Asset Reconstruction Company (India) Limited Versus Tulip Star Hotels Limited & Ors.

Landmark Cases of India / सुप्रीम कोर्ट के ऐतिहासिक फैसले

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVILAPPEAL NOS. 84-85 OF 2020

Asset Reconstruction Company

(India) Limited Appellant (s)

Versus

Tulip Star Hotels Limited & Ors. Respondent (s)

J U D G M E N T

Indira Banerjee, J.

These appeals under Section 62 of the Insolvency and

Bankruptcy Code 2016 (IBC) filed by the Financial Creditor, Asset

Reconstruction Company (India) Limited are against a common

judgment and final order dated 11th December 2019 passed by the

National Company Law Appellate Tribunal (NCLAT), allowing Company

Appeal (AT)(Insolvency) No.525 of 2019 and Company Appeal(AT)

(Insolvency) No.627 of 2019 and holding that the Corporate Insolvency

Resolution Process (CIRP) initiated by the Appellant against the

Corporate Debtor, V. Hotels Ltd. was barred by limitation.

2. The Respondent No.1, Tulip Star Hotels Limited and the

Respondent No.2 Tulip Hotels Private Limited are the shareholders of

the Corporate Debtor, V. Hotels Limited. The Respondent Nos. 1 and 2

each hold 50% share in the Corporate Debtor. Mr. Ajit B. Kerkar is the

Managing Director of the Respondent No.1, Tulip Star Hotel Limited,

Chairman of the Respondent No.2, Tulip Hotels Private Limited and

also the Chairman of the Corporate Debtor.

3. On or about 8th March 2002, a loan agreement was executed by

and between a consortium of banks consisting of Bank of India, Punjab

National Bank, Union Bank of India, Vijaya Bank, Canara Bank and

Indian Bank, led by Bank of India (hereinafter referred to collectively

as the Consortium) and the Corporate Debtor, pursuant to which the

Consortium collectively sanctioned loan to the extent of

Rs.129,00,00,000/- (Rupees One Hundred and Twenty-Nine Crore Only)

to the Corporate Debtor.

4. On 5th June 2003, the Corporate Debtor entered into an

arrangement with Abu Dhabi Commercial Bank (ADCB) whereby ADCB

agreed to advance USD 29,000,000/- to the Corporate Debtor for

repayment of the loan taken by the Corporate Debtor from the

Consortium under the loan agreement executed on 8th March 2002. It

is stated that the Corporate Debtor repaid the amount disbursed by

Bank of India to the Corporate Debtor under the said loan agreement

from out of funds disbursed to the Corporate Debtor by ADCB,

between August and December 2003.

5. In August/ September 2008, a bank guarantee issued by Bank of

India in favour of ADCB, on behalf of the Corporate Debtor was

invoked by ADCB and Bank of India paid Rs.24,49,59,208/- (Twenty

Four Crores Forty Nine Lakhs Fifty Nine Thousand Two Hundred and

Eight) to ADCB under the Bank Guarantee.

6. Around the same time, Bank of India, Punjab National Bank and

Union Bank of India also converted their facility under the loan

agreement into a non-fund-based bank guarantee.

7. On 1st December 2008, the account of the Corporate Debtor in

the Bank of India was classified as non-performing asset (NPA) and on

31st December 2008, an assignment agreement was executed by Bank

of India assigning its receivables to the Appellant Financial Creditor.

8. By a letter dated 7th February 2011 addressed to the Appellant,

the Corporate Debtor proposed a settlement which is as follows:-

(i) The Corporate Debtor would pay interest to the Appellant

Financial Creditor at an average rate of 21% per annum at

quarterly rests.

(ii) The Corporate Debtor would pay a sum of

Rs.9,02,00,000/- being 10% of the aggregate assigned debt

to the Appellant Financial Creditor immediately on

acceptance of the settlement.

(iii) The Corporate Debtor proposed that the balance

aggregate assigned debt of Rs.154,13,00,000/- along with

interest accrued thereon from the date of the payment of the

initial amount up to 30

September 2011 would be repaid in

three equated monthly instalments beginning from 15

October 2011.

9. On or about 10th February 2011, the Corporate Debtor submitted

a revised proposal offering to pay interest on its outstanding dues to

the Appellant at the rate of 22% per annum with monthly rests with

effect from 1st July 2010. The Corporate Debtor also offered to pay

Rs.10,00,00,000/- to the Appellant immediately upon acceptance of

the revised proposal.

10. The Corporate Debtor also agreed to pay the settlement amount

of Rs.150,75,83,970/- being the aggregate assigned debt as on 30th

June 2010 along with interest at the rate of 22% per annum

compounded at monthly rests from 1st July 2010 till 30th September

2011.

11. On or about 28th February 2011 the parties entered into a

Settlement Agreement, the key terms whereof were as follows:-

(i) The Corporate Debtor agreed to pay the settlement

amount of Rs.150,75,83,970/- (Rupees One Hundred Fifty

Crores Seventy-Five Lakhs Eighty-three Thousand Nine

Hundred and Seventy Only) being the Aggregate amount in

default as on 30

June 2010 along with the accrued interest

at the rate of 22% per annum to be compounded at monthly

rests from 1

July 2010 till 30

September 2011.

(ii) Rs. 10,00,00,000/- (Rupees Ten Crore Only) would be

paid as upfront payment upon execution of the Settlement

Agreement.

(iii) The balance amount after adjusting the upfront payment

of Rs.10,00,00,000/- (Rupees Ten Crore Only) would be

repaid on or before 30

September 2011.

12. On 12th September 2011, the Corporate Debtor addressed a

letter to the Appellant, seeking an extension of time till 30th

September 2012 to pay its balance outstanding dues towards principal

and interest. The Corporate Debtor acknowledged that its aggregate

outstanding liability towards principal and interest to the Appellant

was Rs.176,83,00,000/-. The Corporate Debtor offered to make an

interim payment of Rs.15,00,00,000/- (Rupees Fifteen Crores Only) by

31st December 2011. On 29th September 2011, the agreement

between the Corporate Debtor and the Appellant was modified.

13. On 30th December 2011, the Appellant accepted the request of

the Corporate Debtor for extension, subject to the condition that the

Corporate Debtor would pay Rs.15,00,00,000/- (Rupees Fifteen Crores

Only) by 31st December 2011, and the balance portion of the

aggregate assigned debt totalling Rs.150,75,83,970/-, outstanding as

on 30th June 2010, along with accrued interest at the rate of 22% per

annum, to be compounded at monthly rests from 1st July 2010 till the

date of payment, that is, 31st March 2012.

14. On 17th March 2012, the Corporate Debtor confirmed that the

aggregate assigned debt outstanding as on 31st March 2012 was

Rs.192,89,46,697/- and requested for a further extension of time from

31st March 2012 to 31st December 2012 to pay the outstanding

amounts.

15. On 6th August 2012, the Appellant accepted the aforesaid

extension request and agreed to the extension for repayment of the

aggregate assigned debt outstanding as on 30th September 2012.

16. On 10th September 2012, the Corporate Debtor sought further

extension till 31st March 2013 for payment of outstanding principal and

interest aggregating to Rs.211,35,16,073/-. On 5th December 2012,

the Appellant accepted the extension subject to payment of

processing fee of Rs.25,00,000/-.

17. On 6th April 2013, the Corporate Debtor again sought extension

of the date for repayment of the then outstanding amount. The

Corporate Debtor acknowledged the outstanding aggregate assigned

debt (inclusive of principal and interest) which had increased to

Rs.239,88,27,673/- as on 31st March 2013. The Corporate Debtor

offered to make an interim payment of Rs.91,00,00,000/- (Indian

Rupees Ninety One Crores Only) by 31st August 2013 and the balance

outstanding amounts by 30th September 2013.

18. On 19th April 2013, the Corporate Debtor paid Rs.17,50,00,000/-

to the Appellant, towards part repayment of the aggregate assigned

debt. On 29th May 2013, the Appellant again accepted the request of

the Corporate Debtor for extension of time.

19. Ultimately, on 17th June 2013, the Appellant revoked the

settlement and in terms of the default obligations under the

Settlement Agreement, the rate of interest under the Deed of

Variation was revised to 22%. By its letter dated 1st July 2013, the

Corporate Debtor acknowledged its obligation to repay the aggregate

assigned debt inclusive of interest.

20. On 10th July 2013, the Appellant sent the Corporate Debtor a

notice under Section 13(2) of the Securitisation and Reconstruction of

Financial Assets and Enforcement of Security Interest Act, 2002

(SARFAESI Act) in order to enforce security interests against the

Corporate Debtor. On 14th October 2013, the Appellant, through its

authorized officer, issued a possession notice under Section 13(4) of

the SARFAESI Act.

21. On 6th May 2014, the Appellant invoked the personal guarantee

of Mr. Ajit Kerkar, Managing Director of the Corporate Debtor. The

aggregate assigned debt as on 6th May 2014 of principal and interest

at 22% per annum was Rs.235,46,34,381/-.

22. The Corporate Debtor apparently acknowledged its liabilities

towards the Appellant in its Financial Statements from 2008-09 to

2016-17.

23. The Appellant has filed an application to bring on record

additional documents which were part of the records below including

the copies of the financial statements.

24. Mr. Neeraj Kishan Kaul, Senior Advocate appearing on behalf of

the Appellant, rightly submitted that the Financial Statements provide

a true and fair view of the state of affairs of a company in view of

Sections 128 and 129 read with Section 134 of the Companies Act

2013 as also Sections 210, 211, 215, 216 and 217 of the Companies

Act, 1956.

25. On 3rd April 2018, the Appellant, as Financial Creditor, filed an

application under Section 7(2) of the IBC in the National Company Law

Tribunal (NCLT), Mumbai for initiation of the Corporate Insolvency

Resolution Process (CIRP) against the Corporate Debtor which was

registered and numbered CP(IB) No.532 of 2018.

26. The Corporate Debtor filed a Miscellaneous Application being

Misc. App. No.693 of 2018 in CP (IB) No.532 of 2018 before the NCLT,

Mumbai praying for dismissal of the application of the Appellant under

Section 7(2) of the IBC, inter alia, contending that the application was

barred by limitation. By an order dated 1st May 2019, the Adjudicating

Authority (NCLT), Mumbai dismissed the said Miscellaneous

Application filed by the Corporate Debtor.

27. By an order dated 31st May 2019, the Adjudicating Authority

(NCLT) admitted the said application under Section 7(2) of the IBC and

appointed one Mr. Anish Nanavaty as the Interim Resolution

Professional (IRP). The Committee of Creditors confirmed the

appointment of Mr. Anish Nanavaty as the Resolution Professional of

the Corporate Debtor.

28. The Corporate Debtor filed an appeal being Company Appeal

(AT) (Insolvency) No.525 of 2019 before NCLAT against the order

dated 1st May 2019, dismissing the Miscellaneous Application filed by

the Corporate Debtor, seeking dismissal of the application of the

Appellant Financial Creditor under Section 7(2) of the IBC.

29. The shareholders of the Corporate Debtor, that is, the

Respondent No.1, Tulip Star Hotels Limited and the Respondent No.2,

Tulip Hotels Private Limited, filed an appeal being Company Appeal

(AT) (Insolvency) No.627 of 2019 in the NCLAT against the order dated

31st May of the Adjudicating Authority, admitting the application of the

Appellant under Section 7(5)(a) of the IBC.

30. Both the appeals have been allowed by the common judgment

of the Appellate Tribunal (NCLAT) dated 11th December 2019,

impugned in these appeals.

31. On behalf of the Corporate Debtor, it has been argued:

(i) There is no debt due and payable from the Corporate Debtor to

the Appellant. The amounts advanced by the Consortium to the

Corporate Debtor have been repaid.

