Acknowledged Debt under Fresh Loan by ARC Held Enforceable: NCLAT Upholds Section 7 Admission Despite Limitation and Procedural Challenge

The NCLAT upheld the admission of a Section 7 application, holding that the acknowledged debt under a fresh loan granted by an Asset Reconstruction Company was enforceable, despite objections on limitation and procedural grounds.

The National Company Law Appellate Tribunal (NCLAT), Principal Bench comprising Justice Ashok Bhushan (Chairperson) and Mr. Barun Mitra (Technical Member), while reviewing a company appeal, held that a fresh term loan (TL-2) granted by an Asset Reconstruction Company is legally enforceable under IBC when acknowledged in writing within the original limitation period, and such acknowledgment—supported by financial statements and correspondence—validly extends the limitation under Section 18 of the Limitation Act; procedural defects like omission of default date in Form I are not fatal if documentary evidence establishes debt and default.

The National Company Law Appellate Tribunal (NCLAT) dealt with an appeal filed under Section 61(1) of the Insolvency and Bankruptcy Code, 2016, by a suspended director of Karni Developers & Construction Pvt. Ltd., challenging the admission of a Section 7 application by the NCLT, Jaipur Bench. The Section 7 application had been filed by Phoenix ARC Pvt. Ltd. against the Corporate Debtor, leading to the initiation of the Corporate Insolvency Resolution Process (CIRP). The core objections raised by the Appellant included the alleged time-barred nature of the application, absence of a specified date of default in Form I, and questions over the legal capacity of an Asset Reconstruction Company (ARC) to grant a fresh loan like Term Loan-II (TL-2), in addition to claims that the loan terms were usurious.

The NCLAT, after carefully examining the submissions and materials on record, held that TL-2, amounting to ₹3.40 Crores and disbursed on 07.02.2014, was a distinct and independent credit facility, separate from the earlier TL-1 assigned by Union Bank of India. This conclusion was drawn from the language of the loan agreement, security documents, and contemporaneous correspondence, including a letter dated 03.12.2013 by the Corporate Debtor requesting fresh funds. The Tribunal also relied on a series of letters and balance sheets, particularly those dated 05.05.2017 and 11.12.2017, and the audited financials for FY 2019–20, which acknowledged the debt and default related to TL-2. These acknowledgements, made within the initial limitation period, triggered the application of Section 18 of the Limitation Act, thereby extending the period within which the application could be filed.

The Tribunal found that even if the limitation were to expire in March 2019, the Supreme Court’s suo motu extension of limitation owing to the COVID-19 pandemic was applicable, making the filing of the application on 09.01.2021 within the extended period. It rejected the Appellant’s contention that the application was an attempt to revive a time-barred TL-1 under the guise of TL-2. The Tribunal further dismissed the argument that Phoenix ARC lacked the authority to grant TL-2. Referring to the RBI guidelines of 2009, it held that ARCs were permitted to restructure loans and provide additional finance as part of their recovery strategy, and the Corporate Debtor itself had sought such funding for its project revival.

As to the issue of the interest rate—30% contractual and 36% penal—the Tribunal concluded that the rate was commercially agreed upon, and the Corporate Debtor had waived all defences under usury laws through explicit contractual terms. It also distinguished cited precedents on public policy and interest caps as factually inapplicable to the commercial restructuring context of this case. The Tribunal underscored that the agreed terms in a voluntary loan transaction could not later be challenged as unconscionable when the borrower had partly complied without protest.

Regarding the omission of a specific date of default in Part IV of Form I, the NCLAT upheld the NCLT’s finding that such a technical defect did not invalidate the application where the supporting documents—including the Recall Notice and SARFAESI notice—amply demonstrated the existence and timing of default. The Tribunal reaffirmed the legal position that under Innoventive Industries Limited v. ICICI Bank and Another, REEDLAW 2017 SC 08563, the Adjudicating Authority’s role was limited to determining the existence of debt and default without venturing into deeper disputes or technicalities.

The Appellant’s late-stage offer to settle and deposit of dues before the NCLAT Registry was acknowledged, but the Tribunal clarified that since the Committee of Creditors (CoC) had already been constituted, any resolution could now proceed only through a Section 12A application moved by the Financial Creditor. The Tribunal allowed a two-week window for such an application, failing which the CIRP was to continue as per law. The appeal was accordingly dismissed, and directions were issued for the refund of the deposited amount, affirming the validity of the Section 7 admission order.

Mr. Ramji Srinivasan, Sr. Advocate and Mr. Abhijeet Sinha, Sr. Advocate, with Mr. Syed Arsalan Abio, Mr. Prateeek Khaitan, Mr. Chatanya Sharma, Mr. Shitij Chakravarty, Mr. Udhav H. Aggarwal, Mr. Aryun Bhatia and Ms. Shefali Mundi, Advocates, represented the Appellant.

Mr. Amit Singh Chadha, Sr. Advocate with Mr. Suresh Dutt Dobhal, Mr. Nirmal Goenka and Mrs. Kanchan Rathuri, Advocates, appeared for the Respondent No. 1.

Mr. Anurag Bhatt and Mr. Lokesh Pathak, Advocates, appeared for the Intervener.

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