[Priyanshu Mishra is a student at National Law School of India University]
Recently, the Supreme Court in Tottempudi Salatih v State Bank of India clarified the application of the Doctrine of Election in the Insolvency and Bankruptcy Code, 2016 ("IBC"). In this case, the debt recovery was initiated against the respondent firm under s. 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFESI) prior to the initiation of Corporate Insolvency Resolution Proceeding under section 7 of the IBC. The respondent appealed before the NCLAT arguing that the initiation of the Corporate Insolvency Resolution Plan (“CIRP”) is barred by the Limitation Act claiming the alternate remedy is violative of the Doctrine of Election.
The Doctrine of Election is a common law principle of estoppel which bars the aggrieved party from claiming two similar reliefs. However, it does not apply to cases where the ambit and scope of the two remedy is essentially different. In this case, regarding the application of the doctrine, the court ruled that this doctrine cannot be employed to prevent a financial creditor from initiating the corporate insolvency resolution process under the IBC. The relief claimed before the Debt Recovery Tribunals (“DRT”) under the Recovery of Debt and Bankruptcy Act, 1993 (“RDB”) and the IBC are separate and inconsistent reliefs.
In this article, the author attempts to examine the reasoning of the court on the Doctrine of Election in IBC. Furthermore, it evaluates the application of the Doctrine of election in the IBC jurisprudence. In this regard, the paper is divided into three sections. Firstly, the reasoning of the court is explained. Secondly, the position of law on the application of the Doctrine of election in the Indian Corporate Law Jurisprudence is laid down. Finally a critical reflection of the court’s reasoning on the future of Insolvency Law in India.
Reasoning of the Court
The appellant's principal argument on the applicability of the Doctrine of Election was that the Banks had approached the DRT prior to approaching the NCLT for the recovery of the same set of debts. Therefore, as per the doctrine, the Banks cannot claim recovery of the same set of debts from two forums i.e., DRT and NCLT.
The court responded to the arguments of the appellant, in stating that the doctrine of election cannot be applied to prevent the financial creditor from approaching the NCLT for initiation of CIRP. The court gave three reasons to explain it. First, that the debt recovery under the SARFESI Act before the DRT commenced in 2014, prior to the coming into force of the IBC. Secondly, the court was premised on distinguishing the debt recovery under the SARFESI Act and IBC. This court ruled that the IBC itself is not a debt recovery mechanism but a mechanism for the revival of a company fallen into debt. Furthermore, the court ruled that the relief in both the Acts is different and once the CIRP results in a declaration of moratorium, the enforcement mechanism under the RDB Act 1993 or the SARFESI Act. The third reason that the court cited placed reliance on its judgement in the case Transcore v Union of India, where it held that the application of the SARFESI mechanism is permissible even though the proceeding under the RDB Act was initiated.
Current Position of Law
The Doctrine of Election, fundamentally an evidentiary principle, bars the prosecution of the same right in two different fora based on the same cause of action. In Scarf v Jardine, Lord Blackburn discussed the Doctrine of Election that when the party has two or more remedies to be claimed, the moment it communicates to the other party about its choice of remedy, he has completed the election. Similarly, in Kok Hoong v Leong Cheong Kweng Mine Ltd, the privy council held that the election of a remedy resulted in the abandonment of alternative remedies which can no longer be claimed by the aggrieved party.
Subsequently, the Indian courts have attempted to define this doctrine by ensuring adequate safeguards for the aggrieved party. In Transcore v Union of India, the Supreme Court held that there are three elements to the Doctrine of election, namely, the existence of two or more remedies; inconsistencies between such remedies and a choice between one of them. If any of the three elements is absent, the doctrine will not apply. Similarly, in National Insurance Company Ltd v Mastan, the court held that the doctrine of election is a branch of the rule of estoppel, and relied upon the test laid down in Ireo Grace Realtech Pvt Ltd v Abhishek Khanna. In this case, the court held that the election of remedies arises when there are two concurrent remedies available and the aggrieved party choose to exercise one over the other for the same cause of action.
