Supreme Court Clarifies Limitation for IBC Applications: Dena Bank vs. C. Shivakumar Reddy (2021)

Introduction

Date of the Judgment: 4th August 2021

Citation: 2021 INSC 428

Judges: Indira Banerjee, J. and V. Ramasubramanian, J.

Can a financial creditor initiate insolvency proceedings under the Insolvency and Bankruptcy Code (IBC) after three years from the date a loan account is declared a Non-Performing Asset (NPA)? The Supreme Court addressed this crucial question in a recent judgment, clarifying the interplay between the IBC and the Limitation Act, particularly concerning the acknowledgment of debt. This case revolves around Dena Bank’s (now Bank of Baroda) attempt to recover dues from a corporate debtor, and whether their application was within the prescribed time limits. The judgment was delivered by a two-judge bench comprising Justice Indira Banerjee and Justice V. Ramasubramanian, with the opinion authored by Justice Banerjee.

Case Background

The case originated from a loan of ₹45 crores sanctioned by Dena Bank to the Corporate Debtor on December 23, 2011. This loan was to be repaid in 24 quarterly installments, commencing two years after disbursement, with full repayment expected within eight years. The Corporate Debtor executed various documents, including promissory notes and letters of lien, and mortgaged its leasehold rights by depositing title deeds with the bank.

The Corporate Debtor defaulted on its repayment obligations on September 20, 2013, leading to the loan account being declared an NPA on December 31, 2013. The Corporate Debtor requested a loan restructuring on March 24, 2014, which the bank denied. The bank then issued a legal notice on December 22, 2014, demanding ₹52.12 crores. Subsequently, the bank filed an application before the Debt Recovery Tribunal (DRT) on January 1, 2015, for recovery of its dues.

Despite these actions, the Corporate Debtor continued to engage with the bank, proposing a one-time settlement (OTS) on March 3, 2017, for ₹5.50 crores, which was not accepted. The DRT ruled in favor of the bank on March 27, 2017, ordering recovery of ₹52.12 crores with interest. A recovery certificate was issued on May 25, 2017. The Corporate Debtor again proposed an OTS on June 19, 2017. Dena Bank then filed an application under Section 7 of the IBC on October 12, 2018.

Timeline

Course of Proceedings

Initially, the Adjudicating Authority/National Company Law Tribunal (NCLT) admitted the Appellant Bank’s petition under Section 7 of the IBC on March 21, 2019, rejecting the Corporate Debtor’s objection regarding limitation. However, on appeal, the National Company Law Appellate Tribunal (NCLAT) set aside the NCLT order on December 18, 2019, holding that the application was barred by limitation. The NCLAT concluded that there was no evidence on record to suggest that the Corporate Debtor had acknowledged its debt within three years of the NPA declaration.

The NCLAT’s decision was based on the premise that the petition was filed more than three years after the loan account was declared an NPA. The NCLAT also held that the application moved by the Corporate Debtor to restructure the debt or payment of interest does not amount to acknowledgment of debt. The NCLAT further stated that the Balance Sheet of the ‘Corporate Debtor’ for the year 2016-2017 filed after 31st March 2017 cannot be termed to be a document of acknowledgment in terms of Section 18 of the Limitation Act.

Legal Framework

The primary legal framework for this case is the Insolvency and Bankruptcy Code, 2016 (IBC). Section 7 of the IBC allows a financial creditor to initiate the Corporate Insolvency Resolution Process (CIRP) against a corporate debtor if a default has occurred. A default is defined under Section 3(12) of the IBC as the non-payment of debt when it has become due and payable. According to Section 238A of the IBC, the provisions of the Limitation Act, 1963, apply to proceedings under the IBC.

Article 137 of the Limitation Act prescribes a three-year limitation period for applications where no specific period is provided. Section 18 of the Limitation Act states that if, before the expiration of the prescribed period for a suit or application, an acknowledgment of liability is made in writing and signed by the party against whom the right is claimed, a fresh period of limitation shall be computed from the time when the acknowledgment was signed.

