This blog is written by Anisha Tripathi, who is a 3rd-year student at NLU, Odisha.

Recently, the apex court emphasized that the doctrine of election does not find application in cases governed by the Insolvency and Bankruptcy Code (“IBC”) of 2016. It clarified that financial creditors holding a decree from a civil court or a recovery certificate under the Recovery of Debts and Bankruptcy Act 1993 (“RDB Act” ) can  choose to utilize the provisions of IBC alongside the usual methods for executing such decree or recovery certificate. This ruling expands the legal avenues for banks, financial institutions, and other creditors. However, it also prompts a critical question: Does this additional recourse for a decree holder align with the primary goal of the IBC, which is resolution rather than just recovery?

BACKGROUND

State Bank of India (SBI) amongst many other financial institutions, provided loans to Totem Infrastructures Limited (Corporate Debtor). The pivotal legal scenario unfolded when debt recovery proceedings were commenced against the respondent firm under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (SARFAESI) before the Debt Recovery Tribunal (DRT). The tribunal issued recovery Certificate in 2015 and then again in 2017 with SBI having a stake in each. Two years later, SBI seeking the initiation of Corporate Insolvency Resolution Process (CIRP) against the Debtor due to defaulting on payment for the three Recovery Certificates, filed a petition under Section 7 of IBC and the same was initiated by the National Company Law Tribunal (NCLT) in 2021. The Managing Director (MD) of the corporate debtor named Mr. Tottempudi Salalith (appellant)  contested this order passed by NCLT on the ground that the Section 7 petition, filed in 2019, was too late because one of the Recovery Certificates dated back to 2015. They also said that the default date should be when the Corporate Debtor’s account was declared a Non-Performing Asset (NPA), not when the Recovery Certificate was issued. Additionally, Mr. Salalith claimed that the banks, by going to the DRT, could not  seek recovery for the same debts from NCLT under the doctrine of election. The Appellate Tribunal (NCLAT) rejected the appeal, prompting the Appellant to take the case to the Supreme Court.

APPLICATION OF DOCTRINE IN IBC

Originating from the law of evidence, the Doctrine of Election serves as a prohibition against pursuing the same right in two separate forums when grounded in the same cause of action. However, this principle doesn’t apply when the nature and scope of the two remedies are fundamentally distinct.

The doctrine was first discussed in the case of Scarf v Jardine as a principle in which when a party possesses multiple remedies that can be pursued, the act of formally communicating its selected remedy to the other party constitutes the completion of the election process. Achieving the benefit of this principle is contingent upon the simultaneous availability of multiple remedies. The doctrine encompasses three fundamental aspects: (i) the presence of two or more available remedies, (ii) inconsistencies among these remedies, and (iii) the deliberate selection of one remedy over the others. Adherence to all these elements is imperative for the application of this doctrine. Opting for one remedy foregoes the concurrent pursuit of alternative remedies. Additionally, the doctrine does not come into play when the nature and extent of the two remedies differ, as such application may risk fostering injustice and yielding inconsistent outcomes. Similarly, the apex court in India clarified the significance of this doctrine by providing insights into the classic instance of forum shopping. Forum shopping occurs when a litigant seeks relief from one court but opts for an alternative forum to pursue the same relief if the desired outcome is not achieved in the initial court. The court established a functional test to identify forum shopping, considering factors such as functional similarity between the courts or any indication of subterfuge on the part of the litigant.

In the context of the doctrine in debt recovery cases under the SARFAESI  or RDB Act of 1993, the court, as observed in Kotak Mahindra Bank Limited v A. Balakrishnan (Kotak Mahindra), emphasized the distinct nature of remedies provided by the IBC or the Arbitration and Conciliation Act compared to debt recovery laws. The court explicitly stated in this case that the IBC serves as a mechanism for the revival of a company’s indebtedness rather than a direct debt recovery tool. In the case of Fermina Developers Ltd v Indiabulls, where the doctrine of election was challenged concerning the claim of remedy under the NPA Act and the RDB Act 1993, the Delhi High Court ruled that the NPA Act provides an additional remedy alongside the RDB Act. Together, they constitute a unified remedy, rendering the doctrine of election inapplicable in this context.

COURT’S REASONING IN THE PRESENT CASE

The court held the non-applicability of the doctrine in cases governed by IBC primarily on three grounds. Firstly, that in the present recovery proceedings before the DRT were initiated in 2014, a period when the IBC had not yet come into existence. Secondly, the court relied on the Kotak Mahindra judgement to rule that the relief under IBC and under SARFESI are distinct. It was observed that the primary objective of the IBC is not simply to serve as a debt recovery mechanism but to provide a comprehensive legal framework for the resolution of insolvency and the revitalization of distressed companies. Thirdly, relying on its judgement in the case of Transcore v Union of India, the court established that the SARFAESI mechanism can be applied concurrently with proceedings under the RDB Act, providing lenders with the option to utilize both mechanisms simultaneously for debt recovery.

CRITICAL ANALYSIS

The court, by granting an overriding effect to IBC over the debt recovery laws, signalled  a judicial inclination towards the revival of distressed firms rather than their winding up. The Parliament made a conscious effort to maintain a clear distinction between the term ‘resolution’ and ‘recovery’ while drafting IBC. Its primary emphasis is on the revival and rehabilitation of financially distressed firms rather than mere debt recovery. Therefore, such pro-IBC stance adopted by the courts aligns seamlessly with the overarching objective of the IBC and has supplemented the recourse available to the creditors. However, it’s crucial to acknowledge that while the IBC offers an alternative, the success of actions taken under it is not guaranteed. The outcome is contingent on the decree holder’s status or position under the waterfall mechanism outlined in the IBC. The waterfall mechanism determines the priority of claims during the distribution of assets, and the decree holder’s standing in this hierarchy influences the likelihood of recovery. Moreover, the nature of recovery certificates issued under the DRT Act, being in the form of money decrees, may not automatically confer secured creditor status upon the certificate holder.  

CONCLUSION

The court unfurled a new chapter in the grand tapestry of insolvency law—a chapter adorned with the spirit of economic rejuvenation and corporate vitality. Redefining the doctrine of election, has  made way for a future where distressed firms find not only resolution but also a symphony of renewed possibilities.

But, while the Supreme Court’s clarification expands the options available to decree holders, the complexities of the insolvency process, including the waterfall mechanism and secured creditor status, necessitate careful consideration and strategic planning in pursuing actions under the IBC.