DRT certificate in hand. Winding up filed. Bank didn't have to choose.

Two proceedings, one debt: The Supreme Court settles a banker’s dilemma

Kotak Mahindra Bank had a problem. It had lent money to several companies. The dues had swelled to about INR 48 crores. The bank approached the Debts Recovery Tribunal, Mumbai, and secured orders in its favour. It even obtained recovery certificates under Section 19(19) of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993. But the secured properties wouldn’t sell. So the bank did something else: it filed a winding up petition before the Bombay High Court under Sections 433(e) and 434 of the Companies Act, 1956. The companies cried foul. They argued that once a secured creditor uses the DRT route, it cannot also file winding up, and must first give up its security. The stakes were high: if the companies were right, the bank would have to choose between its DRT recovery certificate and a winding up petition. If the bank was right, it could pursue both simultaneously. The Supreme Court of India, in Swaraj Infrastructure Pvt. Ltd. v. Kotak Mahindra Bank Ltd., Civil Appeal No. 1291 of 2019, decided the question on 25 May 2019. The answer was clear: a secured creditor can file a winding up petition even after obtaining DRT orders, and it does not have to relinquish its security at the petition stage.

What the DRT did, and what the bank did next

The story begins with three separate Original Applications filed by Kotak Mahindra Bank before the Debts Recovery Tribunal, Mumbai. On 16 January 2015, the DRT allowed all three applications. On 12 August 2015, recovery certificates were issued under Section 19(19) of the RDB Act. The bank tried to auction the secured properties. It failed. So it issued statutory notices under Section 434(1)(a) of the Companies Act, 1956, demanding payment. The companies neglected to pay for three weeks. The bank then filed a winding up petition before the Bombay High Court.

The companies opposed the petition. They argued that the DRT had exclusive jurisdiction over the debt, and that the winding up petition was barred by Sections 17 and 18 of the RDB Act. They also argued that the bank, as a secured creditor, had to relinquish its security before it could file a winding up petition, relying on Section 529 of the Companies Act read with Section 9(2) of the Provincial Insolvency Act. The Single Judge of the Bombay High Court rejected both arguments and admitted the winding up petition on 26 July 2017. The Division Bench dismissed the appeals. The companies appealed to the Supreme Court.

The argument that almost worked: exclusive jurisdiction

The companies’ first line of attack was the exclusive jurisdiction of the DRT. They relied heavily on Allahabad Bank v. Canara Bank, (2000) 4 SCC 406, where the Supreme Court had held that the DRT has exclusive jurisdiction for adjudication and execution of recovery of debts under the RDB Act, and that no leave of the Company Court is needed. The companies argued that if the DRT has exclusive jurisdiction, then a winding up petition—which is essentially a proceeding to recover a debt—must be barred by Section 18 of the RDB Act, which says “no court or other authority shall have… any jurisdiction… in relation to the matters specified in Section 17.”

The Supreme Court, speaking through Justice R.F. Nariman, rejected this argument. The Court distinguished Allahabad Bank by pointing out that the case was about the execution of a recovery certificate, not about the maintainability of a winding up petition. The Court then turned to two earlier decisions: Amalgamated Commercial Traders (P.) Ltd. v. A.C.K. Krishnaswami, (1965) 35 Comp Cas 456 (SC), and Harinagar Sugar Mills Co. Ltd. v. M.W. Pradhan, (1966) 3 SCR 948. In Amalgamated Commercial Traders, the Court had held that a winding up petition is not a legitimate means of enforcing payment of a bona fide disputed debt. In Harinagar Sugar Mills, the Court had described a winding up petition as a form of equitable execution, but not a normal alternative to ordinary procedure for realization of debts.

Justice Nariman reconciled these two decisions. He held that a winding up proceeding under the Companies Act is not a proceeding “for recovery of debts” within the meaning of Sections 17 and 18 of the RDB Act. The purpose of a winding up petition is not to recover a debt from a solvent company; it is to seek the winding up of a company that is commercially insolvent. The jurisdictional bar under Section 18 read with Section 34 of the RDB Act does not apply to winding up petitions. The Court expressly approved the reasoning of the Bombay High Court in Viral Filaments Ltd. v. Indusind Bank Ltd., (2001) 3 Mah LJ 552, which had reached the same conclusion.