The Supreme Court also considered the interplay between the IBC and the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (now known as the Recovery of Debts and Bankruptcy Act, 1993). The court examined whether a final judgment and decree from the Debt Recovery Tribunal (DRT) or the issuance of a Recovery Certificate could trigger a fresh cause of action for initiating proceedings under Section 7 of the IBC.

Arguments

Appellant (Dena Bank/Bank of Baroda) Arguments:

• The Appellant argued that the NCLAT erred in dismissing their application under Section 7 of the IBC as time-barred.
• The Corporate Debtor had acknowledged its liability through various actions, including:
  • Payment of ₹111 lakhs towards interest on March 28, 2014.
  • A letter dated January 5, 2015, acknowledging liability in response to the bank’s demand notice.
  • A statement of objection filed in the DRT, admitting that part of the amount was due.
  • Financial statements and balance sheets for 2016-2017 and 2017-2018.
  • An offer for a one-time settlement (OTS) on March 3, 2017.
  • A final judgment and decree by the DRT on March 27, 2017, and a Recovery Certificate issued on May 25, 2017.
• The Appellant contended that these acknowledgments extended the limitation period under Section 18 of the Limitation Act, and the petition was filed within three years of these acknowledgments.
• The Appellant also argued that the DRT judgment and the Recovery Certificate created a fresh cause of action for initiating proceedings under Section 7 of the IBC.
• The Appellant relied on the judgments in Sesh Nath Singh and Anr. v. Baidyabati Sheoraphuli Cooperative Bank Ltd. And Anr.[2021 SCC Online SC 244], Laxmi Pat Surana v. Union Bank of India and Ors.[2021 SCC Online SC 267] and Asset Reconstruction Company (India) Limited. v. Bishal Jaiswal and Ors.[2021 SCC Online SC 321] to support the applicability of Section 18 of the Limitation Act to IBC proceedings.

Respondent (C. Shivakumar Reddy and Corporate Debtor) Arguments:

• The Respondents argued that the NCLAT’s factual finding that there was no acknowledgment of debt should not be interfered with.
• The Respondents contended that the application under Section 7 of the IBC was filed five years after the date of default and was thus barred by limitation under Article 137 of the Limitation Act.
• They argued that the documents relied upon by the Appellant were introduced at a belated stage, contrary to the provisions of the IBC.
• The Respondents argued that the application for restructuring the debt or payment of interest does not amount to acknowledgement of debt.
• The Respondents relied on the judgment in Gaurav Hargovindbhai Dave v. Asset Reconstruction Company (India) Ltd. and Anr.[2019 SCC Online SC 1239: (2019) 10 SCC 572] to argue that a proposal for One Time Settlement cannot be construed as an acknowledgment of debt.
• The Respondents argued that the letter dated 24th March 2014 written by the Corporate Debtor was not on record in the proceedings before the Adjudicating Authority and cannot be considered as part of the records.
• They cited Jignesh Shah and Anr. v. Union of India and Anr.[2019 SCC online SC 1254: (2019) 10 SCC 750] to assert that a suit for recovery does not impact the limitation for a winding-up proceeding.
• The Respondents also relied on Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries Private Limited[ (2020) 15 SCC 1: 2020 SCC Online SC 647], arguing that the foundation for a plea of extension of limitation should be in the pleadings and cannot be developed later.
• They argued that communications from the Respondents were only to buy peace and end the litigation and cannot, therefore, be construed as acknowledgment of debts for the purpose of Section 18 of the Limitation Act.

