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Provision of Sec 7(5)(b) of IBC, for notifying the FC before rejection of a claim would be attracted


The Supreme Court bench comprising Justices Indira Banerjee and J.K. Maheshwari was hearing an Appeal on Friday on the issue of limitation and held that an appeal being the continuation of original proceedings, the provision of Section 7(5)(b) of the IBC, of notifying the Financial Creditor before rejection of a claim, would be attracted. If notified of the proposal to close the proceedings, the Appellant Financial Creditor might have got the opportunity to rectify the defects in its application under Section 7 by filing additional pleadings and/or documents. The Appellate Tribunal (NCLAT) erred in closing the CIRP proceedings without giving the Appellant Financial Creditor the opportunity to explain if there was sufficient cause for the delay in approaching the NCLT.


The Corporate Debtor defaulted in payment of Rs.24,55,00,000/- to the appellant Financial Creditor as agreed. In these circumstances, the appellant Financial Creditor filed an application being Company Petition No. (IB) 672/MD/2019 in the NCLT. The said application was admitted by an order dated 6th September 2019 of the Adjudicating Authority (NCLT). The Adjudicating Authority found that the account of the Corporate Debtor with the Appellant Financial Creditor had been declared NPA on 30th September 2015. The Appellant Financial Creditor was, however, relying on the proposal for a one-time settlement given by the Corporate Debtor on 12th December 2018 to contend that the existence of financial debt had been admitted by the Corporate Debtor. The Adjudicating Authority admitted the petition and imposed a moratorium in terms of Section 14 of the IBC and also confirmed the appointment of Mr. Ashwani Kumar Gupta, as the Interim Resolution Professional (IRP).


The suspended Directors of the Corporate Debtor filed the appeal being Company Appeal (AT) Insolvency No. 1349 of 2019 in the NCLAT contending that the petition filed by the Appellant Financial Creditor under Section 7 of the IBC was patently barred by limitation. The Appellate Tribunal admitted the Appeal of the Corporate Debtor and set aside the order of the NCLT on the ground of limitation.


The Financial Creditor filed the present Appeal. In this appeal, it was contended that cheques given by the Corporate Debtor to the Financial Creditor bounced up to February 2017. If, as contended by the Appellant Financial Creditor, any cheque had been issued in February 2017, the application of the Appellant Financial Creditor under Section 7 for initiation of CIRP filed on 2nd January 2019 would clearly be within limitation. However, there are no details of the payment disclosed by the Appellant Financial Creditor either in the proceedings before the NCLT or NCLAT or before this court. However, if no payment had been made, after the account of the Corporate Debtor had been declared NPA in September 2015, acknowledgement made on 12th December 2018 or later, after the expiry of over three years from the date on which the default occurred, would not save limitation.


It was the case of the Appellant Financial Creditor that on 12th December 2018 the Corporate Debtor made an offer of one-time settlement at Rs.15 Crores. This offer was not accepted. On 19th December 2018, the Corporate Debtor revised its offer to Rs.20 Crores for a one-time settlement. This offer was also not accepted. On 20th December 2018, the Corporate Debtor again revised its offer for a one-time settlement. This time the Corporate Debtor offered to settle the outstanding dues of the Financial Creditor upon payment of Rs. 24,55,00,000/- to be paid within 31st December 2018. This offer was accepted, and the terms of the settlement were signed.


In terms of such an agreement, any agreement to pay a time-barred debt would be enforceable in law, within three years from the due date of payment. It appears that Section 25(3) of the Indian Contract Act was not brought to the notice of the NCLAT. The NCLAT also did not consider the Section mentioned above.


This Appeal contended that the last offer of 20th December 2018 was followed by an agreement. Whether there was a such agreement or not would have to be considered by the Adjudicating Authority. To invoke Section 25(3), the following conditions must be satisfied:-

  • It must refer to a debt, which the creditor, but for the period of limitation, might have enforced;

  • There must be a distinct promise to pay such debt, fully or in part;

  • (iii) The promise must be in writing and signed by the debtor or his duly appointed agent.

Under Section 25(3), a debtor can enter into an agreement in writing, to pay the whole or part of a debt, which the creditor might have enforced, but for the limitation of a suit in law. A written promise to pay the barred debt is a valid contract. Such a promise constitutes novation and can form the basis of a suit independent of the original debt, for it is well settled that the debt is not extinguished, the remedy gets barred by the passage of time.