The second argument: must a secured creditor give up its security?

The companies’ second argument was more technical. They argued that under Section 529 of the Companies Act, 1956, the rules of insolvency apply to the winding up of an insolvent company. Under Section 47 of the Provincial Insolvency Act, a secured creditor has an election: it can either relinquish its security and prove for the whole debt, or it can value its security and prove for the balance. The companies argued that this election must be made at the stage of filing the winding up petition itself. If the bank did not relinquish its security, it could not file the petition.

The Supreme Court rejected this argument too. The Court relied on Rajasthan State Financial Corporation v. Official Liquidator, (2005) 8 SCC 190, and Official Liquidator v. Allahabad Bank, (2013) 4 SCC 381, to hold that DRT proceedings and winding up proceedings can operate in parallel streams. The Court then turned to the Karnataka High Court decision in Hegde & Golay Limited v. State Bank of India, ILR 1987 KAR 2673, and the Bombay High Court decision in Asian Power Controls Ltd. v. Bubbles Goyal, (2013) 3 Mah LJ 811. Both had held that the election to relinquish security arises only at the proof-of-claims stage after a winding up order is passed, not at the petition stage. The Supreme Court expressly approved this reasoning.

THE PLAY: A secured creditor can file a winding up petition under Section 439 of the Companies Act, 1956, without first relinquishing or valuing its security. The election under Section 47 of the Provincial Insolvency Act arises only after the winding up order is passed, when the creditor files its proof of claim.

The doctrine that mattered: winding up is not debt recovery

The core of the Supreme Court’s reasoning is simple but powerful. A winding up petition is not a proceeding for recovery of a debt. It is a proceeding to determine whether a company is commercially insolvent and should be wound up. The Companies Act gives a secured creditor the right to file a winding up petition under Section 439(1)(b) read with Section 439(2), which says that a secured creditor “shall be deemed to be creditors within the meaning of clause (b) of sub-section (1).” This right is independent of the right to recover the debt through the DRT.

The Court also clarified the relationship between the RDB Act and the Companies Act. Section 34 of the RDB Act gives it overriding effect over inconsistent laws. But the Court held that there is no inconsistency between the two statutes. The RDB Act deals with recovery of debts. The Companies Act deals with winding up of companies. They operate in different spheres. A bank can pursue both remedies simultaneously. The DRT can sell the secured properties. The Company Court can wind up the company. The two proceedings can run in parallel, with the DRT associating the Official Liquidator when selling properties of a company in liquidation.

Why this matters in practice

For advocates, CFOs, and founders, this judgment settles a recurring question. When a bank has a DRT recovery certificate and the debtor company is not paying, can the bank also file a winding up petition? The answer is yes. The bank does not have to choose. It does not have to give up its security. It can pursue both remedies at the same time.

For debtor companies, the judgment closes a potential defence. The argument that a winding up petition is barred by the exclusive jurisdiction of the DRT will no longer work. The argument that the secured creditor must first relinquish its security will also fail. The only real defence is to show that the debt is bona fide disputed, or that the company is not commercially insolvent.

For secured creditors, the judgment provides a clear roadmap. First, get a DRT order and recovery certificate. Second, if the properties don’t sell, issue a statutory notice under Section 434(1)(a) of the Companies Act. Third, if the company neglects to pay for three weeks, file a winding up petition. The petition will be maintainable even if the DRT proceedings are ongoing. The creditor does not have to relinquish its security at the petition stage. The election to relinquish or value the security arises only after the winding up order is passed, when the creditor files its proof of claim.

The bottom line

A secured creditor can file a winding up petition under the Companies Act, 1956, even after obtaining a DRT recovery certificate, and does not have to relinquish its security at the petition stage—the election arises only at the proof-of-claims stage after the winding up order is passed.