Submissions of Parties

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether the NCLAT erred in concluding that the petition filed by the Appellant Bank under Section 7 of the IBC was barred by limitation.
2. Whether a petition under Section 7 of the IBC would be barred by limitation solely because it was filed beyond three years from the date of declaration of the loan account as NPA, even if the Corporate Debtor acknowledged its liability within three years before filing the petition.
3. Whether a final judgment and decree of the DRT or the issuance of a Recovery Certificate would give rise to a fresh cause of action for initiating proceedings under Section 7 of the IBC.
4. Whether there is a bar to amending pleadings or filing additional documents in a petition under Section 7 of the IBC.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

Cases Relied Upon by the Court:

• Sesh Nath Singh and Anr. v. Baidyabati Sheoraphuli Cooperative Bank Ltd. And Anr. [2021 SCC Online SC 244] – Supreme Court of India: Applied Section 18 of the Limitation Act to IBC proceedings.
• Laxmi Pat Surana v. Union Bank of India and Ors. [2021 SCC Online SC 267] – Supreme Court of India: Held that Section 18 of the Limitation Act applies to IBC proceedings.
• Asset Reconstruction Company (India) Limited. v. Bishal Jaiswal and Ors. [2021 SCC Online SC 321] – Supreme Court of India: Reiterated the applicability of Section 18 of the Limitation Act to IBC proceedings.
• Khan Bahadur Shapoor Fredoom Mazda v. Durga Prasad Chamaria and Others [AIR 1961 SC 1236] – Supreme Court of India: Explained the nature of acknowledgment under the Limitation Act.
• Bengal Silk Mills Co. v. Ismail Golam Hossain Ariff [AIR 1962 Cal 115] – Calcutta High Court: Held that entries in a balance sheet can constitute acknowledgment of debt.
• Re Pandem Tea Co. Ltd. [AIR 1974 Cal 170] – Calcutta High Court: Held that balance sheets and directors’ reports should be read together to determine acknowledgment.
• South Asia Industries (P) Ltd. v. General Krishna Shamsher Jung Bahadur Rana [ILR (1972) 2 Del 712] – Delhi High Court: Held that balance sheets can serve as acknowledgment of liability.
• Hegde Golay Ltd. v. State Bank of India [ILR 1987 Kar 2673] – Karnataka High Court: Held that acknowledgment in a balance sheet provides a fresh starting point of limitation.
• Ferro Alloys Corporation Limited v. Rajhans Steel Limited [(1999) SCC Online Pat 1196] – Patna High Court: Held that a decree gives a fresh cause of action for winding-up proceedings.
• Innoventive Industries Ltd vs. ICICI Bank [(2018) 1 SCC 407] – Supreme Court of India: Discussed the objectives of the IBC.
• P. Mohanraj & Ors. v. Shah Brothers Ispat Private Limited [2021 SCC Online SC 152] – Supreme Court of India: Explained the moratorium under Section 14 of the IBC.
• Swiss Ribbons Private Limited & Anr. v. Union of India and Ors. [(2019) 4 SCC 17] – Supreme Court of India: Highlighted that IBC is not merely a recovery legislation but also for revival of corporate debtors.
• Arcelormittal (India) Pvt. Ltd. V. Satish Kumar Gupta and Anr. [(2019) 2 SCC 152] – Supreme Court of India: Discussed the time limits under the IBC.
• Popatlal Shah v. State of Madras [AIR 1953 SC 274] – Supreme Court of India: Discussed the principles of statutory interpretation.
• Gaurav Hargovindbhai Dave v. Asset Reconstruction Company (India) Ltd. and Anr. [2019 SCC Online SC 1239: (2019) 10 SCC 572] – Supreme Court of India: Held that the limitation period under IBC is three years.
• B. K. Educational Services Private Limited v. Parag Gupta and Associates [(2019) 11 SCC 633] – Supreme Court of India: Held that the right to sue accrues when a default occurs.
• Jignesh Shah v. Union of India [(2019 SCC online SC 1254: (2019) 10 SCC 750] – Supreme Court of India: Reaffirmed that the limitation period is three years from the date of default.
• Vashdeo R. Bhojwani v. Abhyudaya Co-operative Bank Ltd. & Ors. [(2019) 9 SCC 158] – Supreme Court of India: Rejected the contention that default is a continuing wrong.
• Balkrishna Savalram Pujari Waghmare v. Shree Dhyaneshwar Maharaj Sansthan [1959 Supp (2) SCR 476] – Supreme Court of India: Explained the concept of a continuing wrong.
• Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries Private Limited [ (2020) 15 SCC 1: 2020 SCC Online SC 647] – Supreme Court of India: Discussed the importance of pleading facts for extension of limitation.
• Reliance Asset Reconstruction Co. Ltd. v. Hotel Poonja International Pvt. Ltd. [2021 SCC Online SC 289] – Supreme Court of India: Discussed the requirements for acknowledgment of liability.