Section 25(3) applies only where the debt is one which would be enforceable against the defendants, but for the law of limitation. Where a debt is not binding on the defendant for other reasons, and consequentially not enforceable against him, there is no question of applicability of Section 25(3).


There is a distinction between acknowledgement under Section 18 of the Limitation Act, 1963 and a promise within the meaning of Section 25 of the Contract Act. Both promise and acknowledgement in writing, signed by a party or its agent authorised on that behalf, have the effect of creating a fresh starting of limitation. The difference is that an acknowledgement under Section 18 of the Limitation Act has to be made within the period of limitation and need not be accompanied by any promise to pay. If an acknowledgement shows the existence of a jural relationship, it may extend limitation even though there may be a denial to pay. On the other hand, Section 25(3) is only attracted when there is an express promise to pay a debt that is time-barred or any part thereof. A promise to pay can be inferred from scrutinising the document. Only the promise should be clear and unconditional.


The scheme of the Insolvency and Bankruptcy Code, 2016 (IBC) is to ensure that when a default takes place, in the sense that debt becomes due and is not paid, the Corporate Insolvency Resolution Process begins. Where any corporate debtor commits a default, a financial creditor, an operational creditor or the corporate debtor itself may initiate the Corporate Insolvency Resolution Process in respect of a such corporate debtor in the manner as provided in Chapter II of the IBC.


The IBC is not just another statute for the recovery of debts. Nor is it a statute which merely prescribes the modalities of liquidation of a Corporate body, unable to pay its debts. It is essentially a statute which works towards the revival of a Corporate body, unable to pay its debts, by appointment of a Resolution Professional.


IBC has an overriding effect over other laws. Section 238 of the IBC provides that the provisions of the IBC shall have an effect, notwithstanding anything inconsistent therewith contained in any other law, for the time being in force, or any other instrument, having effect by virtue of any such law.


Unlike coercive recovery litigation, the Corporate Insolvency Resolution Process under the IBC is not adversarial to the interests of the Corporate Debtor as observed by the Supreme Court in Swiss Ribbons Private Limited v. Union of India, REED 2019 SC 01504, the Bench observed.


When a question arises as to the meaning of a certain provision in a statute, the provision has to be read in its context. The statute has to be read as a whole. The previous state of the law, the general scope and ambit of the statute and the mischief that it was intended to remedy are relevant factors. In Dena Bank (now Bank of Baroda) v. C. Shivakumar Reddy and Another, REED 2021 SC 08512, the Supreme Court held, "On a careful reading of the provisions of the IBC and in particular, the provisions of Section 7(2) to (5) of the IBC read with the 2016 Adjudicating Authority Rules there is no bar to the filing of documents at any time until a final order either admitting or dismissing the application has been passed.”


It is well settled by a plethora of judgments of this Court as also different High Courts and, in particular, the judgment of this Court in B.K. Educational Services (P) Ltd. v. Parag Gupta & Associates, REED 2018 SC 10542. NCLT/NCLAT has the discretion to entertain an application/appeal after the prescribed period of limitation. The condition precedent for exercise of such discretion is the existence of sufficient cause for not preferring the appeal and/or the application within the period prescribed by limitation.


The condition precedent for condonation of the delay in filing an application or appeal is the existence of sufficient cause. Whether the explanation furnished for the delay would constitute “sufficient cause” or not would be dependent upon the facts of each case.


Section 5 of the Limitation Act, 1963 does not speak of any application. The section enables the court to admit an application or appeal if the applicant or the appellant, as the case may be, satisfies the court that he had sufficient cause for not making the application and/or preferring the appeal, within the time prescribed. A Court/Tribunal may exercise its discretion to condone the delay, even in the absence of a formal application.


The Supreme Court bench observed, that "there is no specific period of limitation prescribed in the Limitation Act, 1963, for an application under the IBC, before the Adjudicating Authority (NCLT). An application for which no period of limitation is provided anywhere else in the Schedule to the Limitation Act is governed by Article 137 of the Schedule to the said Act. Under Article 137 of the Schedule to the Limitation Act, the period of limitation prescribed for such an application is three years from the date of accrual of the right to apply."


