Bank waited 20 years to file insolvency. Supreme Court says: that's fine.

The bank got a recovery certificate in 2017. The default was in 1997. The Supreme Court just said the insolvency case isn't too late.

For twenty years, the money sat unpaid. Then, in 2018, Kotak Mahindra Bank walked into the National Company Law Tribunal (NCLT — the special court that handles corporate insolvency) and filed a petition to push the defaulting company into insolvency. The borrowers had one defence: the default happened in 1997. Twenty-one years ago. The law of limitation, they said, had swallowed the debt whole.

The Supreme Court disagreed. And in doing so, it settled a question that had been nagging banks, lawyers, and insolvency professionals since the Insolvency and Bankruptcy Code (IBC) came into force in 2016: can a Recovery Certificate from the Debt Recovery Tribunal (DRT — a special court that hears bank loan recovery cases) restart the clock for insolvency, even if the original default happened decades ago?

When the loans went bad

Between 1993 and 1994, Ind Bank Housing Limited gave loans to three companies. Prasad Properties, a fourth entity, provided a corporate guarantee — meaning it promised to pay if the borrowers defaulted — and mortgaged its property as security. By November 1997, all three borrowers had stopped paying. The accounts were classified as Non-Performing Assets (NPAs — loans that have stopped generating income for the bank). The file, by then, was thick with unanswered notices and fading bank statements.

Then the bank changed hands. Kotak Mahindra Bank took over the debt through an assignment (a legal transfer of the right to collect the money). In 2007, Kotak got a compromise decree from the Madras High Court — a court-approved settlement that the borrowers agreed to but never honoured. The compromise decree was signed in a hurried corridor of the Madras High Court, the smell of old paper and the murmur of lawyers filling the air. The money stayed unpaid.

Kotak then went to the Debt Recovery Tribunal, which in June 2017 issued Recovery Certificates — official documents declaring that a specific sum of money is due and can be recovered as if it were a court decree. The DRT officer stamped the certificate with a thud, the sound echoing in the small, fluorescent-lit room. Armed with those certificates, Kotak filed a petition under Section 7 of the IBC (the provision that lets a financial creditor start insolvency proceedings against a corporate debtor) in 2018.

The NCLT says yes, the NCLAT says no

The NCLT in Chennai admitted the petition in September 2019. The NCLT bench sat in a silent, wood-panelled room, the only sound the rustling of papers as the order was read. It decided that the debt existed, the default had occurred, and the insolvency process could begin. The corporate debtor appealed to the National Company Law Appellate Tribunal (NCLAT — the appeal court for insolvency matters).

The NCLAT reversed the decision in November 2020. Its reasoning was simple: the default happened in 1997. The IBC's limitation period for filing an insolvency petition is three years from the date the right to file arises, under Article 137 of the Limitation Act (the provision that sets a three-year limit for most applications to a court). Twenty-one years was far too late. The Recovery Certificate, the NCLAT held, did not create a fresh right to file — it was merely a procedural step that did not reset the limitation clock.

Kotak appealed to the Supreme Court.

What the Supreme Court had to decide

The core question was deceptively simple: does the issuance of a Recovery Certificate by the DRT give a financial creditor a fresh cause of action (a new legal right to sue or file a case) to initiate insolvency proceedings, with a fresh three-year limitation period starting from the date of the certificate?

Kotak argued that it did. The Recovery Certificate, the bank said, was not just a piece of paper — it was a judicial determination that the debt was due and payable. It created a new, enforceable liability. The three-year clock under Article 137 should start ticking from June 2017, when the certificate was issued, not from 1997, when the original default occurred.

The corporate debtor argued the opposite. The debt was the same debt. The default was the same default. The Recovery Certificate merely confirmed what everyone already knew — that the money was owed. It did not create a new debt or a new default. The limitation period, they said, had expired long before the IBC even existed.

Why the Recovery Certificate changed everything

The Supreme Court bench — Justices L. Nageswara Rao, B.R. Gavai, and A.S. Bopanna — delivered its judgment on May 30, 2022. The courtroom fell silent as the judgment was pronounced, the weight of the ruling settling over the assembled lawyers. The court began by examining the definitions under the IBC. Section 3(6) defines a 'claim' as a right to payment, whether or not the right is reduced to judgment. Section 5(8) defines 'financial debt' as a debt along with interest, if any, which is disbursed against the consideration for the time value of money. Section 5(7) defines a 'financial creditor' as someone to whom a financial debt is owed.