Legal Provisions Considered by the Court:

• Section 3(12) of the Insolvency and Bankruptcy Code, 2016 (IBC): Defines “default.”
• Section 7 of the IBC: Allows a financial creditor to initiate CIRP.
• Section 18 of the Limitation Act, 1963: Deals with the effect of acknowledgment in writing.
• Section 238A of the IBC: Makes the Limitation Act applicable to IBC proceedings.
• Article 137 of the Limitation Act, 1963: Prescribes a three-year limitation period for applications.
• Section 19 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993: Deals with the procedure for recovery of debts by banks and financial institutions.

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Sesh Nath Singh and Anr. v. Baidyabati Sheoraphuli Cooperative Bank Ltd. And Anr.[2021 SCC Online SC 244]*: Followed. The Court reiterated that the IBC does not exclude the application of Section 18 of the Limitation Act.
• Laxmi Pat Surana v. Union Bank of India and Ors.[2021 SCC Online SC 267]*: Followed. The Court reaffirmed that there was no reason to exclude the effect of Section 18 of the Limitation Act to proceedings initiated under the IBC.
• Asset Reconstruction Company (India) Limited. v. Bishal Jaiswal and Ors.[2021 SCC Online SC 321]*: Followed. The Court held that the question of applicability of Section 18 of the Limitation Act to proceedings under the IBC was no longer res integra.
• Khan Bahadur Shapoor Fredoom Mazda v. Durga Prasad Chamaria and Others[AIR 1961 SC 1236]*: Followed. The Court used this case to explain the nature of acknowledgment under the Limitation Act.
• Bengal Silk Mills Co. v. Ismail Golam Hossain Ariff[AIR 1962 Cal 115]*: Followed. The Court used this case to support the position that entries in books of accounts and balance sheets can amount to an acknowledgment under Section 18 of the Limitation Act.
• Re Pandem Tea Co. Ltd.[AIR 1974 Cal 170]*: Followed. The Court used this case to support the position that balance sheets and directors’ reports should be read together to determine acknowledgment.
• South Asia Industries (P) Ltd. v. General Krishna Shamsher Jung Bahadur Rana[ILR (1972) 2 Del 712]*: Followed. The Court used this case to support the position that balance sheets can serve as acknowledgment of liability.
• Hegde Golay Ltd. v. State Bank of India[ILR 1987 Kar 2673]*: Followed. The Court used this case to support the position that acknowledgment in a balance sheet provides a fresh starting point of limitation.
• Ferro Alloys Corporation Limited v. Rajhans Steel Limited[(1999) SCC Online Pat 1196]*: Followed. The Court used this case to support the position that a decree gives a fresh cause of action for winding-up proceedings.
• Innoventive Industries Ltd vs. ICICI Bank[(2018) 1 SCC 407]*: Referred. The Court referred to this case to discuss the objectives of the IBC.
• P. Mohanraj & Ors. v. Shah Brothers Ispat Private Limited[2021 SCC Online SC 152]*: Referred. The Court referred to this case to explain the moratorium under Section 14 of the IBC.
• Swiss Ribbons Private Limited & Anr. v. Union of India and Ors.[(2019) 4 SCC 17]*: Referred. The Court referred to this case to highlight that IBC is not merely a recovery legislation but also for revival of corporate debtors.
• Arcelormittal (India) Pvt. Ltd. V. Satish Kumar Gupta and Anr.[(2019) 2 SCC 152]*: Referred. The Court referred to this case to discuss the time limits under the IBC.
• Popatlal Shah v. State of Madras[AIR 1953 SC 274]*: Referred. The Court referred to this case to discuss the principles of statutory interpretation.
• Gaurav Hargovindbhai Dave v. Asset Reconstruction Company (India) Ltd. and Anr.[2019 SCC Online SC 1239: (2019) 10 SCC 572]*: Distinguished. The Court distinguished this case, stating that the court had no occasion to consider any proposal for one time settlement.
• B. K. Educational Services Private Limited v. Parag Gupta and Associates[(2019) 11 SCC 633]*: Referred. The Court referred to this case to support the position that the right to sue accrues when a default occurs.
• Jignesh Shah v. Union of India[(2019 SCC online SC 1254: (2019) 10 SCC 750]*: Referred. The Court referred to this case to reaffirm that the limitation period is three years from the date of default.
• Vashdeo R. Bhojwani v. Abhyudaya Co-operative Bank Ltd. & Ors.[(2019) 9 SCC 158]*: Referred. The Court referred to this case to support the position that default is not a continuing wrong.
• Balkrishna Savalram Pujari Waghmare v. Shree Dhyaneshwar Maharaj Sansthan[1959 Supp (2) SCR 476]*: Referred. The Court referred to this case to explain the concept of a continuing wrong.
• Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries Private Limited[(2020) 15 SCC 1: 2020 SCC Online SC 647]*: Distinguished. The Court distinguished this case, stating that the judgement was rendered in the facts of the case and is not an authority for the proposition that there can be no amendment of pleadings at the fag end of the NCLT proceeding.
• Reliance Asset Reconstruction Co. Ltd. v. Hotel Poonja International Pvt. Ltd.[2021 SCC Online SC 289]*: DistinguishedThe Court distinguished this case, stating that it was rendered on its own facts and did not hold that a proposal for One Time Settlement could not constitute an acknowledgment of debt.