(ii) In the statutory notice issued by the Appellant to the Corporate

Debtor under Section 13(2) of the SARFAESI Act, the Appellant had

claimed that principal amount of Rs.90.35 Crores was due from the

Corporate Debtor to the Appellant.

(iii) The Corporate Debtor has paid the Appellant much more than

the Principal amount claimed by the Appellant, as per the table set out

below:-

DATE CHEQUE/PAY ORDER NO. DRAWN ON AMOUNT (RS.)

28-Feb-11 744705 Axis Bank, Nariman Point, Mumbai 10,00,00,000

31-Dec-11 846341 Axis Bank, Nariman Point, Mumbai 5,00,00,000

15-Feb-12 846422 Axis Bank, Nariman Point, Mumbai 10,00,00,000

18-Apr-13 81863 Axis Bank, Nariman Point, Mumbai 17,50,00,000

A. Total Payment As per Settlement with ARCIL 42,50,00,000

25-Feb-14 248177 Axis Bank, Nariman Point, Mumbai 12,50,00,000

15-May-14 248422 Axis Bank, Nariman Point, Mumbai 2,50,00,000

30-Jun-14 248524 Axis Bank, Nariman Point, Mumbai 10,00,00,000

B. Total Payment As per DRT I Order dated 28.01.2014 25,00,00,000

16-Jun-16 63039 Axis Bank, Nariman Point, Mumbai 5,04,30,672

12-May-17 67071 Axis Bank, Nariman Point, Mumbai 10,00,00,000

19-May-17 67192 Axis Bank, Nariman Point, Mumbai 2,40,00,000

26-May-17 67260 Axis Bank, Nariman Point, Mumbai 2,40,00,000

02-Jun-17 67322 Axis Bank, Nariman Point, Mumbai 2,40,00,000

23-Jun-17 68070 Axis Bank, Nariman Point, Mumbai 7,20,00,000

30-Jun-17 68130 Axis Bank, Nariman Point, Mumbai 2,40,00,000

07-Jul-17 68360 Axis Bank, Nariman Point, Mumbai 2,40,00,000

14-Jul-17 68353 Axis Bank, Nariman Point, Mumbai 2,40,00,000

21-Jul-17 68437 Axis Bank, Nariman Point, Mumbai 2,40,00,000

C. Total Amount Deposited with DRT 39,04,30,672

TOTAL PAYMENT (A+B+C) 1,06,54,30,672

(iv) Even though the principal amount had been paid in the full, in the

Application under Section 7 of the IBC, the Appellant claimed that

principal amount of Rs.35,43,72,852/- and Rs.149,91,24,581/- towards

interest.

(v) There is no amount outstanding towards principal, and there is a

long standing dispute in respect of the amount of interest payable by

the Corporate Debtor to the Appellant.

(vi) In the Application under Section 7 of the IBC, the Appellant has

claimed a principal amount of Rs.35,43,72,852/- and interest of

Rs.149,91,24,581/- on the basis of the settlement agreement dated

28.02.2011 which was later revoked by the Appellant on 17.06.2013.

The amount of principal claimed in the Application under Section 7 of

the IBC is at complete variance with the principal amount claimed in

the statutory Notice under Section 13(2) of the SARFAESI Act.

(vii) By an order dated 19.10.2018, passed in relation to proceedings

between the Appellant and the Corporate Debtor in the Debt Recovery

Tribunal, the High Court had held that the Appellant was not entitled

to claim 22% interest since it had revoked the settlement agreement

on the basis of which such interest had been claimed.

(viii) The High Court had, by its aforesaid order dated 19.10.2018,

directed DRT to determine the interest payable by the Corporate

Debtor to the Appellant. Since no determination has been done by the

DRT, the interest amount has not become due and payable.

(ix) The Appellant could not have appropriated the amounts paid by

the Corporate Debtor towards interest.

(x) The principal having been paid and the interest not being due,

there is no financial debt payable by the Corporate Debtor to the

Appellant.

(xi) The Application of the Appellant under Section 7 of the IBC is

hopelessly barred by limitation, the same having been filed about

eight/nine years after the account of the Corporate Debtor was

declared NPA on 01.12.2008.

(xii) Even assuming the Corporate Debtor had acknowledged liability,

the last letter of acknowledgment was written in April 2013. The

period of limitation still expired in April 2016.

(xiii) The Corporate Debtor has not acknowledged any debt in its

financial statements.

(xiv) The Corporate Debtor and/or its Promoters have paid its entire

Principal dues to the CoC (Committee of Creditors) consisting of the

Appellant and Pegasus.

32. The NCLAT held:

“23. In the present case, ‘Asset Reconstruction Company

(India) Ltd.’- (‘Financial Creditor’) has failed to bring on record

any acknowledgment in writing by the ‘Corporate Debtor’ or

its authorised person acknowledging the liability in respect of

debt. The Books of Account cannot be treated as an

acknowledgement of liability in respect of debt payable to

the ‘Asset Reconstruction Company (India) Ltd.’- (‘Financial

Creditor’) signed by the ‘Corporate Debtor’ or its authorised

signatory.

****

25. In fact, the case of ‘Asset Reconstruction Company

(India) Ltd.’- (‘Financial Creditor’) is covered by its own

decision in “Gaurav Hargovindbhai Dave v. Asset

Reconstruction Company (India) Ltd. And Another” (supra)

26. The Adjudicating Authority having failed to appreciate

the aforesaid fact, the impugned order dated 1

May, 2019

rejecting the objections of the ‘Corporate Debtor’ and the

impugned order dated 31

May, 2019 passed by the

Adjudicating Authority admitting the application under

Section 7 are set aside. ‘V. Hotels Limited’- (‘Corporate

Debtor’) is released from all the rigours of law and is allowed

to function independently through its Board of Directors from

immediate effect. The ‘Interim Resolution Professional’/

‘Resolution Professional’ will submit its fees and costs of

‘Corporate Insolvency Resolution Process’ before the

Adjudicating Authority who will determine the same and

amount as is payable is to be paid by ‘Asset Reconstruction

Company (India) Ltd.’ who moved application under Section 7

which was not maintainable. The ‘Interim Resolution

Professional’ will hand over the management, assets and

records to the Board of Directors.

Both the appeals are allowed. No costs.”

33. Citing Asset Reconstruction Company (India) Limited. v.

Bishal Jaiswal and Anr

1 Mr. Nakul Dewan, Senior Advocate argued

that all financial statements issued by a company would not amount

to acknowledgment for the purpose of Section 18 of the Limitation Act

and thereby extend the period of limitation under the Code.

34. In Bishal Jaiswal (supra) this Court:

“21. Importantly, this judgment in Bengal Silk Mills [Bengal

Silk Mills Co. v. Ismail Golam Hossain Ariff, 1961 SCC OnLine

Cal 128 : AIR 1962 Cal 115] holds that though the filing of a

balance sheet is by compulsion of law, the acknowledgment

of a debt is not necessarily so. In fact, it is not uncommon to

have an entry in a balance sheet with notes annexed to or

forming part of such balance sheet, or in the auditor's report,

which must be read along with the balance sheet, indicating

that such entry would not amount to an acknowledgment of

debt for reasons given in the said note.

***

35. A perusal of the aforesaid sections would show that

there is no doubt that the filing of a balance sheet in

accordance with the provisions of the Companies Act is

mandatory, any transgression of the same being punishable

by law. However, what is of importance is that notes that are

annexed to or forming part of such financial statements are

expressly recognised by Section 134(7). Equally, the

auditor's report may also enter caveats with regard to

acknowledgments made in the books of accounts including

the balance sheet. A perusal of the aforesaid would show

that the statement of law contained in Bengal Silk

Mills [Bengal Silk Mills Co. v. Ismail Golam Hossain Ariff, 1961

SCC OnLine Cal 128 : AIR 1962 Cal 115] , that there is a

compulsion in law to prepare a balance sheet but no

compulsion to make any particular admission, is correct in

law as it would depend on the facts of each case as to

whether an entry made in a balance sheet qua any particular

creditor is unequivocal or has been entered into with

caveats, which then has to be examined on a case by case

basis to establish whether an acknowledgment of liability

has, in fact, been made, thereby extending limitation under

Section 18 of the Limitation Act.”

1 (2021) 6 SCC 366

35. The Respondents argued that the Appellant was relying on the

Financial Statements from 2014-15 onwards as acknowledgments to

save limitation. It was argued that the said Financial Statements

would not constitute acknowledgement for the reasons as

demonstrated in the Written Notes of submissions of the Corporate

Debtor reproduced hereinbelow:

(i) Financial Statement for 2014-15 (Pages 6-18 of IA 125766)

wherein:

(a) At page 8 of IA 125776, it is stated that ‘indebtness’ is to be

read with Note No.5 in the notes of Accounts.

(b) At page 15-16 of IA, in the Notes of Accounts, the Respondent

No.3 has clearly stated that pursuant to the Orders of this Court,

the parties entered into a Settlement which was unilaterally

revoked by the Appellant on 17.06.2013 and thus the Respondent

No.3 had been legally advised that the interest for the loans

cannot be 22% as stated in the revoked settlement but 12.85%

and that the rate of interest will be subject to the decision of the

DRT, Mumbai.

(ii) Financial Statement for 2015-2016 (Pages 19-30 of IA 125766),

wherein similar disputes are raised in the notes (at page 21, 29-30 of

IA).

(iii) Financial Statement for 2016-17 (pages 31-42 of IA 125766)

where a similar statement is made as stated above in the Notes to the

Financial Statement for 2015-16 (at page 33, 41-42 of IA).

36. Counsel argued that a perusal of the above Statements from

2014-2015 to 2016-2017 shows that the Corporate Debtor has not

made any unequivocal acknowledgment of debt and has further

questioned the interest sought to be recovered by the Appellant.

Thus, it is submitted that the present case falls within the category

provided in the judgment in Bishal Jaiswal (supra), where this Court

noted that “it would depend on the facts of each case as to whether

an entry made in a balance sheet qua any particular creditor is

unequivocal or has been entered into with caveats, which then has to

be examined on a case by case basis to establish whether an

acknowledgment of liability has, in fact, been made, thereby

extending limitation under Section 18 of the Limitation Act.”

37. It was also argued that contrary to the claims of the Appellant,

the recovery in the present case is not of “public monies”. Nor is the

recovery beneficial to the public. There is no public funding in the

form of holdings by any Public Sector Banks in the subject transaction.

Such arguments are irrelevant to the issue in this appeal of whether

the Application of the Appellant Financial Creditor under Section 7 of

the IBC should have been rejected, and that too on the sole ground of

the same being barred by limitation.

38. For the purpose of computing limitation, the most relevant

balance-sheet is the balance-sheet for the financial year 2014-15,

which, as pointed out by Mr. Kaul, was signed on 14.5.2015. The

balance-sheet acknowledged the continuance of the jural relationship

of debtor and creditor between the Appellant and the Corporate

Debtor and the existence of financial liability of the Corporate Debtor

to the Appellant. The only remark made by the Corporate Debtor

related to the rate of interest which, according to the Corporate

Debtor, would be 12.85% and not 22% in view of the revocation of the

Settlement Agreement by the Appellant. The application of the

Appellant under Section 7 of the IBC was filed on 3.4.2018, well within

three years from 14.5.2015, being the date on which the balancesheet was signed. Similarly, the balance-sheet for the following

financial year signed on 29.8.2016 also acknowledged the existence of

jural relationship of debtor and creditor between the Appellant and the

Corporate Debtor and the existence of financial liability of the

Corporate Debtor to the Appellant. The balance-sheet only contained

a similar additional remark with regard to the rate of interest.