In Union of India v Cipla Limited, the Supreme Court elucidated the relevance of the doctrine of election by explaining the classic example of forum shopping. In forum shopping, the litigant approaches one court for relief, but chooses to approaches an alternative forum for the same relief, if he does not get the desired relief from the first court. The court laid down the functional test to determine forum shopping, where there is any functional similarity between one court and another or whether there is some sort of subterfuge on the part of the litigant.
In the context of the doctrine in debt recovery cases under the SARFESI or RDB Act 1993, the court observed that the remedy under the IBC or the Arbitration and Conciliation Act is distinct from the debt recovery laws. In Kotak Mahindra Bank Limited v A. Balakrishnan, the court held that the IBC is not a debt recovery mechanism but a mechanism for the revival of the company's fallen debt. The question of the election between the fora for enforcement of debt under the RDB Act, 1993 and the initiation of CIRP under IBC is different. In Femina Developers Ltd v Indiabulls, the doctrine of election on the claim of remedy under the NPA Act and the RDB Act, 1993 was under challenge. The Delhi high court held that the NPA Act is an additional remedy to the RDB Act, which together constitute a single remedy, rendering the doctrine inapplicable. In MD Frozen Food Export Pvt Ltd v Hero Fincorp Ltd held that the secured creditor can go for the claim of recovery against the debtor before different forums under the Arbitration Act if the secured assets are insufficient to satisfy the debt. In Mathew Varghese v M Amritha Kumar, the court held that the provisions of the SARFESI Act and the RDB Act are complimentary to each other.
Analysis of the Case
The pro-IBC judicial approach has redefined the jurisprudence of the Doctrine of Election in India. The courts are giving the overriding effect to the IBC over the debt recovery law, which explains the judicial approach to the revival of the firm rather than the winding up of the firm. However, this approach raises two pertinent questions regarding the rationale behind it, and the perceived similarities between the IBC and the debt recovery laws in India.
To answer this question, it is imperative to understand the legal landscape prior to the IBC and after that. Prior to 2016, the claim for the debt of the creditor against the insolvent firm was mostly covered under the SARFESI Act and the RDB Act, 1993. The courts treated both these laws as the complementary debt recovery mechanism for the creditors. But the consequence of this approach was that both the laws focused on the recovery of the debt, and in reality there was no focus on the revival of the debt-ridden firms. During this period, insolvency was another mechanism for the debt recovery. In doing this, the courts were substituting the courts substituted insolvency law as another legally enforced debt recovery mechanism such as the SARFESI Act, 2002 and RDB Act, 1993.
In drafting the IBC, the parliament made a conscious effort to ensure that the line between the ‘resolution’ and ‘recovery’ is not blurred. The purpose of the act emphasises upon the revival of the debt-ridden firm over debt recovery. The pro-IBC approach adopted by the courts signifies a paradigm shift in the jurisprudence surrounding insolvency and debt recovery laws in India. This approach redefines the interplay between the IBC and other debt recovery mechanisms, emphasizing the IBC's overriding impact. By prioritizing the revival and resolution of insolvent firms over mere debt recovery, the court's reasoning strengthens the underlying objectives of the insolvency laws. It addresses the shortcomings of previous debt recovery models that predominantly focused on recovering debts without considering the broader aspect of firm revival. This shift clarifies the distinctiveness between the IBC and other acts like SARFAESI and the RDB Act, aligning the IBC's purpose with the larger goal of corporate restructuring and revival, thus reshaping the landscape of debt resolution in India.
In conclusion, the Tottempudi Salatih v State Bank of India case marks a pivotal moment in Indian jurisprudence, shedding light on the nuanced application of the Doctrine of Election within the context of the IBC. The Supreme Court's elucidation redefines the relationship between debt recovery mechanisms and the IBC, emphasizing the latter's overarching role in corporate restructuring and revival.
The court's redefinition of the Doctrine of Election reflects a profound recognition of the IBC's transformative potential in reshaping India's debt resolution landscape. By prioritizing the revival and resolution of distressed firms over simple debt recovery, the court's reasoning echoes the larger ethos of corporate restructuring, heralding a new era in insolvency law that upholds the spirit of economic rejuvenation and corporate vitality.