Decision

Ratio Decidendi:

The Supreme Court held that the provisions of the Limitation Act, 1963, apply to proceedings under the IBC. The Court clarified that an acknowledgment of debt under Section 18 of the Limitation Act extends the limitation period for initiating proceedings under Section 7 of the IBC. The Court also held that a final judgment and decree of the DRT or the issuance of a Recovery Certificate provides a fresh cause of action for initiating proceedings under Section 7 of the IBC. The Court further clarified that there is no bar to amending pleadings or filing additional documents in a petition under Section 7 of the IBC.

Order:

The Supreme Court allowed the appeal, set aside the judgment of the NCLAT, and restored the order of the NCLT, which had admitted the Appellant’s petition under Section 7 of the IBC. The Court held that the application was not barred by limitation. The Court also directed the NCLT to proceed with the matter in accordance with the law.

Flowchart: Limitation for IBC Applications

Ratio of the Decision

Sentiment Analysis

The Supreme Court’s judgment in Dena Bank vs. C. Shivakumar Reddy is largely seen as a creditor-friendly ruling. The judgment clarifies the applicability of Section 18 of the Limitation Act to IBC proceedings, thereby providing relief to financial creditors who may have had their applications dismissed due to technicalities related to limitation. The court’s interpretation of acknowledgment of debt is also broad, encompassing not only explicit admissions but also actions such as OTS proposals and financial statements. This approach ensures that the IBC is not used as a tool to evade legitimate debts, and it promotes the objectives of the code, which include both recovery and resolution.

Conclusion

The Supreme Court’s judgment in Dena Bank vs. C. Shivakumar Reddy provides significant clarity on the issue of limitation under the IBC. The court’s emphasis on the applicability of Section 18 of the Limitation Act and the recognition of a fresh cause of action arising from DRT judgments and Recovery Certificates are crucial for the effective implementation of the IBC. This judgment will help creditors navigate the complexities of the IBC and ensure that legitimate claims are not defeated on technical grounds. The decision also reinforces the importance of acknowledgment of debt and promotes responsible financial behavior by corporate debtors. In essence, this judgment strengthens the IBC as an effective mechanism for debt recovery and resolution, balancing the interests of both creditors and debtors.