04 Aug 2121

The modification of pleadings in an application under Section 7 of the Insolvency and Bankruptcy Code, 2016, as well as the submission of additional documents other than those first submitted are not prohibited by law - Supreme Court of India

Case : Dena Bank (now Bank of Baroda) v. C. Shivakumar Reddy and Anr. Civil Appeal No.1650 of 2020

Court : Supreme Court of India

Bench : Justice Indira Banerjee and Justice V. Ramasubramanian

Decided on : 04 Aug 2121

The Relevant Statutes

Section 62, 7, 61, 7(3), 7(4), 7(5), 7(2), 8, 9, 10, 239(1)(c), 239(1)(d), 239(1)(e), 239(1)(f), 7(5)(a), 7(5)(b), 5(b), 12(1), 238, 12, 238A, 14, 23 of the Insolvency and Bankruptcy Code, 2016

Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016

Section 19 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, now known as the Recovery of Debts and Bankruptcy Act, 1993

Section 18, 19, 14 of the Limitation Act, 1963

Article 137 of the Limitation Act, 1963

Section 100 of the Civil Procedure Code, 1908

Section 2(20) of the Companies Act, 2013

Section 2(1)(n) of the Limited Liability Partnership Act, 2008

Brief Facts & Procedural History

1. The Appellant Bank had sanctioned Term Loan and Letter of Credit Cum Buyers' Credit in favour of the Corporate Debtor through a letter having a maximum amount of Rs.45.00 Crores.

2. The Term Loan was to be returned in 24 quarterly instalments of Rs.187.50 lakhs, beginning two years after disbursement, and the total Term Loan was to be repaid in eight years, including the one-year implementation period and the moratorium period.

3. The Corporate Debtor completed numerous papers in favour of the Appellant Bank, including Demand Promissory Notes, Letters of General Lien, and mortgaged its leasehold rights in its immovable property stated in the petition of appeal by depositing the Title of Deeds with the Appellant Bank.

4. The Corporate Debtor afterwards failed on its payments to the Appellant Bank. As a result, on December 31, 2013, the Corporate Loan Account was designated a Non-Performing Asset (NPA).

5. The Corporate Debtor wrote to the Appellant Bank, requesting that the Term Loan be restructured. The Appellant Bank refused to comply with the request.

6. The Appellant Bank served a legal notice on the Corporate Debtor and Respondent No. 2 demanding payment of Rs.52.12 crores that the Corporate Debtor was allegedly owed. The payment was not made by the Corporate Debtor.

7. The Appellant Bank applied with the Debt Recovery Tribunal (in short, DRT) in Bangalore for recovery of its outstanding dues of Rs.52,12,49,438.60 under Section 19 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, now known as the Recovery of Debts and Bankruptcy Act, 1993.

8. The Corporate Debtor responded to the notification by, among other things, requesting that the debt be restructured once more. Mr Dhruv Mehta, Senior Advocate, representing the Appellant Bank, argued that the Corporate Debtor has recognised its obligation to the Appellant Bank through the aforementioned letter.

9. While the DRT procedures were ongoing, the Corporate Debtor proposed a one-time settlement of the Term Loan Account in exchange for a payment of Rs.5.50 crores. The Appellant Bank, on the other hand, did not accept the proposition.

10. In the said O.A. No.16/2015, the Debt Recovery Tribunal in Bengaluru issued a final judgement and order/decree against the Corporate Debtor for the recovery of Rs.52,12,49,438.60 plus future interest at a rate of 16.55 per cent per annum from the date of applying the date of realisation.

11. The Debt Recovery Tribunal granted the Appellant Bank a Recovery Certificate No. 2060/2017 to collect Rs.52,12,49,438.60 from the Corporate Debtor. Following that, the Appellant Bank received a proposal from the Corporate Debtor for a One-Time Settlement to jointly settle the loan amount.

12. Mr Mehta, who represented the Appellant Bank, pointed out that the Corporate Debtor had recognised its obligation for the loan it had accepted from the Appellant Bank in its Annual Reports for the financial years 2016-2017 and 2017-2018.

