Bank had DRT order and recovery certificate. Could it still file for winding up?

The bank had already won in the DRT. It had a recovery certificate. Then it filed a winding up petition. The company cried foul.

Kotak Mahindra Bank had lent money to several companies. The dues swelled to about INR 48 crores. It went to the Debts Recovery Tribunal (DRT — a specialised court that hears only bank loan recovery cases). The DRT ruled in the bank's favour. It issued recovery certificates — physical documents, stamped and signed, declaring the debt was due and payable. The bank tried to auction the secured properties. The auction notice went up. No buyers came. The auction room sat empty. Nothing worked.

So it did the next logical thing: it issued statutory notices and filed a winding up petition before the Bombay High Court.

The companies hit back with a sharp argument: once a secured creditor chooses the DRT route, it cannot also file for winding up. And if it wants to wind up the company, it must first give up its security. Both the single judge and the Division Bench of the Bombay High Court rejected these arguments. The order sheets from those hearings recorded the dismissal. The companies appealed to the Supreme Court.

When the DRT order wasn't enough

The bank had obtained orders and recovery certificates under Section 19(19) of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (the RDB Act — the law that created the DRT system). The DRT applications had been allowed on January 16, 2015. The recovery certificates followed on August 12, 2015. The bank had also filed winding up petitions under Sections 433(e) and 434 of the Companies Act, 1956 (provisions that let a creditor ask the court to shut down a company that cannot pay its debts).

The companies argued that Sections 17 and 18 of the RDB Act created a complete bar. Section 17 gives the DRT exclusive jurisdiction over debt recovery cases. Section 18 says no other court can hear those cases. The companies' logic was simple: the bank had already gone to the DRT, so it could not simultaneously pursue winding up in the High Court. The RDB Act also has an overriding effect under Section 34, which says its provisions prevail over any other law.

But the bank's position was different. It said winding up is not a debt recovery proceeding. It is a collective proceeding for the benefit of all creditors. The DRT route and the winding up route serve different purposes and can run in parallel.

The bank's second move

The Supreme Court, in a judgment delivered by Justice R.F. Nariman on May 25, 2019, upheld the Bombay High Court. The single judge had admitted the winding up petition on July 26, 2017. The Division Bench had dismissed the appeals. The Supreme Court dismissed the appeals too. In the courtroom, the argument that the RDB Act barred winding up was met with a firm rejection. The silence that followed the judge's pronouncement was telling.

The court held, in its ratio, that "a winding up proceeding under the Companies Act, 1956 is not a proceeding for recovery of debts within the meaning of Sections 17 and 18 of the RDB Act". The jurisdictional bar under Section 18, read with Section 34, simply does not apply to winding up petitions.

The reasoning was straightforward. The DRT deals with individual debt recovery — one creditor against one debtor. Winding up deals with the entire company — all creditors, all assets, all claims. One is a bilateral fight. The other is a multilateral distribution. They are different species of proceedings, and the RDB Act's bar only catches the first species.

The court also addressed the second argument: that the bank must give up its security before filing a winding up petition. The companies relied on Section 529 of the Companies Act, which brings in the insolvency rules from the Provincial Insolvency Act, 1920. Section 9(2) of that Act says a secured creditor can only file an insolvency petition if it gives up its security or values it. The companies said this requirement applies at the petition stage itself.

The courtroom argument

This is where the judgment gets interesting. The Supreme Court said the election to relinquish or value security arises only at the proof-of-claims stage — after a winding up order is passed, not at the petition stage. A secured creditor can file a winding up petition without giving up its security. The court file at that stage does not require any such election. It only has to make the choice later, when it comes to proving its claim before the official liquidator.