39. As held by this Court in Innoventive Industries Ltd. v. ICICI

Bank and Anr

., the Adjudicating Authority, considering an

application under Section 7 of the IBC, is only required to see if there

is the existence of a debt and default. Any dispute with regard to the

quantum of debt is immaterial. The relevant part of the judgment of

2 (2018) 1 SCC 407

this Court in Innoventive Industries Ltd. (supra) is set out

hereinbelow:-

“29. The scheme of Section 7 stands in contrast with the scheme

under Section 8 where an operational creditor is, on the

occurrence of a default, to first deliver a demand notice of the

unpaid debt to the operational debtor in the manner provided in

Section 8(1) of the Code. Under Section 8(2), the corporate debtor

can, within a period of 10 days of receipt of the demand notice or

copy of the invoice mentioned in sub-section (1), bring to the

notice of the operational creditor the existence of a dispute or the

record of the pendency of a suit or arbitration proceedings, which

is pre-existing—i.e. before such notice or invoice was received by

the corporate debtor. The moment there is existence of such a

dispute, the operational creditor gets out of the clutches of the

Code.

30. On the other hand, as we have seen, in the case of a corporate

debtor who commits a default of a financial debt, the adjudicating

authority has merely to see the records of the information utility or

other evidence produced by the financial creditor to satisfy itself

that a default has occurred. It is of no matter that the debt is

disputed so long as the debt is “due” i.e. payable unless

interdicted by some law or has not yet become due in the sense

that it is payable at some future date. It is only when this is proved

to the satisfaction of the adjudicating authority that the

adjudicating authority may reject an application and not

otherwise.”

40. As argued by Mr. Kaul appearing on behalf of the Appellant, any

part payments made by the Respondent would first be appropriated

towards the interest amount due, as held by this Court in Industrial

Credit & Development Syndicate Now Called I.C.D.S. Ltd. v.

Smithaben H. Patel (Smt.) and Others

41. In Industrial Credit & Development Syndicate (supra), this

Court held :-

6. In Venkatadri Appa Row v. Parthasarathi Appa Row [(1920-21)

48 IA 150 : AIR 1922 PC 233] the Judicial Committee of the Privy

3 (1999) 3 SCC 80

Council had held that upon taking an account of principal and

interest due, the ordinary rule with regard to payments by the

debtor unappropriated either to principal or interest is that they

are first to be applied to the discharge of the interest. This Court

in Meghraj v. Bayabai [(1969) 2 SCC 274: (1970) 1 SCR 523]

reiterated the position of law and held that the normal rule was

that in the case of a debt due with interest, any payment made by

the debtor was in the first instance to be applied towards

satisfaction of interest and thereafter to the principal. It was for

the debtor to plead and prove the agreement, if any, that the

amounts paid or deposited in the Court by him were accepted by

the creditor/decree-holder subject to the condition imposed by

him. …”

42. Even otherwise, in this case, the quantum of debt was well in

excess of Rs. 1 crore and many times in excess of Rs.1 lakh, being the

threshold amount under the IBC for initiation of CIRP proceedings at

the material time. Subsequently, in 2020, the threshold limit was

enhanced to Rs.1 crore.

43. In our view, the NCLAT erred in law in holding that the Books of

Account of a company could not be treated as acknowledgement of

liability in respect of debt payable to a financial creditor.

44. Under the scheme of the IBC, the Insolvency Resolution Process

begins, when a default takes place, in the sense that a debt becomes

due and is not paid. Some of the relevant provisions of the IBC, are

set out hereinbelow for convenience:-

“3 Definitions..—In this Code, unless the context otherwise requires,—

...

(6) “claim” means—

(a) a right to payment, whether or not such right is reduced to

judgment, fixed, disputed, undisputed, legal, equitable, secured or

unsecured;

(b) right to remedy for breach of contract under any law for the time

being in force, if such breach gives rise to a right to payment, whether

or not such right is reduced to judgment, fixed, matured, unmatured,

disputed, undisputed, secured or unsecured;

(7) “corporate person” means a company as defined in clause (20) of

Section 2 of the Companies Act, 2013 (18 of 2013), a limited liability

partnership, as defined in clause (n) of sub-section (1) of Section 2 of the

Limited Liability Partnership Act, 2008 (6 of 2009), or any other person

incorporated with limited liability under any law for the time being in force

but shall not include any financial service provider;

(8) “corporate debtor” means a corporate person who owes a debt to any

person;

…..

(10) “creditor” means any person to whom a debt is owed and includes a

financial creditor, an operational creditor, a secured creditor, an unsecured

creditor and a decree-holder;

(11) “debt” means a liability or obligation in respect of a claim which is

due from any person and includes a financial debt and operational debt;

(12) “default” means non-payment of debt when whole or any part or

instalment of the amount of debt has become due and payable and is

not paid by the debtor or the corporate debtor, as the case may be;

4. Application of this Part.—(1) This Part shall apply to matters relating

to the insolvency and liquidation of corporate debtors where the minimum

amount of the default is one lakh rupees:

Provided that the Central Government may, by notification, specify the

minimum amount of default of higher value which shall not be more than

one crore rupees.

5. Definitions.—In this Part, unless the context otherwise requires—

...

(7) “financial creditor” means any person to whom a financial debt

is owed and includes a person to whom such debt has been legally

assigned or transferred to;

(8) “financial debt” means a debt along with interest, if any, which is

disbursed against the consideration for the time value of money and

includes—

(a) money borrowed against the payment of interest;

(b) any amount raised by acceptance under any acceptance credit

facility or its dematerialised equivalent;

issue of bonds, notes, debentures, loan stock or any similar

instrument;

(d) the amount of any liability in respect of any lease or hirepurchase contract which is deemed as a finance or capital lease

under the Indian Accounting Standards or such other accounting

standards as may be prescribed;

(e) receivables sold or discounted other than any receivables sold

on non-recourse basis;

(f) any amount raised under any other transaction, including any

forward sale or purchase agreement, having the commercial effect

of a borrowing;

(g) any derivative transaction entered into in connection with

protection against or benefit from fluctuation in any rate or price

and for calculating the value of any derivative transaction, only the

market value of such transaction shall be taken into account;

(h) any counter-indemnity obligation in respect of a guarantee,

indemnity, bond, documentary letter of credit or any other

instrument issued by a bank or financial institution;

(i) the amount of any liability in respect of any of the guarantee or

indemnity for any of the items referred to in sub-clauses (a) to (h) of

this clause;

6. Persons who may initiate corporate insolvency resolution

process.—Where any corporate debtor commits a default, a financial

creditor, an operational creditor or the corporate debtor itself may initiate

corporate insolvency resolution process in respect of such corporate debtor

in the manner as provided under this Chapter.

7. Initiation of corporate insolvency resolution process by financial

creditor.—(1) A financial creditor either by itself or jointly with other

financial creditors, or any other person on behalf of the financial creditor, as

may be notified by the Central Government, may file an application for

initiating corporate insolvency resolution process against a corporate debtor

before the Adjudicating Authority when a default has occurred.

Provided that for the financial creditors, referred to in clauses (a) and (b) of

sub-section (6-A) of Section 21, an application for initiating corporate

insolvency resolution process against the corporate debtor shall be filed

jointly by not less than one hundred of such creditors in the same class or

not less than ten per cent. of the total number of such creditors in the same

class, whichever is less:

Provided further that for financial creditors who are allottees under a real

estate project, an application for initiating corporate insolvency resolution

process against the corporate debtor shall be filed jointly by not less than

one hundred of such allottees under the same real estate project or not less

than ten per cent. of the total number of such allottees under the same real

estate project, whichever is less:

Provided also that where an application for initiating the corporate

insolvency resolution process against a corporate debtor has been filed by a

financial creditor referred to in the first and second provisos and has not

been admitted by the Adjudicating Authority before the commencement of

the Insolvency and Bankruptcy Code (Amendment) Act, 2020, such

application shall be modified to comply with the requirements of the first or

second proviso within thirty days of the commencement of the said Act,

failing which the application shall be deemed to be withdrawn before its

admission.

Explanation.—For the purposes of this sub-section, a default includes a

default in respect of a financial debt owed not only to the applicant financial

creditor but to any other financial creditor of the corporate debtor.

(2) The financial creditor shall make an application under sub-section (1) in

such form and manner and accompanied with such fee as may be

prescribed.

(3) The financial creditor shall, along with the application furnish—

(a) record of the default recorded with the information utility or such

other record or evidence of default as may be specified;

(b) the name of the resolution professional proposed to act as an

interim resolution professional; and

(4) The Adjudicating Authority shall, within fourteen days of the receipt of

the application under sub-section (2), ascertain the existence of a default

from the records of an information utility or on the basis of other evidence

furnished by the financial creditor under sub-section (3):

Provided that if the Adjudicating Authority has not ascertained the existence

of default and passed an order under sub-section (5) within such time, it

shall record its reasons in writing for the same.]

(5) Where the Adjudicating Authority is satisfied that—

(a) a default has occurred and the application under sub-section (2) is

complete, and there is no disciplinary proceedings pending against the

proposed resolution professional, it may, by order, admit such application;

(b) default has not occurred or the application under sub-section (2) is

incomplete or any disciplinary proceeding is pending against the

proposed resolution professional, it may, by order, reject such

application:

Provided that the Adjudicating Authority shall, before rejecting the

application under clause (b) of sub-section (5), give a notice to the applicant

to rectify the defect in his application within seven days of receipt of such

notice from the Adjudicating Authority.

(6) The corporate insolvency resolution process shall commence from the

date of admission of the application under sub-section (5).

(7) The Adjudicating Authority shall communicate—

(a) the order under clause (a) of sub-section (5) to the financial creditor and

the corporate debtor;

(b) the order under clause (b) of sub-section (5) to the financial creditor,

within seven days of admission or rejection of such application, as the

case may be.

***

12. Time-limit for completion of insolvency resolution process.—(1)

Subject to sub-section (2), the corporate insolvency resolution process shall

be completed within a period of one hundred and eighty days from the date

of admission of the application to initiate such process.

(2) The resolution professional shall file an application to the Adjudicating

Authority to extend the period of the corporate insolvency resolution

process beyond one hundred and eighty days, if instructed to do so by a

resolution passed at a meeting of the committee of creditors by a vote

of sixty-six per cent of the voting shares.

(3) On receipt of an application under sub-section (2), if the Adjudicating

Authority is satisfied that the subject-matter of the case is such that

corporate insolvency resolution process cannot be completed within one

hundred and eighty days, it may by order extend the duration of such

process beyond one hundred and eighty days by such further period as it

thinks fit, but not exceeding ninety days:

Provided that any extension of the period of corporate insolvency resolution

process under this section shall not be granted more than once:

Provided further that the corporate insolvency resolution process shall

mandatorily be completed within a period of three hundred and thirty days

from the insolvency commencement date, including any extension of the

period of corporate insolvency resolution process granted under this section

and the time taken in legal proceedings in relation to such resolution

process of the corporate debtor:

Provided also that where the insolvency resolution process of a corporate

debtor is pending and has not been completed within the period referred to

in the second proviso, such resolution process shall be completed within a

period of ninety days from the date of commencement of the Insolvency and

Bankruptcy Code (Amendment) Act, 2019.

12-A. Withdrawal of application admitted under Section 7, 9 or 10.—

The Adjudicating Authority may allow the withdrawal of application admitted

under Section 7 or Section 9 or Section 10, on an application made by the

applicant with the approval of ninety per cent. voting share of the

committee of creditors, in such manner as may be specified.

13. Declaration of moratorium and public announcement.—(1) The

Adjudicating Authority, after admission of the application under Section 7

or Section 9 or Section 10, shall, by an order—

(a) declare a moratorium for the purposes referred to in Section 14;

(b) cause a public announcement of the initiation of corporate

insolvency resolution process and call for the submission of claims

under Section 15; and

down in Section 16.

(2) The public announcement referred to in clause (b) of sub-section (1) shall

be made immediately after the appointment of the interim resolution

professional.