13. The Appellant Bank issued a Demand Notice to the Corporate Debtor in Form-3 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, and the Appellant Bank filed the Petition CP(IB) No.244/BB/2018 before the Adjudicating Authority under Section 7 of the Insolvency and Bankruptcy Code, 2016 in Form-1 of the Annexure.

14. Three months later, the Department of Financial Services, Ministry of Finance, Government of India merged Vijaya Bank, Dena Bank, and Bank of Baroda by GSR No.2(e).

15. The Appellant Bank applied with the Adjudicating Authority, I.A. No.27/2019 in CP(IB) No.244/BB/2018, under Rule 11 of the National Company Law Tribunal Rules 2016, hereinafter referred to as the "NCLT Rules," read with Rule 4 of the 2016 Adjudicating Authority Rules, for permission to place on record additional documents, including the final judgement and order of the Appellant Bank.

16. The Corporate Debtor submitted a preliminary objection to the Appellant Bank's Petition filed under Section 7 of the Insolvency and Bankruptcy Code, 2016, claiming, among other things, that the Petition was prohibited by limitation.

17. The Adjudicating Authority granted the Appellant Bank's application, I.A. No. 27/2019, in CP (IB) No.244/BB/2018, and instructed the Appellant Bank to file an updated petition containing the documents mentioned in the Application, I.A. No. 27/2019. The Registry was instructed to allow the Appellant Bank's counsel to alter the Company Petition appropriately.

18. The Appellant Bank filed another application before the Adjudicating Authority under Rule 11 of the NCLT Rules, I.A. No.131 of 2019 in CP(IB) No.244/BB/2018, for permission to place on record additional documents, including the letter from the Corporate Debtor to the Appellant Bank proposing a One-Time Settlement, the Corporate Debtor's Annual Report for the years 2016-2017, and the Financial Statements of the Corporate Debtor. The Appellant Bank was granted permission to submit the papers in Registry by an order in I.A. No.131 of 2019.

19. The Adjudicating Authority accepted the Petition under Section 7 of the Insolvency and Bankruptcy Code, 2016, CP (IB) No.244/BB/2018, and appointed an Interim Resolution Professional by an order. The Adjudicating Authority reviewed the bar of limitation challenge submitted on behalf of the Corporate Debtor but rejected it (NCLT).

20. Under Section 61 of the Insolvency and Bankruptcy Code, 2016, Respondent No. 1 filed an appeal with the NCLAT. The Appellant Bank filed a written statement in support of the Adjudicating Authority's judgement, accepting the Appellant Bank's Petition under Section 7 of the Insolvency and Bankruptcy Code, 2016.

21. After hearing the Appellant Bank, Respondent No. 1, and the Corporate Debtor, the NCLAT reversed the Adjudicating Authority (NCLT) Bengaluru's order dated March 21, 2019, and dismissed the Appellant Bank's Petition filed under Section 7 of the Insolvency and Bankruptcy Code, 2016, holding that the application was barred by limitation.

22. The Appellant Bank is aggrieved by the NCLAT's ruling and the verdict may appeal to the Supreme Court of India.

The Issue(s) of the Case

Whether a judgment and final order dated 18th December 2019 passed by the National Company Law Appellate Tribunal valid?

The Observations of the Court

1. Honourable Supreme Court of India observed that The Insolvency and Bankruptcy Code, 2016 isn't just another debt-collection statute. It is also not a statute that merely specifies the procedures for a corporate body that is unable to pay its debts to be liquidated. It is essentially a statute that encourages the appointment of a Resolution Professional to help a corporate body that is unable to pay its debts get back on its feet.

2. Referring to the case of Swiss Ribbons Private Limited v. Union of India and Ors. (2019) 4 SCC 17 Unlike coercive recovery litigation, the Insolvency and Bankruptcy Code, 2016's Corporate Insolvency Resolution Process is not hostile to the Corporate Debtor's interests.

3. Honourable Supreme Court of India also observed that The Limitation Act of 1963 does not provide a time restriction for applying for the Insolvency and Bankruptcy Code, 2016 with the Adjudicating Authority (NCLT). Article 137 of the Schedule to the Limitation Act, 1963 governs an application for which there is no other term of limitation specified elsewhere in the Schedule. The period of limitation required for such an application is three years from the date of accrual of the right to apply, according to Article 137 of the Schedule to the Limitation Act, 1963.

