The Supreme Court has held that a recovery certificate issued by a Debts Recovery Tribunal (DRT) before the 2016 amendment to the Recovery of Debts and Bankruptcy Act (RDB Act) cannot form the basis for issuing an insolvency notice under Section 9(2) of the Presidency Towns Insolvency Act, 1909.
The bench of Justice Dipankar Datta and Justice Satish Chandra Sharma dismissed HDFC Bank’s appeal and upheld the Bombay High Court’s decision quashing the insolvency notice issued against the borrower.
The case arose from credit facilities extended to Beautiful Diamonds Ltd. by a consortium of 15 banks, including HDFC Bank. The company’s loans were secured by mortgages over immovable properties, and its directors had executed personal guarantees.
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After the company defaulted on its repayment obligations and the personal guarantees were invoked unsuccessfully, HDFC Bank approached the Debts Recovery Tribunal (DRT), Mumbai. In October 2004, the DRT directed issuance of a recovery certificate for over ₹14.74 crore against one of the guarantors, Kishore K. Mehta, followed by the formal recovery certificate in November 2004.
Relying on this recovery certificate, the Bank obtained an insolvency notice under Section 9(2) of the Presidency Towns Insolvency Act, alleging that the debtor had committed an act of insolvency by failing to satisfy the certified debt. Kishore Mehta challenged the notice before the Bombay High Court, which held that a DRT recovery certificate was not equivalent to a “decree or order” contemplated under the Insolvency Act. The Division Bench affirmed that decision, leading to the present appeal before the Supreme Court. During the pendency of the proceedings, Mehta passed away and his legal representatives were substituted on record.
The principal question before the Supreme Court was whether a recovery certificate issued by a Debts Recovery Tribunal under the unamended RDB Act could be treated as a “decree or order” for the purpose of issuing an insolvency notice under Section 9(2) of the Presidency Towns Insolvency Act.
The Bank argued that the expression “decree or order” in Section 9(2) was intentionally broader than “decree of any court” used elsewhere in the statute and should therefore include recovery certificates issued by the DRT. It further contended that since the DRT exercises functions similar to civil courts in bank recovery matters, excluding recovery certificates from the insolvency framework would create an anomalous situation where small civil court decrees could trigger insolvency proceedings but substantially larger DRT recoveries could not.
Rejecting these submissions, the Supreme Court reaffirmed the principles laid down in Paramjeet Singh Patheja v. ICDS Ltd., where it had held that an arbitral award is not a “decree or order” for purposes of Section 9 of the Presidency Towns Insolvency Act.
The Court observed that the reasoning in Paramjeet Singh Patheja extended beyond arbitral awards and rested upon broader principles governing insolvency law. Since adjudication as an insolvent carries severe civil consequences, including what the Court described as “civil death,” the provisions of the Insolvency Act require strict interpretation.
The Bench reiterated that the expressions “decree” and “order” must ordinarily be understood in the sense assigned to them under the Code of Civil Procedure, and insolvency proceedings cannot be expanded through judicial interpretation to include instruments not expressly recognised by the statute. It also emphasized that an insolvency notice is not an alternative mechanism for executing a debt recovery order but serves a distinct statutory purpose.
A major aspect of the Bank’s case rested on Section 19(22A) of the RDB Act, introduced through the 2016 amendment, which expressly provides that a recovery certificate shall be deemed to be a decree or order for initiating winding-up or insolvency proceedings.
However, the Supreme Court held that this amendment actually weakened rather than strengthened the Bank’s case.
According to the Bench, Parliament’s decision to expressly insert Section 19(22A) demonstrated that such legal equivalence did not exist before the amendment. Had recovery certificates already been treated as decrees or orders for insolvency purposes, there would have been no necessity for Parliament to enact a deeming provision.
The Court further noted that the amendment was not given retrospective operation. Consequently, recovery certificates issued before the amendment could not retrospectively acquire the status of decrees for initiating insolvency proceedings. Reading such an effect into the statute would amount to supplying a legislative omission, which courts are not permitted to do.
The Supreme Court also relied on settled principles of procedural jurisprudence that the rights of parties are ordinarily determined based on the law prevailing when legal proceedings commence.
Citing earlier precedents including Rameshwar v. Jot Ram, P. Venkateswarlu v. Motor & General Traders, and Beg Raj Singh v. State of Uttar Pradesh, the Court observed that subsequent legislative developments cannot convert an untenable claim into a legally maintainable one unless the legislature expressly provides retrospective effect.
Accordingly, the legality of the insolvency notice had to be judged according to the law as it existed when the proceedings were initiated and not by reference to amendments introduced years later.
Finding no error in the Bombay High Court’s reasoning, the Supreme Court dismissed HDFC Bank’s appeal. It held that the insolvency notice had rightly been quashed and directed that any pending proceedings arising from the notice stood closed insofar as the deceased respondent was concerned.
The Court clarified that while the appeal failed, the Bank would remain free to pursue any other remedies available against the other certificate debtors in accordance with law, subject to limitation and other legal requirements.
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