14. Moratorium.—(1) Subject to provisions of sub-sections (2) and (3), on

the insolvency commencement date, the Adjudicating Authority shall by

order declare moratorium for prohibiting all of the following, namely—

(a) the institution of suits or continuation of pending suits or

proceedings against the corporate debtor including execution of any

judgment, decree or order in any court of law, tribunal, arbitration

panel or other authority;

(b) transferring, encumbering, alienating or disposing of by the

corporate debtor any of its assets or any legal right or beneficial

interest therein;

created by the corporate debtor in respect of its property including

any action under the Securitisation and Reconstruction of Financial

Assets and Enforcement of Security Interest Act, 2002 (54 of 2002);

(d) the recovery of any property by an owner or lessor where such

property is occupied by or in the possession of the corporate debtor.

Explanation.—For the purposes of this sub-section, it is hereby clarified that

notwithstanding anything contained in any other law for the time being in

force, a license, permit, registration, quota, concession, clearances or a

similar grant or right given by the Central Government, State Government,

local authority, sectoral regulator or any other authority constituted under

any other law for the time being in force, shall not be suspended or

terminated on the grounds of insolvency, subject to the condition that there

is no default in payment of current dues arising for the use or continuation

of the license, permit, registration, quota, concession, clearances or a

similar grant or right during the moratorium period.

(2) The supply of essential goods or services to the corporate debtor as may

be specified shall not be terminated or suspended or interrupted during

moratorium period.

(2-A) Where the interim resolution professional or resolution professional, as

the case may be, considers the supply of goods or services critical to protect

and preserve the value of the corporate debtor and manage the operations of

such corporate debtor as a going concern, then the supply of such goods or

services shall not be terminated, suspended or interrupted during the period of

moratorium, except where such corporate debtor has not paid dues arising

from such supply during the moratorium period or in such circumstances as

may be specified.

(3) The provisions of sub-section (1) shall not apply to—

(a) such transactions, agreements or other arrangements as may be

notified by the Central Government in consultation with any financial

sector regulator or any other authority;

(b) a surety in a contract of guarantee to a corporate debtor.

(4) The order of moratorium shall have effect from the date of such order till

the completion of the corporate insolvency resolution process:

Provided that where at any time during the corporate insolvency resolution

process period, if the Adjudicating Authority approves the resolution plan

under sub-section (1) of Section 31 or passes an order for liquidation of

corporate debtor under Section 33, the moratorium shall cease to have

effect from the date of such approval or liquidation order, as the case may

be.

...

16. Appointment and tenure of interim resolution professional.—(1)

The Adjudicating Authority shall appoint an interim resolution professional on

the insolvency commencement date.

(2) Where the application for corporate insolvency resolution process is

made by a financial creditor or the corporate debtor, as the case may be,

the resolution professional, as proposed respectively in the application

under Section 7 or Section 10, shall be appointed as the interim resolution

professional, if no disciplinary proceedings are pending against him.

(3) Where the application for corporate insolvency resolution process is

made by an operational creditor and—

(a) no proposal for an interim resolution professional is made, the

Adjudicating Authority shall make a reference to the Board for the

recommendation of an insolvency professional who may act as an

interim resolution professional;

(b) a proposal for an interim resolution professional is made under subsection (4) of Section 9, the resolution professional as proposed, shall

be appointed as the interim resolution professional, if no disciplinary

proceedings are pending against him.

(4) The Board shall, within ten days of the receipt of a reference from the

Adjudicating Authority under sub-section (3), recommend the name of an

insolvency professional to the Adjudicating Authority against whom no

disciplinary proceedings are pending.

(5) The term of the interim resolution professional shall continue till the

date of appointment of the resolution professional under Section 22.

17. Management of affairs of corporate debtor by interim

resolution professional.—(1) From the date of appointment of the interim

resolution professional,—

(a) the management of the affairs of the corporate debtor shall vest in

the interim resolution professional;

(b) the powers of the board of directors or the partners of the

corporate debtor, as the case may be, shall stand suspended and be

exercised by the interim resolution professional;

the interim resolution professional and provide access to such

documents and records of the corporate debtor as may be required by

the interim resolution professional;

(d) the financial institutions maintaining accounts of the corporate

debtor shall act on the instructions of the interim resolution

professional in relation to such accounts and furnish all information

relating to the corporate debtor available with them to the interim

resolution professional.

18. Duties of interim resolution professional.—(1) The interim

resolution professional shall perform the following duties, namely—

(a) collect all information relating to the assets, finances and operations of

the corporate debtor for determining the financial position of the corporate

debtor, including information relating to—

(i) business operations for the previous two years;

(ii) financial and operational payments for the previous two years;

(iii) list of assets and liabilities as on the initiation date; and

(iv) such other matters as may be specified;

(b) receive and collate all the claims submitted by creditors to him,

pursuant to the public announcement made under Sections 13 and 15;

(d) monitor the assets of the corporate debtor and manage its operations

until a resolution professional is appointed by the committee of creditors;

(e) file information collected with the information utility, if necessary; and

(f) take control and custody of any asset over which the corporate debtor

has ownership rights as recorded in the balance sheet of the corporate

debtor, or with information utility or the depository of securities or any

other registry that records the ownership of assets including—

(i) assets over which the corporate debtor has ownership rights

which may be located in a foreign country;

(ii) assets that may or may not be in possession of the corporate

debtor;

(iii) tangible assets, whether movable or immovable;

(iv) intangible assets including intellectual property;

(v) securities including shares held in any subsidiary of the

corporate debtor, financial instruments, insurance policies;

(vi) assets subject to the determination of ownership by a court or

authority;

(g) to perform such other duties as may be specified by the Board.

Explanation.— For the purposes of this section, the term “assets” shall not

include the following, namely—

(a) assets owned by a third party in possession of the corporate debtor

held under trust or under contractual arrangements including bailment;

(b) assets of any Indian or foreign subsidiary of the corporate debtor;

and

consultation with any financial sector regulator.

20. Management of operations of corporate debtor as going

concern.—(1) The interim resolution professional shall make every

endeavour to protect and preserve the value of the property of the

corporate debtor and manage the operations of the corporate debtor as a

going concern.

21. Committee of creditors.—(1) The interim resolution professional shall

after collation of all claims received against the corporate debtor and

determination of the financial position of the corporate debtor, constitute a

committee of creditors.

(2) The committee of creditors shall comprise all financial creditors of the

corporate debtor:

Provided that a financial creditor or the authorised representative of the

financial creditor referred to in sub-section (6) or sub-section (6-A) or subsection (5) of Section 24, if it is a related party of the corporate debtor, shall

not have any right of representation, participation or voting in a meeting of

the committee of creditors:

Provided further that the first proviso shall not apply to a financial creditor,

regulated by a financial sector regulator, if it is a related party of the

corporate debtor solely on account of conversion or substitution of debt into

equity shares or instruments convertible into equity shares or completion of

such transactions as may be prescribed, prior to the insolvency

commencement date.

22. Appointment of resolution professional.—(1) The first meeting of

the committee of creditors shall be held within seven days of the

constitution of the committee of creditors.

(2) The committee of creditors, may, in the first meeting, by a majority vote

of not less than sixty-six per cent of the voting share of the financial

creditors, either resolve to appoint the interim resolution professional as a

resolution professional or to replace the interim resolution professional by

another resolution professional.

(3) Where the committee of creditors resolves under sub-section (2)—

(a) to continue the interim resolution professional as resolution

professional subject to a written consent from the interim resolution

professional in the specified form, it shall communicate its decision to

the interim resolution professional, the corporate debtor and the

Adjudicating Authority; or

(b) to replace the interim resolution professional, it shall file an

application before the Adjudicating Authority for the appointment of the

proposed resolution professional along with a written consent from the

proposed resolution professional in the specified form.

(4) The Adjudicating Authority shall forward the name of the resolution

professional proposed under clause (b) of sub-section (3) to the Board for its

confirmation and shall make such appointment after confirmation by the

Board.

(5) Where the Board does not confirm the name of the proposed resolution

professional within ten days of the receipt of the name of the proposed

resolution professional, the Adjudicating Authority shall, by order, direct the

interim resolution professional to continue to function as the resolution

professional until such time as the Board confirms the appointment of the

proposed resolution professional.

23. Resolution professional to conduct corporate insolvency

resolution process.—(1) Subject to Section 27, the resolution professional

shall conduct the entire corporate insolvency resolution process and manage

the operations of the corporate debtor during the corporate insolvency

resolution process period:

Provided that the resolution professional shall continue to manage the

operations of the corporate debtor after the expiry of the corporate

insolvency resolution process period, until an order approving the resolution

plan under sub-section (1) of Section 31 or appointing a liquidator under

Section 34 is passed by the Adjudicating Authority.

(2) The resolution professional shall exercise powers and perform duties as

are vested or conferred on the interim resolution professional under this

Chapter.

(3) In case of any appointment of a resolution professional under subsections (4) of Section 22, the interim resolution professional shall provide

all the information, documents and records pertaining to the corporate

debtor in his possession and knowledge to the resolution professional.

***

25. Duties of resolution professional.—(1) It shall be the duty of the

resolution professional to preserve and protect the assets of the corporate

debtor, including the continued business operations of the corporate debtor.

(2) For the purposes of sub-section (1), the resolution professional shall

undertake the following actions, namely—

(a) take immediate custody and control of all the assets of the

corporate debtor, including the business records of the corporate

debtor;

(b) represent and act on behalf of the corporate debtor with third

parties, exercise rights for the benefit of the corporate debtor in

judicial, quasi-judicial or arbitration proceedings;

creditors under Section 28;

***

27. Replacement of resolution professional by committee of

creditors.-

(1) Where, at any time during the corporate insolvency resolution process,

the committee of creditors is of the opinion that a resolution professional

appointed under Section 22 is required to be replaced, it may replace him

with another resolution professional in the manner provided under this

section.

***

30. Submission of resolution plan.—(1) A resolution applicant may

submit a resolution plan along with an affidavit stating that he is eligible

under Section 29-A to the resolution professional prepared on the basis of

the information memorandum.

(2) The resolution professional shall examine each resolution plan received

by him to confirm that each resolution plan—

(a) provides for the payment of insolvency resolution process costs in a

manner specified by the Board in priority to the payment of other debts

of the corporate debtor;

(b) provides for the payment of debts of operational creditors in such

manner as may be specified by the Board which shall not be less than—

(i) the amount to be paid to such creditors in the event of a liquidation

of the corporate debtor under Section 53; or

(ii) the amount that would have been paid to such creditors, if the

amount to be distributed under the resolution plan had been

distributed in accordance with the order of priority in sub-section (1) of

Section 53,

whichever is higher, and provides for the payment of debts of financial

creditors, who do not vote in favour of the resolution plan, in such

manner as may be specified by the Board, which shall not be less than

the amount to be paid to such creditors in accordance with sub-section

(1) of Section 53 in the event of a liquidation of the corporate debtor.

Explanation 1.—For the removal of doubts, it is hereby clarified that a

distribution in accordance with the provisions of this clause shall be

fair and equitable to such creditors.

31. Approval of resolution plan.—(1) If the Adjudicating Authority is

satisfied that the resolution plan as approved by the committee of creditors

under sub-section (4) of Section 30 meets the requirements as referred to in

sub-section (2) of Section 30, it shall by order approve the resolution plan

which shall be binding on the corporate debtor and its employees,

members, creditors, including the Central Government, any State

Government or any local authority to whom a debt in respect of the

payment of dues arising under any law for the time being in force, such as

authorities to whom statutory dues are owed, guarantors and other

stakeholders involved in the resolution plan:

Provided that the Adjudicating Authority shall, before passing an order for

approval of resolution plan under this sub-section, satisfy that the resolution

plan has provisions for its effective implementation.

