Recovery Certificate Issued Before 2016 Amendment Of RDB Act Can't Be Basis For Initiating Insolvency Proceedings Under Presidency Towns Insolvency Act: Supreme Court

The Apex Court was considering an appeal filed at the instance of HDFC Bank raising the issue of whether an insolvency notice under Section 9(2) of the Presidency Towns Insolvency Act, 1909 can be issued based on a recovery certificate issued by a Debts Recovery Tribunal.

The Division Bench of Justice Dipankar Datta and Justice Satish Chandra Sharma held, “The fact that Parliament found it necessary in 2016 to insert sub-section (22A) in Section 19 of the RDB Act for the express purpose of equating a recovery certificate with a ‘decree or order’ is clear legislative recognition that such equivalence did not exist earlier. By necessary implication, a recovery certificate issued prior to the 2016 amendment could not form the basis for initiating insolvency proceedings. To hold otherwise would be to supply what the legislature omitted – a clear casus omissus. That apart, it is significant that the amendment has not been given retrospective effect. Matters would perhaps have been simpler, had the amendment been made earlier.”

Senior Advocate Gopal Jain represented the Appellant while Senior Advocate Devdatt Kamat represented the Respondent.

Factual Background

The original respondent was a director of Beautiful Diamonds Ltd., which had availed credit facilities from a consortium of 15 banks, including the Appellant-Bank, for its diamond business. The facilities were secured by mortgage through deposit of title deeds, and the original respondent, along with other directors, executed personal guarantees. Upon default, and after the invocation of personal guarantees failed, the Appellant-Bank approached the Debt Recovery Tribunal, Mumbai, by filing an application. By an order, the DRT, Bombay, directed the issuance of a recovery certificate for Rs 14,74,51,929.35 against the original respondent, followed by a recovery certificate. Based on the recovery certificate, the Insolvency Registrar issued an insolvency notice under Section 9(2) upon an approach being made by the Appellant-Bank. This notice was the core of this litigation. The original respondent challenged the notice before the Bombay High Court by taking out a Notice of Motion under Section 9(5)11, contending that a recovery certificate of the DRT could not form the basis of an insolvency notice.

A Single Judge, while keeping the notice of motion pending, held that no insolvency notice could have been issued on the basis of a recovery certificate, and the Division Bench upheld the order of the Single Judge. Aggrieved, the Appellant-Bank preferred the appeal, whereupon leave was granted. The Court had stayed the proceedings in the Notice of Motion. During the pendency of the appeal, the original respondent died, and the Application filed by the Appellant-Bank for substitution of the legal representatives of the original respondent (since deceased) was allowed by the Registrar. The Respondents were substituted in place of the deceased original respondent, who were his three sons and wife.

The Single Judge as well as the Division bench of the High Court relied on the decision of the Apex Court in Paramjeet Singh Patheja v. ICDS Ltd. (2006), wherein the issues involved were whether an arbitration award is a “decree” for the purpose of Section 9 and whether insolvency proceedings under Section 9(2) of the Insolvency Act can be initiated based on an arbitral award. The Court answered both the questions in the negative and held that the words "decree or order" cannot include an arbitral award.

Reasoning

The Bench noted that the question involved in Paramjeet Singh Pathreja (supra) arose with respect to an arbitral award, but its ratio was resting on a wider principle. The Apex Court had noted therein that the Insolvency Act must be strictly construed as insolvency has grave civil consequences and the term “decree or order" must be understood in light of the definition contained in the Code of Civil Procedure, 1908.

The Bench stated, “If denying a suitor relief based on accrual of post-natal events because of the Court’s delay to decide the lis is impermissible, by the same logic, the converse must also hold. A claim which was untenable on the date the suitor entered the portals of the Court cannot become tenable simply because a fortuitous event during the pendency of the trial has made it so. The lis must be decided on the basis of rights and liabilities as they stood on the date of institution, unless the statute or equity of the case otherwise requires.”

The Bench was of the view that Section 19(22A) of the RDB Act did not aid the Appellant-Bank and accepted the applicability of Paramjeet Singh Patheja (supra). Thus, dismissing the appeal, the Bench closed the proceedings in notice of motion before the Single Judge qua the deceased original respondent. Holding that no order was required to be made now against the other two Respondents, the Bench concluded, “Appellant-Bank, if so advised, can work out its remedies against them, in accordance with law, if not barred by limitation or otherwise.”

Cause Title: H.D.F.C. Bank Limited v. Kishore K. Mehta (Dead) Thr. Lrs ( Neutral Citation: 2026 INSC 688)

Appearance

Appellant: Senior Advocate Gopal Jain, Advocates Sanjay Gupta, Aditi Pundhir, Raghu Aggarwal, AOR Alok Tripathi

Respondent: Senior Advocate Devdatt Kamat, AOR M/S. Chambers Of Kartik Seth, Advocates Tarun Mehra, Dakshesh Vyas, AOR Shivendra Singh, Advocates Aryama Singh Rajput, Utsav Trivedi, Arpit Gupta, Manini Roy, AOR Girish Bhardwaj, AOR Varun Singh, Advocates Gaurav Nair, Nishtha Kumar, Veera Mathai, Bhairavi Sn, Shrom Sethi, Archana Singh, Imran Khan, Inam Ul Haq

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