The court relied on several precedents to hold that the DRT and winding up proceedings can operate in parallel streams. One does not bar or exclude the other. The precedents cited included Allahabad Bank v. Canara Bank — (2000) 4 SCC 406, Amalgamated Commercial Traders (P.) Ltd. v. A.C.K. Krishnaswami — (1965) 35 Comp Cas 456 (SC), Harinagar Sugar Mills Co. Ltd. v. M.W. Pradhan — (1966) 3 SCR 948, Viral Filaments Ltd. v. Indusind Bank Ltd. — (2001) 3 Mah LJ 552, Rajasthan State Financial Corporation v. Official Liquidator — (2005) 8 SCC 190, Official Liquidator v. Allahabad Bank — (2013) 4 SCC 381, Hegde & Golay Limited v. State Bank of India — ILR 1987 KAR 2673, and Asian Power Controls Ltd. v. Bubbles Goyal — (2013) 3 Mah LJ 811.

The procedural journey itself tells a story. The bank first went to the DRT in Mumbai on January 16, 2015. The tribunal allowed the applications. The recovery officer then issued the recovery certificates on August 12, 2015, under Section 19(19) of the RDB Act. Each certificate bore the tribunal's seal. Each one declared the debt enforceable. But the bank could not auction the secured properties. The auction notices were published. The dates came and went. No bidders appeared. The properties remained unsold.

So the bank turned to the Companies Act. It filed a company petition before the Bombay High Court under Sections 433(e) and 434, alleging that the companies were unable to pay their debts. The single judge admitted the petition on July 26, 2017. The companies appealed to the Division Bench. The Division Bench dismissed the appeals. The companies then approached the Supreme Court through a special leave petition — Civil Appeal No. 1291 of 2019 (SLP(C) 6221/2018). The Supreme Court dismissed the appeals on May 25, 2019.

The judgment clarified several key points. First, the RDB Act's bar under Sections 17 and 18 applies only to proceedings that are 'for recovery of debts'. Winding up is not such a proceeding. It is a proceeding for the distribution of assets among all creditors, not just one. Second, a secured creditor does not have to relinquish its security at the petition stage. The election under Section 47 of the Provincial Insolvency Act, read with Section 529 of the Companies Act, arises only at the proof-of-claims stage after the winding up order is passed. Third, the DRT and winding up proceedings can run in parallel. One does not exclude the other.

What this means for lenders

The practical takeaway is significant. A bank that has already obtained a DRT order and a recovery certificate can still file a winding up petition. It does not have to choose one remedy over the other. It can pursue both simultaneously. And it does not have to give up its security at the filing stage — that choice comes later.

But there is a catch. If the winding up order is passed and the bank wants to participate in the distribution of assets, it must then decide: either relinquish its security and claim as an unsecured creditor, or value its security and prove the shortfall. The court made clear that this election happens after the winding up order, not before.

The judgment also has implications for the interplay between the RDB Act and the Companies Act. The RDB Act was designed to create a specialised forum for debt recovery, but it did not intend to override the winding up mechanism. The two statutes operate in different spheres. The DRT deals with individual claims. The winding up court deals with the collective fate of the company. The RDB Act's overriding effect under Section 34 does not extend to winding up proceedings because they are not 'debt recovery' proceedings in the strict sense.

The court also distinguished the provisions of the Provincial Insolvency Act that the companies relied upon. Section 9(2) of that Act requires a secured creditor to relinquish or value its security before filing an insolvency petition. But the court said this requirement does not apply at the petition stage in a winding up proceeding. The election arises only after the winding up order is passed, when the creditor proves its claim before the official liquidator. This distinction is crucial for secured creditors who want to preserve their security rights while also pursuing winding up.

THE PLAY: A secured creditor can file a winding up petition even after obtaining a DRT recovery certificate, without relinquishing security at the petition stage — the election to value or surrender security arises only after the winding up order.

The bank had won in the DRT. The recovery certificate sat in its file, stamped and signed. The auction room had remained empty. And the Supreme Court said it could still ask for the company to be wound up. The two streams run side by side — until the moment one of them reaches the sea.