***

33. Initiation of liquidation.—(1) Where the Adjudicating Authority,—

(a) before the expiry of the insolvency resolution process period or the

maximum period permitted for completion of the corporate insolvency

resolution process under Section 12 or the fast track corporate

insolvency resolution process under Section 56, as the case may be,

does not receive a resolution plan under sub-section (6) of Section 30;

(b) rejects the resolution plan under Section 31 for the non-compliance

of the requirements specified therein,

it shall—

(i) pass an order requiring the corporate debtor to be liquidated in the

manner as laid down in this Chapter;

(ii) issue a public announcement stating that the corporate debtor is in

liquidation; and

(iii) require such order to be sent to the authority with which the

corporate debtor is registered.

(2) Where the resolution professional, at any time during the corporate

insolvency resolution process but before confirmation of resolution plan,

intimates the Adjudicating Authority of the decision of the committee of

creditors approved by not less than sixty-six per cent of the voting share] to

liquidate the corporate debtor, the Adjudicating Authority shall pass a

liquidation order as referred to in sub-clauses (i), (ii) and (iii) of clause (b) of

sub-section (1).

Explanation.—For the purposes of this sub-section, it is hereby declared that

the committee of creditors may take the decision to liquidate the corporate

debtor, any time after its constitution under sub-section (1) of Section 21

and before the confirmation of the resolution plan, including at any time

before the preparation of the information memorandum.

(3) Where the resolution plan approved by the Adjudicating Authority is

contravened by the concerned corporate debtor, any person other than the

corporate debtor, whose interests are prejudicially affected by such

contravention, may make an application to the Adjudicating Authority for a

liquidation order as referred to in sub-clauses (i), (ii) and (iii) of clause (b) of

sub-section (1).

(4) On receipt of an application under sub-section (3), if the Adjudicating

Authority determines that the corporate debtor has contravened the

provisions of the resolution plan, it shall pass a liquidation order as referred

to in sub-clauses (i), (ii) and (iii) of clause (b) of sub-section (1).

(5) Subject to Section 52, when a liquidation order has been passed, no suit

or other legal proceeding shall be instituted by or against the corporate

debtor:

Provided that a suit or other legal proceeding may be instituted by the

liquidator, on behalf of the corporate debtor, with the prior approval of the

Adjudicating Authority.”

45. Where any Corporate Debtor commits default, a Financial

Creditor, an Operational Creditor or the Corporate Debtor itself may

initiate Corporate Insolvency Resolution Process in respect of such

Corporate Debtor, in the manner as provided in Chapter II of the IBC.

46. The provisions of the IBC are designed to ensure that the

business and/or commercial activities of the Corporate Debtor are

continued by a Resolution Professional, upon imposition of a

moratorium, to give the Corporate Debtor some reprieve from

coercive litigation, which could drain the Corporate Debtor of its

financial resources.

47. Under Section 7(2) of the IBC, read with the Insolvency and

Bankruptcy (Application to Adjudicating Authority) Rules, 2016,

hereinafter referred to as “2016 Adjudicating Authority Rules” made in

exercise of powers conferred, inter alia, by clauses (c) (d) (e) and (f)

of sub-section (1) of Section 239 read with Sections 7, 8, 9 and 10 of

the IBC, a financial creditor is required to apply in the prescribed Form

1 for initiation of the Corporate Insolvency Resolution Process, against

a Corporate Debtor under Section 7 of the IBC, accompanied with

documents and records required therein, and as specified in the

Insolvency and Bankruptcy Board of India (Insolvency Resolution

Process for Corporate Persons) Regulations, 2016, hereinafter referred

to as the “2016 IB Board of India Regulations”.

48. Statutory Form 1 under Rule 4(1) of the 2016 Adjudicating

Authority Rules comprises Parts I to V, of which Part I pertains to

particulars of the Applicant, Part II pertains to particulars of the

Corporate Debtor and Part III pertains to particulars of the proposed

Interim Resolution Professional. Parts IV and V which require

particulars of Financial Debt with Documents, Records and Evidence of

default, is extracted hereinbelow:-

PART IV

PARTICULARS OF FINANCIAL DEBT

1 TOTAL AMOUNT OF DEBT GRANTED DATE(S) OF

DISBURSEMENT

2 AMOUNT CLAIMED TO BE IN DEFAULT AND THE

DATE ON WHICH THE DEFAULT OCCURRED

(ATTACH THE WORKINGS FOR COMPUTATION OF

AMOUNT AND DAYS OF DEFAULT IN TABULAR

FORM)

PART V

PARTICULARS OF FINANCIAL DEBT [DOCUMENTS, RECORDS AND EVIDENCE OF

DEFAULT]

1 PARTICULARS OF SECURITY HELD, IF ANY, THE DATE OF ITS CREATION, ITS

ESTIMATED VALUE AS PER THE CREDITOR.

ATTACH A COPY OF A CERTIFICATE OF REGISTRATION OF CHARGE ISSUED BY THE

REGISTRAR OF COMPANIES (IF THE CORPORATE DEBTOR IS A COMPANY)

2 PARTICULARS OF AN ORDER OF A COURT, TRIBUNAL OR ARBITRAL PANEL

ADJUDICATING ON THE DEFAULT, IF ANY

(ATTACH A COPY OF THE ORDER)

3 RECORD OF DEFAULT WITH THE INFORMATION UTILITY, IF ANY (ATTACH A COPY OF

SUCH RECORD)

4 DETAILS OF SUCCESSION CERTIFICATE, OR PROBATE OF A WILL, OR LETTER OF

ADMINISTRATION, OR COURT DECREE (AS MAY BE APPLICABLE), UNDER THE INDIAN

SUCCESSION ACT, 1925 (10 OF 1925) (ATTACH A COPY)

5 THE LATEST AND COMPLETE COPY OF THE FINANCIAL CONTRACT REFLECTING ALL

AMENDMENTS AND WAIVERS TO DATE

(ATTACH A COPY)

6 A RECORD OF DEFAULT AS AVAILABLE WITH ANY CREDIT INFORMATION COMPANY

(ATTACH A COPY)

7 COPIES OF ENTRIES IN A BANKERS BOOK IN ACCORDANCE WITH THE BANKERS

BOOKS EVIDENCE ACT, 1891 (18 OF 1891)

(ATTACH A COPY)

8 LIST OF OTHER DOCUMENTS ATTACHED TO THIS APPLICATION IN ORDER TO PROVE

THE EXISTENCE OF FINANCIAL, DEBT, THE AMOUNT AND DATE OF DEFAULT

49. Since a Financial Creditor is required to apply under Section 7 of

the IBC, in Statutory Form 1, the Financial Creditor can only fill in

particulars as specified in the various columns of the Form. There is

no scope for elaborate pleadings. An application to the Adjudicating

Authority (NCLT) under Section 7 of the IBC, in the prescribed form,

cannot therefore, be compared with the plaint in a suit, and cannot be

judged by the same standards, as a plaint in a suit, or any other

pleadings in a Court of law.

50. Section 7(3) requires a financial creditor making an application

under Section 7(1) to furnish records of the default recorded with the

information utility or such other record or evidence of default as may

be specified; the name of the resolution professional proposed to act

as an Interim Resolution Professional and any other information as

may be specified by the Insolvency and Bankruptcy Board of India.

51. Section 7(4) of the IBC casts an obligation on the Adjudicating

Authority to ascertain the existence of a default from the records of an

information utility or on the basis of other evidence furnished by the

financial creditor within fourteen days of the receipt of the application

under Section 7. As per the proviso to Section 7(4) of the IBC, inserted

by amendment, by Act 26 of 2019, if the Adjudicating Authority has

not ascertained the existence of default and passed an order, within

the stipulated period of time of fourteen days, it shall record its

reasons for not doing so in writing. The application does not lapse for

non-compliance of the time schedule. Nor is the Adjudicating

Authority obliged to dismiss the application. On the other hand, the

application cannot be dismissed, without compliance with the

requisites of the Proviso to Section 7(5) of the IBC.

52. Section 7(5)(a) provides that when the Adjudicating Authority is

satisfied that a default has occurred, and the application under subsection (2) of Section 7 is complete and there is no disciplinary

proceeding pending against the proposed resolution professional, it

may by order admit such application. As per Section 7(5)(b), if the

Adjudicating Authority is satisfied that default has not occurred or the

application under sub-Section (2) of Section 7 is incomplete or any

disciplinary proceeding is pending against the proposed resolution

professional, it may, by order, reject such application, provided that

the Adjudicating Authority shall, before rejecting the application under

sub-section (b) of Section 5, give notice to the applicant, to rectify the

defects in his application, within 7 days of receipt of such notice from

the Adjudicating Authority.

53. The Corporate Insolvency Resolution Process commences on the

date of admission of the application under sub-section (5) of Section 7

of the IBC. Section 7(7) casts an obligation on the Adjudicating

Authority to communicate an order under clause (a) of sub-section (5)

of Section 7 to the Financial Creditor and the Corporate Debtor and to

communicate an order under clause (b) of sub-section (5) of Section 7

to the financial creditor within seven days of admission or rejection of

such application, as the case may be. Sections 8 and 9 of IBC pertain

to Insolvency Resolution by an Operational Creditor and are not

attracted in the facts and circumstances of this case. Section 10

pertains to initiation of Corporate Insolvency Resolution Process by the

Corporate Debtor itself, and is also not attracted in the facts and

circumstances of the case.

54. Section 12(1) of the IBC requires the Corporate Insolvency

Process to be completed within a period of 180 days from the date of

admission of the application to initiate such process. The period of

180 days is not extendable more than once.

55. The IBC is not just a statute for recovery of debts. It is also not a

statute which only 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.

56. In Swiss Ribbons Private Limited & Anr. v. Union of India

and Ors.

, authored by Nariman, J. this Court observed: -

4 (2019) 4 SCC 17

“28. It can thus be seen that the primary focus of the legislation

is to ensure revival and continuation of the corporate debtor by

protecting the corporate debtor from its own management and

from a corporate death by liquidation. The Code is thus a

beneficial legislation which puts the corporate debtor back on its

feet, not being a mere recovery legislation for creditors. The

interests of the corporate debtor have, therefore, been

bifurcated and separated from that of its promoters/those who

are in management. Thus, the resolution process is not

adversarial to the corporate debtor but, in fact, protective of its

interests. The moratorium imposed by Section 14 is in the

interest of the corporate debtor itself, thereby preserving the

assets of the corporate debtor during the resolution process.

The timelines within which the resolution process is to take

place again protects the corporate debtor's assets from further

dilution, and also protects all its creditors and workers by seeing

that the resolution process goes through as fast as possible so

that another management can, through its entrepreneurial skills,

resuscitate the corporate debtor to achieve all these ends.”

57. IBC has overriding effect over other laws. Section 238 of the

IBC provides that the provisions of the IBC shall have 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 such law.

58. 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 this Court in Swiss Ribbons

Private Limited v. Union of India (supra).

59. On the other hand, the IBC is a beneficial legislation for equal

treatment of all creditors of the Corporate Debtor, as also the

protection of the livelihoods of its employees/workers, by revival of the

Corporate Debtor through the entrepreneurial skills of persons other

than those in its management, who failed to clear the dues of the

Corporate Debtor to its creditors. It only segregates the interests of

the Corporate Debtor from those of its promoters/persons in

management.

60. Relegation of creditors to the remedy of coercive litigation

against the Corporate Debtors could be detrimental to the interests of

the Corporate Debtor and its creditors alike. While multiple coercive

proceedings against a Corporate Debtor in different forums could

impede its commercial/business activities, deplete its cash reserves,

dissipate its assets, moveable and immoveable and precipitate its

commercial death, such proceedings might not be economically viable

for the creditors as well, because of the length of time consumed in

the litigations, the expenses of litigation, and the uncertainties of

realisation of claims even after ultimate success in the litigation.

