Secured Creditor entitled to file Winding Up Petition even after obtaining decree from DRT, Supreme Court

The Supreme Court has held that a secured creditor has the right to file a winding up petition after such secured creditor has obtained a decree from the Debts Recovery Tribunal (DRT) and a recovery certificate based on it.

The judgment was rendered by a Bench of Justices Rohinton Nariman and Navin Sinha which held Companies Act, 1956 is overridden by the Recovery of Debts Act only qua recovery of debts due to banks and financial institutions.

In the instant case, the respondent, Kotak Mahindra Bank Limited, had advanced various loans to the companies in question. The outstanding amount against these companies, together with interest, was Rs. 48 crores. The respondent approached the DRT, Mumbai by filing three separate original applications to recover the debt owed to them. The DRT delivered three separate judgments allowing the applications filed by the respondent bank.

Recovery certificates for the said amounts were then issued by the Recovery Officer under Section 19(19) of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993.

Meanwhile, the respondent issued statutory notices under Sections 433 and 434 of the Companies Act, 1956.

As no payments were forthcoming, a company petition was filed before the Bombay High Court. By an order dated July 26, 2017, the said petition was admitted as the companies in question were said to be commercially insolvent.

In the appeals that were filed to the Division Bench of the Bombay High Court, the main point argued was that once a secured creditor has obtained an order from the DRT, and a recovery certificate has been issued, such secured creditor cannot file a winding up petition as the Recovery of Debts Act is a special Act which vests exclusive jurisdiction in the DRT. Also, a secured creditor can file a winding up petition only on giving up its security, which has not been done in the present case. These contentions did not find favour with the Division Bench which dismissed the appeals in question.

This led to the appeal in Supreme Court by the companies.

Advocate K Parameshwar appearing for the appellant companies argued that the Recovery of Debts Act being a special statute, qua the Companies Act, exclusive jurisdiction is vested in the DRT to the exclusion of Company Court.

Thus, it was the argument of the appellant that once the DRT has been approached, the necessary corollary is that a winding up petition to realize the same debt would be expressly barred on a conjoint reading of Sections 17 and 18 of the Recovery of Debts Act.

Senior Advocate Shyam Divan, appearing for the respondent bank placed reliance on Section 439 of the Companies Act to argue that a secured creditor can maintain a winding up petition in the facts and circumstances as in the instant case.

According to Divan, his client had gone from pillar to post in an attempt to recover the loans made to the appellants and had not succeeded in any endeavour to do so. Also, nothing had been repaid and the debt owed by these companies amounted to a staggering figure of Rs. 48 crores.

He also sought to distinguish the present case from the case of Allahabad Bank v. Canara Bank. According to him, the context of that judgment was whether leave had to be obtained from the Company Court when a winding up proceeding is either pending, or a winding up order is made, in order to pursue a debt recovery proceeding under the Recovery of Debts Act.

The Court at the outset proceeded to deal with the judgment in Allahabad Bank case. It observed that the statement in that judgment regarding exclusive jurisdiction conferred on DRT was made in the context of non-requirement of leave of the Company Court to initiate, continue with, and execute orders passed under the Recovery of Debts Act.

Thus, it held that Companies Act, 1956 is overridden to the extent of the inconsistency between the Companies Act, 1956 and the Recovery of Debts Act only qua recovery of debts due to banks and financial institutions.

The Court then went on to hold that winding up proceeding is not a proceeding for realisation of debt and would, therefore, not be within the ambit of Section 17 of the Recovery of Debts Act. Consequently, the bar of jurisdiction of other forums as per Section 18 read with Section 34 of the Recovery of Debts Act will not be applicable, it held.

The Court also placed reliance on the judgment in Rajasthan State Financial Corporation v. Official Liquidator to hold that proceedings before DRT and Company Court can go on simultaneously.

The Court, therefore, dismissed the appeal but not before it summed up the creditor’s predicament in the following words:

“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.”

Read the judgment below.