Acknowledgment of Debt and a Fresh Promise to Pay Under Section 25(3) of the Indian Contract Act Can Extend Limitation for IBC Proceedings

NCLAT held that acknowledgment of debt and a fresh promise to pay under Section 25(3) of the Indian Contract Act, 1872, can extend the limitation period for initiating proceedings under Section 7 of the IBC.

The National Company Law Appellate Tribunal (NCLAT), Chennai Bench, comprising Justice Sharad Kumar Sharma (Judicial Member) and Mr. Jatindranath Swain (Technical Member), reviewed an appeal along with connected IAs and held that acknowledgment of debt in balance sheets, legal proceedings, and settlement agreements extends the limitation period under Section 18 of the Limitation Act, 1963. The Tribunal further ruled that a fresh promise to pay a time-barred debt under Section 25(3) of the Indian Contract Act, 1872, constitutes an independent contractual obligation, thereby rendering the proceedings under Section 7 of the IBC within limitation.

The National Company Law Appellate Tribunal (NCLAT) adjudicated upon the appeal filed by the Suspended Director of RR Info Park Private Limited against the admission of proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC). The primary contention raised by the Appellant was that the financial creditor’s claim was barred by limitation since the date of default was 21.05.2013, whereas the Section 7 application was filed in 2019. The claim originated from a loan of Rs. 270 Crores availed from a consortium of banks, which was subsequently assigned to various Asset Reconstruction Companies (ARCs). The liability of the Corporate Debtor was crystallized through a Recovery Certificate issued by the Debt Recovery Tribunal (DRT) on 21.05.2013, leading the Appellant to assert that the limitation period had expired under Article 137 of the Limitation Act, 1963.

The Respondents, however, countered this argument by relying on multiple acknowledgments of debt by the Corporate Debtor in its balance sheets from 2014-15 to 2017-18, as well as its legal conduct, including a One Time Settlement (OTS) proposal dated 30.01.2019. The Tribunal analyzed whether these acts constituted a valid acknowledgment under Section 18 of the Limitation Act, which extends the limitation period by three years from each such acknowledgment. Additionally, the Tribunal examined whether the settlement agreement dated 22.12.2020, recorded before the NCLT, amounted to a fresh promise to pay a time-barred debt under Section 25(3) of the Indian Contract Act, 1872, thereby forming an independent basis for liability.

The NCLAT relied on the Supreme Court’s rulings in Vidyasagar Prasad v. UCO Bank and Another, REEDLAW 2024 SC 10546; Laxmi Pat Surana v. Union Bank of India and Another, REEDLAW 2021 SC 03571; Dena Bank (now Bank of Baroda) v. C. Shivakumar Reddy and Another, REEDLAW 2021 SC 08512; and Rajendra Narottamdas Sheth and Another v. Chandra Prakash Jain and Another, REEDLAW 2021 SC 09573, which emphasized that an acknowledgment of debt must be made within the subsisting limitation period to trigger a fresh three-year period. The Tribunal observed that balance sheets, even if not listing individual creditors, could constitute valid acknowledgment if they reflect outstanding debt and are corroborated by other financial documents. Since the Corporate Debtor not only maintained such balance sheet entries but also engaged in negotiations and executed a Memorandum of Compromise, these acts were held to be sufficient acknowledgment to extend the limitation period.

Further, the Tribunal distinguished between acknowledgment under Section 18 of the Limitation Act and a fresh promise to pay under Section 25(3) of the Indian Contract Act. While the former merely extends limitation, the latter creates a separate contractual obligation. The Tribunal determined that the settlement agreement dated 22.12.2020 triggered a fresh cause of action, rendering the limitation period applicable from that date. Consequently, the restoration of proceedings on 04.03.2022, based on the liberty granted by the NCLT in its earlier order, was held to be well within the extended limitation period.

In conclusion, the NCLAT upheld the validity of the Section 7 application, ruling that the proceedings were not time-barred. The Tribunal affirmed that an application under Section 7 of the IBC would not be dismissed on limitation grounds solely because it was filed beyond three years from the original default, provided there was a valid acknowledgment within the statutory period. Since the Corporate Debtor had acknowledged its liability through multiple channels, including financial statements, legal proceedings, and settlement negotiations, the initiation of Corporate Insolvency Resolution Process (CIRP) was deemed to be within the permissible limitation period.

Mr. Arvindh Pandian, Senior Advocate for Mr. Kumar Anurag Singh, Mr. Zain A. Khan and Mr. Shailendran, Advocates, represented the Appellant.

Mr. E. Omprakash, Senior Advocate for Ms. Abitha Banu, Advocate, appeared for Respondent No. 1.

Mr. Srinath Sridevan, Senior Advocate for Mr. Surya Teja Nalla, Advocate, appeared for Respondent No. 2.

Ms. Sujata Chattopadhyay, Resolution Professional (RP).

---

Subscribers can access the Case, including Case Analysis, Ratio Decidendi, Headnotes, Briefs, Case Research, Cited Case Laws, Case Law Cross-references, and the latest updates on Statutes, Notifications, Circulars, Guidelines, Press Releases and more.

Click on the following Citation/Link to access these resources:

Read Judgment