61. It is, therefore, imperative that the provisions of the IBC and the

Rules and Regulations framed thereunder be construed liberally, in a

purposive manner to further the objects of enactment of the statute.

62. 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.

63. The time stipulation of fourteen days in Section 7(4) to ascertain

the existence of a default is apparently directory not mandatory. The

proviso inserted by amendment with effect from 16th August 2019

provides that if the Adjudicating Authority has not ascertained the

default and passed an order under sub-section (5) of Section 7 of the

IBC within the aforesaid time, it shall record its reasons in writing for

not doing so. No other penalty is stipulated.

64. Furthermore, the proviso to Section 7(5)(b) of the IBC requires

the Adjudicating Authority to give notice to an applicant, to rectify the

defect in its application within seven days of receipt of such notice

from the Adjudicating Authority, before rejecting its application under

Clause (b) of sub-section (5) of Section 7 of the IBC. When the

Adjudicating Authority calls upon the applicant to cure some defects,

that defect has to be rectified within seven days. However, in the

absence of any prescribed penalty in the IBC for inability to cure the

defects in an application within seven days from the date of receipt of

notice, in an appropriate case, the Adjudicating Authority may accept

the cured application, even after expiry of seven days, for the ends of

justice.

65. The Insolvency Committee of the Ministry of Corporate Affairs,

Government of India, in a report published in March 2018, stated that

the intent of the IBC could not have been to give a new lease of life to

debts which were already time barred. Thereafter Section 238A was

incorporated in the IBC by the Insolvency and Bankruptcy Code

(Second Amendment) Act, 2018 (Act 26 of 2018), with effect from 6th

June 2018.

66. Section 238A of the IBC provides as follows:-

“238A. The provisions of the Limitation Act, 1963 (36 of 1963)

shall, as far as may be, apply to the proceedings or appeals

before the Adjudicating Authority, the National Company Law

Appellate Tribunal, the Debt Recovery Tribunal or the Debt

Recovery Appellate Tribunal, as the case may be.”

67. In Sesh Nath Singh & Anr. v. Baidyabati Sheoraphuli

Cooperative Bank Ltd.

, authored by one of us (Indira Banerjee, J.),

this Court held:-

“91. Legislature has in its wisdom chosen not to make the

provisions of the Limitation Act verbatim applicable to

proceedings in NCLT/NCLAT, but consciously used the words ‘as

far as may be’. The words ‘as far as may be’ are not meant to

be otiose. Those words are to be understood in the sense in

which they best harmonise with the subject matter of the

legislation and the object which the Legislature has in view. The

Courts would not give an interpretation to those words which

would frustrate the purposes of making the Limitation Act

applicable to proceedings in the NCLT/NCLAT ‘as far as may be’.

xxx xxx xxx

94. The use of words ‘as far as may be’, occurring in Section

238A of the IBC tones down the rigour of the words ‘shall’ in the

aforesaid Section which is normally considered as mandatory.

The expression ‘as far as may be’ is indicative of the fact that

all or any of the provisions of the Limitation Act may not apply

to proceedings before the Adjudicating Authority (NCLT) or the

Appellate authority (NCLAT) if they are patently inconsistent

with some provisions of the IBC. At the same time, the words

‘as far as may be’ cannot be construed as a total exclusion of

the requirements of the basic principles of Section 14 of the

Limitation Act, but permits a wider, more liberal, contextual and

purposive interpretation by necessary modification, which is in

harmony with the principles of the said Section.”

68. There is no specific period of limitation prescribed in the

Limitation Act, 1963, for an application under the IBC, before the

5 2021 SCC Online SC 244

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.

69. There can be no dispute with the proposition that the period of

limitation for making an application under Section 7 or 9 of the IBC is

three years from the date of accrual of the right to sue, that is, the

date of default. In Gaurav Hargovindbhai Dave v. Asset

Reconstruction Company (India) Ltd.

6authored by Nariman, J. this

Court held:-

“6. …...The present case being “an application” which is filed

under Section 7, would fall only within the residuary Article

137.”

70. In B. K. Educational Services Private Limited v. Parag

Gupta and Associates

, this Court speaking through Nariman, J.

held:-

“42. It is thus clear that since the Limitation Act is applicable to

applications filed under Sections 7 and 9 of the Code from the

inception of the Code, Article 137 of the Limitation Act gets

attracted. “The right to sue”, therefore, accrues when a default

occurs. If the default has occurred over three years prior to the

date of filing of the application, the application would be barred

under Article 137 of the Limitation Act, save and except in those

cases where, in the facts of the case, Section 5 of the Limitation

6 (2019) 10 SCC 572

7 (2019) 11 SCC 633

Act may be applied to condone the delay in filing such

application.”

71. In Jignesh Shah v. Union of India

this Court speaking

through Nariman, J. reiterated the proposition that the period of

limitation for making an application under Section 7 or 9 of the IBC

was three years from the date of accrual of the right to sue, that is,

the date of default.

72. In Radha Exports (India) (P) Ltd. v. K.P. Jayaram9

, this Court

held:-

“32. The proposition of law which emerges from Innoventive

Industries Ltd. [Innoventive Industries Ltd. v. Icici Bank, (2018) 1

SCC 407 : (2018) 1 SCC (Civ) 356] is that the insolvency resolution

process begins when a default takes place. In other words, once a

debt or even part thereof becomes due and payable, the

resolution process begins. Section 3(11) defines “debt” as a

liability or obligation in respect of a claim and the claim means a

right to payment even if it is disputed. The Code gets triggered

the moment default is of Rs 1,00,000 or more. Once the

adjudicating authority is satisfied that a default has occurred, the

application must be admitted, unless it is otherwise incomplete

and not in accordance with the rules. The judgment is however,

not an authority for the proposition that a petition under Section 7

IBC has to be admitted, even if the claim is ex facie barred by

limitation.

33. On the other hand, in B.K. Educational Services (P)

Ltd. v. Parag Gupta & Associates [B.K. Educational Services (P)

Ltd. v. Parag Gupta & Associates, (2019) 11 SCC 633 : (2018) 5

SCC (Civ) 528] , this Court held : (SCC p. 664, para 42)

“42. It is thus clear that since the Limitation Act is

applicable to applications filed under Sections 7 and 9 of the

Code from the inception of the Code, Article 137 of the

Limitation Act gets attracted. “The right to sue”, therefore,

accrues when a default occurs. If the default has occurred

over three years prior to the date of filing of the application,

the application would be barred under Article 137 of the

Limitation Act, save and except in those cases where, in the

facts of the case, Section 5 of the Limitation Act may be

applied to condone the delay in filing such application.”

8 (2019) 10 SCC 750

9 (2020) 10 SCC 538

***

35. It was for the applicant invoking the corporate insolvency

resolution process, to prima facie show the existence in his favour,

of a legally recoverable debt. In other words, the respondent had

to show that the debt is not barred by limitation, which they failed

to do.”

73. In Babulal Vardharji Gurjar v. Veer Gurjar Aluminium

Industries (P) Ltd.

, relied upon by the Respondents, this Court,

speaking through Dinesh Maheshwari, J., reiterated that the period of

limitation for an application seeking initiation of CIRP under Section 7

of the IBC, was governed by Article 137 of the Limitation Act, 1963

and was, therefore, three years from the date when the right to apply

accrued, i.e., the date when default occurred. In Babulal Vardharji

Gurjar (supra), this Court observed and held:-

“35. Apart from the above and even if it be assumed that the

principles relating to acknowledgment as per Section 18 of the

Limitation Act are applicable for extension of time for the purpose

of the application under Section 7 of the Code, in our view, neither

the said provision and principles come in operation in the present

case nor do they enure to the benefit of Respondent 2 for the

fundamental reason that in the application made before NCLT,

Respondent 2 specifically stated the date of default as “8-7-2011

being the date of NPA”. It remains indisputable that neither has

any other date of default been stated in the application nor has

any suggestion about any acknowledgment been made. As

noticed, even in Part V of the application, Respondent 2 was

required to state the particulars of financial debt with documents

and evidence on record. In the variety of descriptions which could

have been given by the applicant in the said Part V of the

application and even in residuary Point 8 therein, nothing was at

all stated at any place about the so-called acknowledgment or any

other date of default.

35.1. Therefore, on the admitted fact situation of the present

case, where only the date of default as “8-7-2011” has been

stated for the purpose of maintaining the application under

Section 7 of the Code, and not even a foundation is laid in the

application for suggesting any acknowledgment or any other date

10 (2020) 15 SCC 1

of default, in our view, the submissions sought to be developed on

behalf of Respondent 2 at the later stage cannot be permitted. It

remains trite that the question of limitation is essentially a mixed

question of law and facts and when a party seeks application of

any particular provision for extension or enlargement of the period

of limitation, the relevant facts are required to be pleaded and

requisite evidence is required to be adduced. Indisputably, in the

present case, Respondent 2 never came out with any pleading

other than stating the date of default as “8-7-2011” in the

application. That being the position, no case for extension of

period of limitation is available to be examined. In other words,

even if Section 18 of the Limitation Act and principles thereof were

applicable, the same would not apply to the application under

consideration in the present case, looking to the very averment

regarding default therein and for want of any other averment in

regard to acknowledgment. In this view of the matter, reliance on

the decision in Mahabir Cold Storage

does not advance the cause

of Respondent 2.

***

36. The submissions made on behalf of the respondents that the

rules of limitation are not meant to destroy the rights of the

parties and reference to the decision in N. Balakrishnan

are also

misplaced. Application of the rules of limitation to CIRP (by virtue

of Section 238-A of the Code read with the above referred

consistent decisions of this Court) does not, in any manner, deal

with any of the rights of Respondent 2; it only bars recourse to the

particular remedy of initiation of CIRP under the Code. Equally, the

other submissions made on behalf of the respondents about any

stringent application of the law of limitation which was introduced

to the Code only after filing of the application by Respondent 2; or

about the so-called prejudice likely to be caused to other banks

and financial institutions are also of no substance, particularly in

the light of the principles laid down and consistently followed by

this Court right from the decision in B.K. Educational Services

These contentions have only been noted to be rejected. Needless

to add that when the application made by Respondent 2 for CIRP

is barred by limitation, no proceedings undertaken therein after

the order of admission could be of any effect. All such proceedings

remain non est and could only be annulled.”

74. In Vashdeo R. Bhojwani v. Abhyudaya Co-operative Bank

Ltd. & Ors.

this Court rejected the contention that the default was

a continuing wrong and Section 23 of the Limitation Act 1963 would

11 1991 Supp (1) SCC 402

12 (1998) 7 SCC 123

13 (2019) 11 SCC 633

14 (2019) 9 SCC 158

apply, relying upon Balkrishna Savalram Pujari Waghmare v.

Shree Dhyaneshwar Maharaj Sansthan

75. To quote P.B. Gajendragadkar, J. in Balkrishna Savalram

Pujari Wagmare (supra):-

“......Section 23 refers not to a continuing right but to a

continuing wrong. It is the very essence of a continuing wrong

that it is an act which creates a continuing source of injury and

renders the doer of the act responsible and liable for the

continuance of the said injury. If the wrongful act causes an

injury which is complete, there is no continuing wrong even

though the damage resulting from the act may continue. If,

however, a wrongful act is of such a character that the injury

caused by it itself continues, then the act constitutes a

continuing wrong. In this connection it is necessary to draw a

distinction between the injury caused by the wrongful act and

what may be described as the effect of the said injury. It is only

in regard to acts which can be properly characterised as

continuing wrongs that Section 23 can be invoked. .....”

76. There can be no dispute with the proposition of law laid down in

Babulal Vardharji Gurjar (supra) that limitation is essentially a

mixed question of law and facts and when a party seeks application of

any particular provision for extension or enlargement of the period of

limitation, the relevant facts are required to be pleaded and requisite

evidence is required to be adduced. However, as observed above, an

application in a statutory form cannot be judged in the manner of a

plaint in a suit. Documents filed along with the application, or later,

and subsequent affidavits and applications would have to be

construed as part of the pleadings.

