The Supreme Court held that a liability arising out of a claim under the Recovery of Debts and Bankruptcy Act, 1993 is a "financial debt" under Section 5(8) of the Insolvency and Bankruptcy Code, 2016 (IBC) and that the holder of such a Recovery Certificate is a "financial creditor" under Section 5(7) of the IBC.
It was specifically stated in the judgment that:
"..we hold that a liability in respect of a claim arising out of a Recovery Certificate would be a "financial debt" within the meaning of clause (8) of Section 5 of the IBC. Consequently, the holder of the Recovery Certificate would be a financial creditor within the meaning of clause (7) of Section 5 of the IBC. As such, the holder of such certificate would be entitled to initiate CIRP, if initiated within a period of three years from the date of issuance of the Recovery Certificate"
In the instant case titled Kotak Mahindra Bank Limited v A.Balakrishna and anr the issue that was raised before the Apex Court for clarification was:
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Whether a Corporate Debtor and a Financial Creditor can be referred to arbitration while deciding on an application under Section 7 of IBC?
Whether the application was time-barred as per the order of NCLAT?
With regard to the first issue, the court referred to various provisions of IBC. A ‘financial creditor’, ‘an operational creditor’, or the ‘Corporate Debtor’ can initiate CIRP. Furthermore, 'default' has been defined as 'non-payment of debt', 'debt' has been defined as 'liability or obligation in respect of a claim due from any person, including a financial debt and operational debt'; and 'claim' has been defined as a right to payment, whether or not such right is reduced to judgement.'
As on the second issue, the Court reasoned that the decisions on res-judicata and cause-of-action estoppel would be irrelevant in the facts of this case as the application was filed within three years of the date on which the Recovery Certificate was granted, and thus was not subject to limitation.
The Court categorically held that:
“A debt that has crystallised in the form of a decree would be covered by Section 5(8), based on the statute's goal and purpose. As a result, a liability arising out of a Recovery Certificate would constitute a "financial debt" as defined in clause (8) of Section 5 of the IBC, and the holder of such certificate would be a financial creditor as defined in Section 5(7) of the IBC”.
In light of this, the Court reasoned that it should consider whether liability in respect of a 'claim' arising out of a Recovery Certificate falls within the definition of 'financial debt,' which is defined as a debt, together with interest, if any, which is disbursed against the consideration for the time value of money and includes...' under Section 5(8) of the IBC. The Court highlighted that inserting the word "including" would have the effect of broadening the scope of the legislation, citing a slew of decisions on the subject. It was of the opinion that because the word "including" was included in the definition of "financial debt" in Section 5(8), the list was not exhaustive but inclusive.