decision in Rajasthan Financial Corporation v. Official Liquidator[5] and observed that the proceedings before DRT and winding-up proceedings under the Companies Act, 1956 can run alongside.

It rejected the argument of the appellant that the secured creditor at the time of filing of the winding-up petition must relinquish his security. It held that under Section 439 of the Companies Act, 1956 a petition by the secured creditor for winding-up will be entertained without any requirement of it having to give away or surrender its security.

The Supreme Court also considered Section 434(1) of the Companies Act, 1956, and held that sub-clauses are not mutually exclusive. If  Section 434(1)(b) is applied it does not mean that Section 434(1)(a) ceases to be applicable.

The Court observed that the winding-up proceeding under the Companies Act,1956 is not a proceeding for ‘recovery of debts’ due to banks. Therefore, the bar to jurisdiction contained in section 18 read with section 34 of the Recovery of Debt Act would not apply to the winding-up proceedings under the Companies Act 1956.

In case of Lissenden v. C.A.V. Bosch, Ltd.[6], where Lord Atkin was the judge, it is observed that a person does not lose the right to choose the second option for help just because he has taken the first option, the Court said that the Bank cannot be said to be blowing hot and cold in pursuing a remedy under the Recovery of Debts Act and a winding-up proceeding under the Companies Act, 1956 simultaneously, in fact when secured creditors like the respondent are driven from pillar to post to recover what is legitimately due to them, in attempting to avail of more than one remedy at the same time, they do not ‘blow hot and cold’, but they blow hot and hotter.[7]

Legal positions of the authorities are also discussed in the case:[8]

1. A Debts Recovery Tribunal acting under the Recovery of Debts Act and Financial Institutions Act, 1993 is entitled to pass the order for sale and consequently sell the properties of the borrower, regardless of whether a company is in liquidation or not, through its Recovery Officer but only after notification to the Official Liquidator or the Liquidator appointed by the Company Court and subsequent to hearing him.
2. A District Court accepting an application under Section 31 of the SFC Act will have the capacity to order the sale of the assets of a borrower company-in-liquidation, however only after notification to the Official Liquidator or the Liquidator selected by the Company Court and after hearing him.
3. If a financial corporation acting under Section 29 of the SFC Act seeks to sell or transfer the assets of a borrower company-in-liquidation, the said power could be practiced by it only after getting the proper permission from the Company Court and acting in terms of the directions issued by that court as regards associating the Official Liquidator with the sale, the fixing of the upset price or the reserve price, confirmation of the sale, holding of the sale proceeds and the distribution thereof among the creditors in terms of Section 529-A and Section 529 of the Companies Act.
4. In a situation where proceedings under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 or the SFC Act are not set in motion, the creditor concerned is to move toward the Company Court appropriate directions in respect of realization of its securities consistent with the relevant provisions of the Companies Act regarding the distribution of the assets of the company-in-liquidation.

Another observation, in this case,was that Section 434(1)(b) is attracted only if execution or other process is issued concerning an order of a Tribunal in favourof a creditor of the company is returned unsatisfied in whole or in part. This is only one of three circumstances in which a company shall be deemed to be unable to pay its debts. If the fact and situation fit sub-clause (b) of Section 434(1), then a company may be said to be deemed to be unable to pay its debts.

However, this doesn’t imply that every last one of the sub-clauses of Section 434(1) are mutually exclusive that once Section 434(1)(b) applies, Section 434 (1) (a) cease to be applicable. Also, on the facts of this case, we may express that the company’s petition was filed only on 03.07.2015, in accordance with a notification under Section 433 of the Companies Act, 1956 dated 15.04.2015. This petition was filed under Section 433(e) read with Section 434(1)(a) of the Companies Act, 1956.

At the phase at which the appeal was recorded, it couldn’t in any way, shape or form have been documented under Section 434(1)(b) of the Companies Act, 1956, as execution or different procedures as a recuperation endorsement had not been given by the Recovery Officer till 12.08.2015, i.e., till after the organization request was recorded. Consequently, additionally, plainly this conflict of the educated advice showing up for the litigant must be dismissed.

Does Recovery of Debts Act Supersede the Companies Act?

Now, answering the issue, if the ‘Recovery of Debts Act’ overrides the provisions of the Sections 442, 446 and 537 of the Companies Act, 1956, the court held that, the Recovery of Debts Act is a special kind of statute which should necessarily override the said provisions of the more general statute, that is The Companies Act, 1956.

Even though both are treated as special laws because The Recovery of Debts Act has come later in point of time, together with a non-obstante clause contained in Section 34, the said Act will prevail to the extent that is set out in the Recovery of Debts Act. The court concluded that, for the reasons mentioned above, we hold that at the stage of adjudication under Section 17 and execution of the certificate under Section 25, etc. The provisions of the RDB Act, 1993 confer exclusive jurisdiction on the Tribunal and the Recovery Officer in respect of the debts payable to banks and financial institutions and that there can be no interference by the Company Court under Section 442 which is read with Section 537 or is under the Section 446 of the Companies Act, 1956.

In respect of the funds released under the RDB Act, the question of priorities appears among the banks and financial institutions and other creditors can be decided only by the Tribunal under the RDB Act and under section 19(19) read with section 529-A of the Companies Act and not in any other manner. The provisions of the RDB Act, 1993 are to some above-mentioned extent are inconsistent with the provisions of the former. This position holds nice during the pendency of the winding-up petition against the company that is in debt and after the winding-up order is passed. No leave of the Company Court is necessary for initiating or continuing the proceedings under the RDB Act, 1993. Points 2 and 3 are decided accordingly with being in favor of the appellant and against the respondents.

Conclusion

After referring to this case, we can conclude that a secured creditor can file a winding-up petition despite obtaining a recovery certificate from the debt recovery tribunal. The recovery certificate and the winding-up petition are two different remedies available for the secured creditor. Winding-up of the debtor’s assets is not a remedy for repayment of the dues. Therefore, a secured creditor can file a winding-up petition even after obtaining the recovery certificate from the debt recovery tribunal.

References:

[1] Winding-Up Petition Can Be Filed bythe Secured Creditor Even After Obtaining Decree from The Debts Recovery Tribunal: Supreme Court, https://www.mondaq.com/india/insolvencybankruptcy/782382/winding-up-petition-can-be-filed-by-the-secured-creditor-even-after-obtaining-decree-from-the-debts-recovery-tribunal-supreme-court

[2] Ibid

[3] Winding-Up Petition Can Be Filed by The Secured Creditor Even After Obtaining Decree from The Debts Recovery Tribunal: Supreme Court, https://www.mondaq.com/india/insolvencybankruptcy/782382/winding-up-petition-can-be-filed-by-the-secured-creditor-even-after-obtaining-decree-from-the-debts-recovery-tribunal-supreme-court

[4] Ibid

[5] (2005) 8 SCC 190

[6] [1940] 1 All E.R. 425 at 436-437

[7] SC| Secured creditor can file winding-up petition even after obtaining a recovery certificate from DRT, https://www.scconline.com/blog/post/2019/01/30/sc-secured-creditor-can-file-winding-up-petition-even-after-obtaining-a-recovery-certificate-from-drt/

[8] Whether creditor can seek more than one remedy simultaneously? https://www.lawweb.in/2019/02/whether-creditor-can-seek-more-than-one.html