Supreme Court Clarifies Limitation in Insolvency Proceedings: Acknowledgment of Debt, Recovery Certificates, and Doctrine of Election Analysed

In a recent judgment, the Indian Supreme Court has addressed key aspects of limitation in insolvency proceedings, shedding light on acknowledgment of debt, treatment of the date of default, the role of recovery certificates, and the doctrine of election. The decision, delivered by a bench comprising Justices Aniruddha Bose and Vikram Nath, offers valuable insights for creditors and debtors navigating the complex landscape of insolvency law.

The court's observations provide clarity on several crucial issues:

Acknowledgment of Debt: The court clarified that the mere acknowledgment of debt does not automatically extend the limitation period in an ongoing insolvency proceeding. It distinguished between acknowledgment under Section 18 of the Limitation Act and a promise within the meaning of Section 25 of the Indian Contract Act, emphasizing that a promise to pay must be clear and unconditional to have such an effect.

Date of Default: The judgment examined the treatment of the date of default as the starting point for the limitation period in insolvency proceedings. It compared this with previous judgments and analyzed the effect of a recovery certificate as a deemed decree. The court clarified the time limit for initiating the Corporate Insolvency Resolution Process (CIRP) based on a recovery certificate. It was determined that a recovery certificate retains the character of a decree to lodge a claim in an IBC proceeding.

Doctrine of Election: The court also addressed the doctrine of election, particularly in the context of banks approaching Debt Recovery Tribunal (DRT) and the National Company Law Tribunal (NCLT) for debt recovery. It ruled that the doctrine of election does not prevent financial creditors from approaching the NCLT for the initiation of CIRP. This decision underscores the differences between the reliefs available under the Debt Recovery Act and the IBC, highlighting the importance of considering various factors, including the issuance of a recovery certificate.

Application of Limitation Act: The court reaffirmed the application of Article 137 of the Limitation Act for computing the limitation period for filing an application under Section 7 of the IBC. It also discussed the significance of Section 19(22A) of the Recovery of Debts Due to Banks and Financial Institutions Act, which deems a recovery certificate as a decree or order of the court. The court clarified that this character extends to lodging a claim in an IBC proceeding.

This judgment is expected to have far-reaching implications for insolvency cases in India, providing much-needed clarity on the intricacies of limitation, acknowledgment of debt, and the use of recovery certificates in insolvency proceedings. It serves as a crucial reference point for both creditors and debtors navigating the legal intricacies of the insolvency landscape.

The decision also highlights the court's commitment to interpreting and clarifying complex legal issues, ensuring a fair and consistent application of the law in insolvency cases.                                        

Date of Decision: October 18, 2023

TOTTEMPUDI SALALITH vs STATE BANK OF INDIA & ORS.

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