15 1959 Supp (2) SCR 476

77. The judgment of this Court in Babulal Vardharji Gurjar (supra)

was rendered in the facts of the aforesaid case, where the date of

default had been mentioned as 8.7.2011 being the date of N.P.A. and

it remained undisputed that there had neither been any other date of

default stated in the application nor had any suggestion about any

acknowledgement been made.

78. In the backdrop of the aforesaid facts, this court observed that

even if Section 18 of the Limitation Act and principles thereof were

applicable, the same would not apply to the application under

consideration, in view of the averments regarding default therein and

for want of any other averment with regard to acknowledgment.

79. It is well settled, that a judgment is a precedent for the issue of

law that is raised and decided and not observations made in the facts

of any particular case. To quote V. Sudhish Pai in “Constitutional

Supremacy-A Revisit”, “Judicial utterances/pronouncements are in the

setting of the facts of a particular case. To interpret words and

provisions of a statute it may become necessary for judges to embark

upon lengthy discussions, but such discussion is meant to explain not

define. Judges interpret statutes, their words are not to be interpreted

as statutes.” The aforesaid passage was extracted and incorporated

as part of the judgment of this Court in Sesh Nath Singh (supra).

80. Babulal Vardharji Gurjar (supra) is not an authority for the

proposition that the Books of Accounts of a Corporate Debtor could not

be treated as acknowledgement of liability to a Financial Creditor. Nor

does the judgment lay down the proposition that any affidavits or

documents filed during the pendency of the proceedings cannot be

taken into consideration.

81. In Sesh Nath Singh (supra) this Court held that the IBC does

not exclude the application of Section 14 or 18 or any other provision

of the Limitation Act. There is, therefore, no reason to suppose that

Sections 14 or 18 of the Limitation Act do not apply to proceedings

under Section 7 or Section 9 of the IBC. In Laxmi Pat Surana v.

Union Bank of India

this Court speaking through Khanwilkar J. held

that there was no reason to exclude the effect of Section 18 of the

Limitation Act to proceedings initiated under the IBC. In Bishal

Jaiswal (supra), this Court, speaking through Nariman J. relied, inter

alia, on Sesh Nath Singh (supra) and Laxmi Pat Surana (supra)

and held that the question of applicability of Section 18 of the

Limitation Act to proceedings under the IBC was no longer res integra.

82. Section 18 of the Limitation Act is set out hereinunder:-

“18. Effect of acknowledgment in writing.—(1) Where, before

the expiration of the prescribed period for a suit or application in

respect of any property or right, an acknowledgment of liability in

respect of such property or right has been made in writing signed

by the party against whom such property or right is claimed, or by

any person through whom he derives his title or liability, a fresh

period of limitation shall be computed from the time when the

acknowledgment was so signed.

(2) Where the writing containing the acknowledgment is undated,

oral evidence may be given of the time when it was signed; but

subject to the provisions of the Indian Evidence Act, 1872 (1 of

1872), oral evidence of its contents shall not be received.

Explanation.—For the purposes of this section,—

16 (2021) 8 SCC 481

(a) an acknowledgment may be sufficient though it omits to

specify the exact nature of the property or right, or avers that

the time for payment, delivery, performance or enjoyment

has not yet come or is accompanied by refusal to pay,

deliver, perform or permit to enjoy, or is coupled with a claim

to set off, or is addressed to a person other than a person

entitled to the property or right,

(b) the word “signed” means signed either personally or by

an agent duly authorised in this behalf, and

not be deemed to be an application in respect of any

property or right.”

83. As per Section 18 of 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.

84. In Khan Bahadur Shapoor Fredoom Mazda v. Durga

Prasad Chamaria and Others

, this Court held:-

“6. It is thus clear that acknowledgment as prescribed by

Section 19 merely renews debt; it does not create a new right of

action. It is a mere acknowledgment of the liability in respect of

the right in question; it need not be accompanied by a

promise to pay either expressly or even by implication.

The statement on which a plea of acknowledgment is based

must relate to a present subsisting liability though the exact

nature or the specific character of the said liability may not be

indicated in words. Words used in the acknowledgment must,

however, indicate the existence of jural relationship between

the parties such as that of debtor and creditor, and it must

appear that the statement is made with the intention to admit

such jural relationship. Such intention can be inferred by

implication from the nature of the admission, and need not be

17 AIR 1961 SC 1236

expressed in words. If the statement is fairly clear then the

intention to admit jural relationship may be implied from it. The

admission in question need not be express but must be made in

circumstances and in words from which the court can

reasonably infer that the person making the admission intended

to refer to a subsisting liability as at the date of the statement.

In construing words used in the statements made in writing on

which a plea of acknowledgment rests oral evidence has been

expressly excluded but surrounding circumstances can always

be considered. Stated generally courts lean in favour of a liberal

construction of such statements though it does not mean that

where no admission is made one should be inferred, or where a

statement was made clearly without intending to admit the

existence of jural relationship such intention could be fastened

on the maker of the statement by an involved or far-fetched

process of reasoning. Broadly stated that is the effect of the

relevant provisions contained in Section 19, and there is really

no substantial difference between the parties as to the true

legal position in this matter.”

85. It is well settled that entries in books of accounts and/or

balance sheets of a Corporate Debtor would amount to an

acknowledgment under Section 18 of the Limitation Act. In Bishal

Jaiswal (supra) authored by Nariman, J. this Court quoted with

approval the judgments, inter alia, of Calcutta High Court in Bengal

Silk Mills Co. v. Ismail Golam Hossain Ariff,

18 and Pandem Tea

Co.

19 Ltd., the judgment of the Delhi High Court in South Asia

Industries (P) Ltd. v. General Krishna Shamsher Jung Bahadur

Rana

and the judgment of Karnataka High Court in Hegde Golay

Ltd. v. State Bank of India

and held that an acknowledgement of

liability that is made in a balance sheet can amount to an

acknowledgement of debt.

86. In Bengal Silk Mills Co. (supra), the Calcutta High Court held:-

18 1961 SCC Cal 128: AIR 1962 Cal 115

19 AIR 1974 Cal 170

20 ILR (1972) 2 Del 712

211985 SCC Kar 290 : ILR 1987 Kar 2673

“9. ….. I am unable to agree with the reasoning of the Nagpur

decision that a balance-sheet does not save limitation

because it is drawn up under a duty to set out the claims

made on the company and not with the intention of

acknowledging liability. The balance-sheet contains

admissions of liability; the agent of the company who makes

and signs it intends to make those admissions. The

admissions do not cease to be acknowledgements of liability

merely on the ground that they were made in discharge of a

statutory duty. I notice that in the Nagpur case the balancesheet had been signed by a director and had not been passed

either by the Board of Directors or by the company at its

annual general meeting and it seems that the actual decision

may be distinguished on the ground that the balance-sheet

was not made or signed by a duly authorized agent of the

company.

***

11. To come under section 19 an acknowledgement of a debt

need not be made to the creditor nor need it amount to a

promise to pay the debt. In England it has been held that a

balance-sheet of a company stating the amount of its

indebtedness to the creditor is a sufficient acknowledgement

in respect of a specialty debt under section 5 of the Civil

Procedure Act, 1833 (3 and 4 Will — 4c. 42), see Re : Atlantic

and Pacific Fibre Importing and Manufacturing Co. Ltd., [1928]

Ch. 836…….”

87. In Re Pandem Tea Co. Ltd. (supra), Sabyasachi Mukharji J.

held:-

“Now the question is whether the statements, which are

contained in the profits and loss accounts and the assets and

liabilities side indicating the liability of the petitioning creditor

along with the statement of the Directors made to the

shareholders as Directors' report should be read together and if

so whether reading these two statements together these

amount to an acknowledgement as contemplated under

Section 18 of the Limitation Act, 1963, or Section 19 of the

Limitation Act, 1908. In my opinion, both these statements

have to be read together. The balance-sheet is meant to be

presented and passed by the shareholders and is generally

accompanied by the Directors' report to the shareholders.

Therefore, in understanding the balance-sheets and in

explaining the statements in the balance-sheets, the balancesheets together with the Directors' report must be taken

together to find out the true meaning and purport of the

statements. Counsel appearing for petitioning creditor

contended that under the statute the balance-sheet was a

separate document and as such if there was unequivocal

acknowledgement on the balance-sheet the statement of the

Directors' report should not be taken into consideration. It is

true the balance-sheet is a statutory document and perhaps is

a separate document but the balance-sheet not confirmed or

passed by the shareholders cannot be accepted as correct.

Therefore, in order to validate the balance-sheet, it must be

duly passed by the shareholders at the appropriate meeting

and in order to do so it must be accompanied by a report, if

any, made by the Directors. Therefore, even though the

balance-sheet may be a separate document these two

documents in the facts and circumstances of the case should

be read together and should be construed together. It was held

by the Supreme Court in the case of L.C. Mills v. Aluminium

Corpn. of India Ltd., (1971) 1 SCC 67 : AIR 1971 SC 1482, that

it was clear that the statement on which the plea of

acknowledgement was founded should relate to a subsisting

liability as the section required and it should be made before

the expiration of the period prescribed under the Act. It need

not, however, amount to a promise to pay for an

acknowledgement did not create a new right of action but

merely extended the period of limitation. The statement need

not indicate the exact nature or the specific character of the

liability. The words used in the statement in question must,

however, relate to a present subsisting liability and indicate the

existence of a jural relationship between the parties such as,

for instance, that of a debtor and a creditor and the intention to

admit such jural relationship. Such an intention need not,

however, be in express terms and could be inferred by

implication from the nature of the admission and the

surrounding circumstances. Generally speaking, a liberal

construction of the statement in question should be given. That

of course did not mean that where a statement was made

without intending to admit the existence of jural relationship,

such intention should be fastened on the person making the

statement by an involved and far-fetched reasoning. In order to

find out the intention of the document by which

acknowledgement was to be construed the document as a

whole must be read and the intention of the parties must be

found out from the total effect of the document read as a

whole. …”

88. In South Asia Industries (P) Ltd. v. General Krishna

Shamsher Jung Bahadur Rana (supra), the Delhi High Court

observed:-

“46. Shri Rameshwar Dial argued that statements in the

balance-sheet of a company cannot amount to

acknowledgement of liability because the balance-sheet is

made under compulsion of the provisions in the Companies Act.

There is no force in this argument. In the first place, section 18

of the Limitation Act, 1963, requires only that the

acknowledgement of liability must have been made in writing,

but it does not prescribe that the writing should be in any

particular kind of document. So, the fact that the writing is

contained in a balance-sheet is immaterial. In the second place,

it is true that section 131 of the Companies Act, 1913 (section

210 of the Companies Act, 1956) makes it compulsory that an

annual balance sheet should be prepared and placed before the

Company by the Directors, and section 132 (section 211 of the

Companies Act, 1956) requires that the balance-sheet should

contain a summary, inter alia, of the current liabilities of the

company. But, as pointed out by Bachawat J. in Bengal Silk

Mills v. Ismail Golam Hossain Ariff, AIR 1962 Cal 115 although

there was statutory compulsion to prepare the annual balancesheet, there was no compulsion to make any particular

admission, and a document is not taken out of the purview of

section 18 of the Indian Limitation Act, 1963 (section 19 of the

Indian Limitation Act, 1908) merely on the ground that it is

prepared under compulsion of law or in discharge of statutory

duty. Reference may also be made to the decisions in Raja of

Vizianagram v. Vizianagram Mining Co. Ltd., AIR 1952 Mad

136, Jones v. Bellgrove Properties Ltd., (1949) 1 All ER 498;

and Lahore Enamelling and Stamping Co. v. A.K. Bhalla, AIR

1958 Punj 341, in which statements in balance-sheets of

companies were held to amount to acknowledgements of

liability of the companies.