4. Referring to the case of Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries Private Limited (2020) 15 SCC 1: 2020 SCC Online SC 647, There can be no disagreement that limitation is essentially a mixed question of law and facts, and that when a party seeks application of any particular provision for extension or enlargement of the period of limitation, the relevant facts must be pleaded and the necessary evidence must be presented.

5. Honourable Supreme Court of India also observed that There were new papers before the Adjudicating Authority (NCLT) in this matter, including a letter of offer for a one-time settlement of the Corporate Debtor's dues to the Financial Creditor in exchange for a payment of Rs.5.5 crores. Apart from the final decision and order in O.A. 16/2015 and the following Recovery Certificate No.2060/2017, which formed cause of action for initiation of proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016, the Appellant Bank has relied on financial statements up to March 31, 2018.

6. Honourable Supreme Court of India also observed that 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 starting a new period of limitation from the date on which the acknowledgement is signed, according to Section 18 of the Limitation Act, 1963. This recognition does not have to be followed by an express or implied agreement to pay. However, the acknowledgement must be given before the expiration of the applicable limitation period.

7. Referring to the case of Sesh Nath Singh and Anr. v. Baidyabati Sheoraphuli Cooperative Bank Ltd., 2021 SCC Online SC 244, The Supreme Court of India ruled that the Insolvency and Bankruptcy Code, 2016 does not exclude the application of Sections 14 and 18 of the Limitation Act, 1963 or any other provision of the Act. There's no reason to believe that Sections 14 or 18 of the Limitation Act, 1963 don't apply to Insolvency and Bankruptcy Code, 2016 proceedings brought under Sections 7 or 9.

8. Referring to the case of Laxmi Pat Surana v. Union Bank of India and Ors., 2021 SCC Online SC 267, The Supreme Court of India decided that there was no reason to limit the application of Section 18 of the Limitation Act, 1963 to Insolvency and Bankruptcy Code, 2016 proceedings.

9. Referring to the case of Reliance Asset Reconstruction Co. Ltd. v. Hotel Poonja International Pvt. Ltd. 2021 SCC Online SC 289, The Appellant had relied on two documents in the Paper Book, namely I the Corporate Debtor's Balance Sheet dated 16th August 2017 and (ii) a letter dated 23rd April 2019 issued by the Corporate Debtor, to argue that the proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016 were not barred by limitation because limitation would start running anew for three years from the respective dates of the documents.

10. Honourable Supreme Court of India observed that An Acknowledgement of Liability in Writing, signed by the party against whom such property or right is claimed, is required under Section 18 of the Limitation Act, 1963. Even if the writing containing the acknowledgement is undated, proof of when it was signed may be provided. The explanation clarifies that an acknowledgement may be adequate even if it is accompanied by a refusal to pay, deliver, perform, or enable enjoyment, or if it is accompanied by a claim to set off, or if it is addressed to someone who is not the rightful owner of the property or right. The term "signed" should be understood to imply "signed personally or by an authorised agent."

11. Honourable Supreme Court of India observed that on the 28th of March, 2014, Rs.111 lakhs were paid towards unpaid interest, and the offer of One Time Settlement was made three years later. In any event, NCLAT ignored the fact that on May 25, 2017, Appellant Bank was awarded a Certificate of Recovery. The Corporate Debtor failed to pay the Certificate of Recovery's dues. The Certificate of Recovery provides the Appellant Bank with a new cause of action to file a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016. The petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 was filed on March 28, 2014, which was less than three years ago.

12. Honourable Supreme Court of India observed that There's no reason why the principles shouldn't apply to an application filed under Section 7 of the Insolvency and Bankruptcy Code, 2016, which allows a financial creditor to apply with the Adjudicating Authority to start the Corporate Insolvency Resolution Process against a Corporate Debtor after a default. A final judgement and/or decision of any Court or Tribunal, or any Arbitral Award for payment of money, if not fulfilled, would fall within the purview of financial debt, enabling the creditor to start proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016, as stated previously in this judgement.

The Decision Held by the Court

Honourable Supreme Court of India held that in both law and fact, the contested judgement and decree are unsustainable. As a result, the appeal is allowed, and the NCLAT's contested decision and order are set aside.

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