It is the well-settled proposition of law, as laid down in the judgment of this Court in Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries (P) Limited, REED 2019 SC 02501, that limitation is essentially a mixed question of law and facts and when a party seeks application of any particular provision for extension in enlargement of the period of limitation, the relevant facts are required to be pleaded and requisite evidence is required to be adduced.


As per Section 18 of the Limitation Act, an acknowledgement of present subsisting liability, made in writing in respect of any right claimed by the opposite party and signed by the party against whom the right is claimed, has the effect of commencing a fresh period of limitation from the date on which the acknowledgement is signed. Such acknowledgement need not be accompanied by a promise to pay expressly or even by implication. However, the acknowledgement must be made before the relevant period of limitation has expired.


It is well settled that even entries in books of accounts and/or balance sheets of a Corporate Debtor would amount to an acknowledgement under Section 18 of the Limitation Act. In this Case, the Appellant Financial Creditor has not relied on any books of accounts or Balance Sheets of the Corporate Debtor.


Section 18 of the Limitation Act speaks of an acknowledgement in writing of liability, signed by the party against whom such property or right is claimed. Even if the writing containing the acknowledgement is undated, evidence might be given of the time when it was signed. The explanation clarifies that an acknowledgement may be sufficient even though it is accompanied by a refusal to pay, deliver, perform or permit to enjoy or is coupled with claim to set off, or is addressed to a person other than a person entitled to the property or right. “Signed” is to be construed to mean signed personally or by an authorised agent.


An acknowledgement made in writing within the period of limitation extends the period of limitation. In this case, there was no acknowledgement of debt within three years from the period in which the account of the Corporate Debtor was declared NPA or within three years from the date on which the loan facilities were recalled.


The Adjudicating Authority proceeded on the basis that the offer of settlement made by the Corporate Debtor on 12th December 2018 and rejection thereof by the Appellate Authority showed the Corporate Debtor had conceded that there was a continuous cause of action. It is, however, the case of the Appellant Financial Creditor in this appeal that terms of the settlement were executed on 20th December 2018 whereby the Corporate Debtor agreed to repay the amount of Rs.24,55,00,000/- within 31st December 2018. The Adjudicating Authority, however, did not refer to any settlement. Nor did it address the question of whether any agreement for repayment of debt came into existence in December 2018 and, if so, whether the agreement would attract Section 25(3) of the Contract Act.


The Appellate Tribunal (NCLAT) found that there was no acknowledgement of debt within the period of limitation of three years. Holding the application of the Appellant Financial Creditor, under Section 7 of the IBC, to be barred by limitation, the Appellate Authority (NCLAT) allowed the appeal.


The Appellate Tribunal (NCLAT) also did not notice the terms of the settlement stated to have been executed on 20th December 2018, possibly because the attention of the NCLAT was not drawn to any terms of the settlement. The Appellate Tribunal (NCLAT) did not, therefore, have the occasion to consider whether Section 25(3) of the Contract Act would be attracted. The Appellate Tribunal (NCLAT), as observed above, proceeded on the basis that the CIRP proceedings were barred by limitation in the absence of any acknowledgement of debt within the period of limitation, and closed the CIRP proceedings in the NCLT, without considering the question of applicability of Section 5 of the Limitation Act for condonation of delay, to proceedings under Section 7 of the IBC.


The Supreme Court was of the view that the Appellate Tribunal (NCLAT) erred in closing the CIRP proceedings without giving the Appellant Financial Creditor the opportunity to explain if there was sufficient cause for the delay in approaching the NCLT. An appeal being the continuation of original proceedings, the provision of Section 7(5)(b) of the IBC, of notifying the Financial Creditor before rejection of a claim, would be attracted. If notified of the proposal to close the proceedings, the Appellant Financial Creditor might have got the opportunity to rectify the defects in its application under Section 7 by filing additional pleadings and/or documents.


The Bench concluded "the documents can be filed at any time until the application for CIRP is finally dismissed, as held in Dena Bank (now Bank of Baroda) v. C. Shivakumar Reddy and Another, REED 2021 SC 08512.


The appeal was, therefore, allowed. The impugned judgment and order of the NCLAT were set aside to the extent that the CIRP proceedings have been closed. The Adjudicating Authority shall consider the application for CIRP afresh, in accordance with the law, in the light of the observations made above, after giving the Appellant and the Respondent opportunity to file additional affidavits disclosing documents/additional affidavits in response.


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