47. Shri Rameshwar Dial referred to the decision of the Privy

Council in Consolidated Agencies Ltd. v. Bertram Ltd., (1964) 3

All ER 282. We shall advert to this decision presently when we

deal with another argument of Shri Rameshwar Dial, and it is

sufficient to state so far as the argument under consideration is

concerned that even in this decision of the Privy Council it has

been recognised that balance-sheets could in certain

circumstances amount to acknowledgements of liability. It

cannot, therefore, be said as a general proposition of law that

statements in balance-sheets of a company cannot operate at

all as acknowledgements of liability as contended by Shri

Rameshwar Dial.”

89. In Hegde & Golay Limited v. State Bank of India (supra) the

Karnataka High Court held:

“43. The acknowledgement of liability contained in the balancesheet of a company furnishes a fresh starting point of limitation.

It is not necessary, as the law stands in India, that the

acknowledgement should be addressed and communicated to

the creditor.”

90. In Reliance Asset Reconstruction Co. Ltd. v. Hotel Poonja

International Pvt. Ltd.

, the Appellant had relied on two documents

in the Paper Book, that is, (i) the Balance Sheet of the Corporate

Debtor dated 16th August, 2017 and (ii) a letter dated 23rd April, 2019

issued by the Corporate Debtor to contend that the proceedings under

Section 7 of the IBC were not barred by limitation, as limitation would

start running afresh for a period of three years from the respective

dates of those documents in acknowledgment of liability.

91. This Court, however, did not accept the balance sheet dated 16th

August, 2017 and the letter dated 23rd April, 2019 in the special facts

and circumstances of the case where it could not be ascertained if the

documents had been signed before the expiry of the prescribed period

of limitation. This Court also found that the two documents could not

be construed as admission that amounted to acknowledgement of the

jural relationship and the existence of liability, since the balance sheet

dated 16th August, 2017 did not acknowledge or admit any liability.

Rather the Corporate Debtor had disputed and denied its liability.

Similarly, the letter dated 23rd April, 2019 was also found not be an

acknowledgment or admission of liability. On the other hand, the

language of the letter made it absolutely clear that the liability had in

fact been denied.

92. Significantly, in Reliance Asset Reconstruction (supra), the

loan had been sanctioned by Vijaya Bank in May 1986. The loan

22. 2021 SCC Online SC 289

amount was declared NPA on 1st April 1993, an original application

moved under the Debt Recovery Act was compromised in 2001 and

the DRT had issued a Recovery Certificate in May 2003. Vijaya Bank

assigned its Reliance Asset Reconstruction in May 2011 after which

amended Recovery Certificate was issued in December 2012. The

petition under Section 7 of the IBC was, however filed on 27th July

2018.

93. Section 18 of the Limitation Act speaks of an Acknowledgment in

writing of liability, signed by the party against whom such property or

right is claimed. Even if the writing containing the acknowledgment is

undated, evidence might be given of the time when it was signed. The

explanation clarifies that an acknowledgment may be sufficient even

though it is accompanied by 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.

94. In Lakshmirattan Cotton Mills Co. Ltd. v. Aluminium

Corpn. of India Ltd.

, this Court held:-

“8. Section 19(1) of the Limitation Act, 1908, provides that

where, before the expiration of the period prescribed for a

suit in respect of any property or right, an acknowledgment

of liability in respect of such property or right has been made

in writing signed by the party against whom such property or

right is claimed, a fresh period of limitation shall be

computed from the time when the acknowledgment was so

signed. The expression ‘signed’ here means not only signed

personally by such a party, but also by an agent duly

authorised in that behalf. Explanation 1 to the section then

23 (1971) 1 SCC 67

provides that an acknowledgment would be sufficient though

it omits to specify the exact nature of the property or right,

or avers that the time for payment has not yet come, or is

accompanied by a refusal to pay or is coupled with a claim to

a set-off, or is addressed to a person other than the person

entitled to the property or right. The new Act of 1963,

contains in Section 18 substantially similar provisions.

9. It is clear that the statement on which the plea of

acknowledgment is founded must relate to a subsisting

liability as the section requires that it must be made before

the expiration of the period prescribed under the Act. It need

not, however, amount to a promise to pay, for, an

acknowledgment does not create a new right of action but

merely extends the period of limitation. The statement need

not indicate the exact nature or the specific character of the

liability. The words used in the statement in question,

however, must relate to a present subsisting liability and

indicate the existence of jural relationship between the

parties, such as, for instance, that of a debtor and a creditor

and the intention to admit such jural relationship. Such an

intention need not be in express terms and can be inferred

by implication from the nature of the admission and the

surrounding circumstances. Generally speaking, a liberal

construction of the statement in question should be given.

That of course does not mean that where a statement is

made without intending to admit the existence of jural

relationship, such intention should be fastened on the person

making the statement by an involved and far-fetched

reasoning. (See Khan Bahadur Shapoor Fredoom

Mazda v. Durga Prasad Chamaria [1962 (1) SCR 140]

and Tilak Ram v. Nathu [AIR 1967 SC 935 at 938, 939] ). As

Fry, L.J., Green v. Humphreys [(1884) 26 Ch D 474 at 481]

said “an acknowledgment is an admission by the writer that

there is a debt owing by him, either to the receiver of the

letter or to some other person on whose behalf the letter is

received but it is not enough that he refers to a debt as

being due from somebody. In order to take the case out of

the statute there must upon the fair construction of the

letter, read in the light of the surrounding circumstances, be

an admission that the writer owes the debt”. As already

stated, the person making the acknowledgment can be both

the debtor himself as also a person duly authorised by him

to make the admission. In Khan Bahadur Shapoor Fredoom

Mazda case the Court accepted a statement in a letter by a

mortgagor to a second mortgagee to save the mortgaged

property from being sold away at a cheap price at the

instance of the prior mortgagee by himself purchasing it as

one amounting to an admission of the jural relationship of a

mortgagor and mortgagee, and therefore, to an

acknowledgment within Section 19. Also, an agreement of

reference to arbitration containing an unqualified admission

that whoever on account should be proved to be the debtor

would pay to the other has been held to amount to an

acknowledgment. Such an admission is not subject to the

condition that before the agreement should operate as an

acknowledgment, the liability must be ascertained by the

arbitrator. The acknowledgment operates whether the

arbitrator acts or not. (See Tejpal Saraogi v. Lallanjee

Jain [ CA No. 766 of 1962, decided on February, 8, 1965],

approving Abdul Rahim Oosman & Co. v. Ojamshee

Prushottamdas & Co. [1928 ILR 56 Cal 639].”

95. In Jignesh Shah and Another v. Union of India (supra), this

Court relied upon a judgment of the Patna High Court in Ferro Alloys

Corporation Limited v. Rajhans Steel Limited

, and held in effect

that an application under Section 7 or 9 of the IBC may be time

barred, even though some other recovery proceedings might have

been instituted earlier, well within the period of limitation, in respect

of the same debt. However, it would be a different matter, if the

applicant had approached the Adjudicating Authority after obtaining a

final order and/or decree in the recovery proceedings, if the decree

remained unsatisfied. This Court held that a decree and/or final

adjudication would give rise to a fresh period of limitation for initiation

of the Corporate Insolvency Resolution Process.

96. In Dena Bank (Now Bank of Baroda) v. C. Shivakumar

Reddy and Another

, this Court held:-

“138. While it is true that default in payment of a debt triggers

the right to initiate the corporate resolution process, and a petition

under Section 7 or 9 IBC is required to be filed within the period of

limitation prescribed by law, which in this case would be three

24. (1999) SCC Online Pat 1196

25 (2021) 10 SCC 330

years from the date of default by virtue of Section 238-A IBC read

with Article 137 of the Schedule to the Limitation Act, the delay in

filing a petition in the NCLT is condonable under Section 5 of the

Limitation Act unlike delay in filing a suit. Furthermore, as

observed above Sections 14 and 18 of the Limitation Act are also

applicable to proceedings under the IBC.

139. Section 18 of the Limitation Act cannot also be construed

with pedantic rigidity in relation to proceedings under the IBC. This

Court sees no reason why an offer of one-time settlement of a live

claim, made within the period of limitation, should not also be

construed as an acknowledgment to attract Section 18 of the

Limitation Act. In Gaurav Hargovindbhai Dave [Gaurav

Hargovindbhai Dave v. Asset Reconstruction Co. (India) Ltd.,

(2019) 10 SCC 572 : (2020) 1 SCC (Civ) 1] cited by Mr

Shivshankar, this Court had no occasion to consider any proposal

for one-time settlement. Be that as it may, the balance sheets and

financial statements of the corporate debtor for 2016-2017, as

observed above, constitute acknowledgment of liability which

extended the limitation by three years, apart from the fact that a

certificate of recovery was issued in favour of the appellant Bank

in May 2017. The NCLT rightly admitted the application by its

order dated 21-3-2019 [Dena Bank v. Kavveri Telecom

Infrastructure Ltd., 2019 SCC OnLine NCLT 7881] .

140. To sum up, in our considered opinion an application under

Section 7 IBC would not be barred by limitation, on the ground

that it had been filed beyond a period of three years from the date

of declaration of the loan account of the corporate debtor as NPA,

if there were an acknowledgment of the debt by the corporate

debtor before expiry of the period of limitation of three years, in

which case the period of limitation would get extended by a

further period of three years.

142. There is no bar in law to the amendment of pleadings in an

application under Section 7 IBC, or to the filing of additional

documents, apart from those initially filed along with application

under Section 7 IBC in Form 1. In the absence of any express

provision which either prohibits or sets a time-limit for filing of

additional documents, it cannot be said that the adjudicating

authority committed any illegality or error in permitting the

appellant Bank to file additional documents. Needless however, to

mention that depending on the facts and circumstances of the

case, when there is inordinate delay, the adjudicating authority

might, at its discretion, decline the request of an applicant to file

additional pleadings and/or documents, and proceed to pass a

final order. In our considered view, the decision of the adjudicating

authority to entertain and/or to allow the request of the appellant

Bank for the filing of additional documents with supporting

pleadings, and to consider such documents and pleadings did not

call for interference in appeal.”

97. To sum up, in our considered opinion an application under

Section 7 of the IBC would not be barred by limitation, on the ground

that it had been filed beyond a period of three years from the date of

declaration of the loan account of the Corporate Debtor as NPA, if

there were an acknowledgement of the debt by the Corporate Debtor

before expiry of the period of limitation of three years, in which case

the period of limitation would get extended by a further period of

three years.

98. In this case, the amount of the Corporate Debtor was declared

NPA on 1st December 2008. By a letter dated 7th February, 2011,

written well within three years, the Corporate Debtor acknowledged its

liability and proposed a settlement. This was followed by several

requests of extension of time to make payment and revised

settlements. On 6th April, 2013, the Corporate Debtor sought

extension of time to pay Rs.239,88,27,673 outstanding as on 31st

March 2013. On 19th April, 2013, the Corporate Debtor made payment

of Rs.17,50,00,000/-. On 1st July, 2013, the Corporate Debtor

acknowledged its liability – this was after the Appellant Financial

Creditor revoked the settlement invoking the default clause. The

Corporate Debtor acknowledged its liabilities in its financial

statements from 2008-09 till 2016-17. The application under Section

7(2) of the IBC was filed on 3rd April 2018, well within the extended

period of limitation.

99. For the reasons discussed above, the impugned judgment and

order is unsustainable in law and facts. The appeals are, accordingly

allowed, and the impugned judgment and order of the NCLAT is set

aside.

...…………………………………,J.

[INDIRA BANERJEE]

...…………………………………,J

[J.K. MAHESHWARI]

NEW DELHI;

AUGUST 01, 2022

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