The court held that "a liability in respect of a claim arising out of a Recovery Certificate constitutes a 'financial debt' under Section 5(8) IBC, and the holder of such certificate is a 'financial creditor' entitled to initiate CIRP." The certificate is not a mere acknowledgment — it is a legally enforceable demand. The holder of such a certificate is a financial creditor entitled to initiate the Corporate Insolvency Resolution Process (CIRP — the formal process of resolving a company's insolvency under the IBC).

More importantly, the court ruled that the issuance of a Recovery Certificate gives rise to a fresh cause of action. The three-year limitation period under Article 137 for filing a Section 7 application begins from the date of the certificate, not from the date of the original default. The court relied on its own earlier decision in Dena Bank (Now Bank of Baroda) v. C. Shivakumar Reddy (2021), which had held the same principle. The NCLAT had suggested that Dena Bank was decided incorrectly — that it was per incuriam (a decision made in ignorance of a binding statute or precedent). The Supreme Court rejected that argument. Dena Bank, the court said, correctly states the law and is not per incuriam any statutory provision or binding precedent.

Deep dive: The Dena Bank precedent

The Dena Bank case, decided in 2021 by a three-judge bench of the Supreme Court, had already established that a financial creditor could initiate CIRP on the basis of a debt that had been reduced to a decree or a Recovery Certificate. In that case, the court held that the right to sue under Section 7 IBC accrues when the default occurs, but if the debt is subsequently crystallised through a decree or certificate, that crystallisation constitutes a fresh default for the purposes of limitation. The NCLAT in the Kotak case had tried to distinguish Dena Bank or argue that it was wrongly decided, but the Supreme Court firmly shut that door. The court examined the Dena Bank reasoning in detail, noting that it had considered the interplay between the Limitation Act, the Recovery of Debts and Bankruptcy Act, and the IBC. The court found no error in the Dena Bank judgment and reaffirmed its binding authority.

The Supreme Court also considered a string of other precedents. In Gaurav Hargovindbhai Dave v. Asset Reconstruction Co. (India) Ltd. (2019), the court had held that the Limitation Act applies to IBC proceedings and that the three-year period under Article 137 begins when the right to apply accrues. In B.K. Educational Services (P) Ltd. v. Parag Gupta & Associates (2019), the court had clarified that the limitation period for IBC applications is three years from the date of default. The Kotak judgment harmonised these precedents by holding that the issuance of a Recovery Certificate creates a fresh accrual of the right to apply, thereby restarting the limitation clock. The court also cited Swiss Ribbons Pvt. Ltd. v. Union of India (2019), which upheld the constitutional validity of the IBC, and Jignesh Shah v. Union of India (2019), which dealt with the applicability of limitation to IBC proceedings.

What this means for banks and borrowers

For financial creditors, the judgment is a powerful tool. A bank that holds a Recovery Certificate — even one issued decades after the original default — can file an insolvency petition within three years of the certificate's date. The old debt is not dead. The certificate breathes new life into it. Consider a hypothetical scenario: a bank that lent money to a company in 1995, saw the loan turn into an NPA in 1998, obtained a Recovery Certificate in 2015, and filed an insolvency petition in 2017. Under the Kotak ruling, the petition would be within limitation, because the three-year clock started ticking in 2015, not 1998. The bank does not need to worry about the original default date being decades old.

For corporate debtors, the message is stark: a Recovery Certificate is not a passive document. It is a ticking clock. Once the DRT issues it, the bank has three years to push for insolvency. Ignoring the certificate does not make it go away. The debtor cannot simply argue that the original default is too old to be revived — the certificate itself creates a fresh legal obligation that can trigger insolvency proceedings.

THE PLAY: If you hold a Recovery Certificate from DRT, file your Section 7 IBC application within three years of its issuance — the clock resets, and the original default date becomes irrelevant.

The NCLAT order was set aside. The NCLT's admission of Kotak's insolvency petition was restored. The corporate debtor, which had evaded payment for over two decades, would now have to face the insolvency process. The file, once dusty and forgotten, was now alive again in the courts.

The bank got its certificate in 2017. The default was in 1997. The Supreme Court just said that twenty years of waiting was not too long.