Supreme Court Dismisses Insolvency Plea Citing Limitation: Reliance Asset Reconstruction vs. Hotel Poonja International (2021)

Date of the Judgment: January 21, 2021

Citation: (2021) INSC 21

Judges: Hon’ble Ms. Justice Indira Banerjee and Hon’ble Mr. Justice Sanjiv Khanna

Can a financial creditor initiate insolvency proceedings against a corporate debtor many years after the debt was declared a non-performing asset? The Supreme Court of India addressed this critical question in a recent case, clarifying the application of the Limitation Act to insolvency proceedings. This judgment underscores the importance of timely action by creditors seeking to recover their dues under the Insolvency and Bankruptcy Code (IBC), 2016. The two-judge bench, comprising Justice Indira Banerjee and Justice Sanjiv Khanna, delivered the unanimous judgment.

Case Background

The case involves M/s. Reliance Asset Reconstruction Company Ltd. (Appellant), a financial institution, and M/s. Hotel Poonja International Pvt. Ltd. (Respondent), a corporate debtor. The dispute arose from a loan granted by Vijaya Bank (Assignor Bank) to the Corporate Debtor. The Assignor Bank later assigned the debt to the Appellant.

On May 20, 1986, the Assignor Bank sanctioned a term loan of Rs. 40 Lakhs to the Corporate Debtor. The Corporate Debtor failed to repay the loan, and on April 1, 1993, the account was declared a Non-Performing Asset (NPA) by the Assignor Bank.

The Assignor Bank filed an Original Application before the Debt Recovery Tribunal (DRT) in 1998 to recover its dues. During the pendency of the application, the Corporate Debtor acknowledged the debt and entered into a settlement with the Assignor Bank on June 30, 2001. The DRT issued a Recovery Certificate on March 27, 2003. However, the Corporate Debtor failed to pay the settlement amount.

The Assignor Bank then initiated execution proceedings before the DRT. On May 3, 2011, the Assignor Bank assigned its dues to the Appellant. Consequently, the Appellant was substituted in place of the Assignor Bank in the DRT proceedings, and an amended Recovery Certificate was issued on December 13, 2012.

On July 27, 2018, the Appellant filed a petition before the National Company Law Tribunal (NCLT) under Section 7 of the IBC, seeking to initiate the Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor. The NCLT dismissed the petition, stating that the IBC could not be used for recovery of dues. The National Company Law Appellate Tribunal (NCLAT) upheld the NCLT’s decision, stating that the application was barred by limitation.

Timeline:

Course of Proceedings

The Appellant initially filed a petition under Section 7 of the IBC before the NCLT, Bengaluru, seeking to initiate CIRP against the Corporate Debtor. The NCLT dismissed the petition, holding that the IBC could not be invoked for the recovery of outstanding dues but only to initiate CIRP for just reasons. The NCLT noted that the loan was sanctioned in 1986, the account was declared NPA in 1993, and a recovery certificate was issued in 2003.

Aggrieved by the NCLT’s order, the Appellant filed an appeal before the NCLAT. The NCLAT also dismissed the appeal, holding that the application under Section 7 of the IBC was barred by limitation. The NCLAT clarified that the dismissal would not preclude the Appellant from pursuing other legal remedies.

Legal Framework

The primary legal provisions at play in this case are:

• Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC): This section allows a financial creditor to initiate the Corporate Insolvency Resolution Process (CIRP) against a corporate debtor who has defaulted on a financial debt.
• Article 137 of the Limitation Act, 1963: This article prescribes a limitation period of three years for any application for which no specific period of limitation is provided elsewhere in the Act. The Supreme Court has held that this article applies to applications under Sections 7 and 9 of the IBC.
• Section 18 of the Limitation Act, 1963: This section states that if, before the expiration of the prescribed period for a suit or application, an acknowledgment of liability has been made in writing, signed by the party against whom such right is claimed, a fresh period of limitation shall be computed from the time when the acknowledgment was signed.

The Supreme Court has consistently held that the Limitation Act applies to applications under the IBC. The right to sue accrues when a default occurs. If the default occurred more than three years before the application is filed, the application is barred by limitation.

Arguments

Appellant’s Submissions:

• The Appellant argued that the Corporate Debtor had acknowledged its debt through a settlement agreement on June 30, 2001, and by making payments.
• The Appellant contended that the amended Recovery Certificate issued on December 13, 2012, provided a fresh cause of action.
• The Appellant also argued that the balance sheet of the Corporate Debtor dated August 16, 2017, and a letter dated April 23, 2019, constituted acknowledgments of liability, extending the limitation period under Section 18 of the Limitation Act.

Respondent’s Submissions:

• The Respondent argued that the application under Section 7 of the IBC was barred by limitation, as the default occurred on April 1, 1993, when the account was declared NPA.
• The Respondent contended that the settlement agreement and the Recovery Certificate did not extend the limitation period for initiating proceedings under the IBC.
• The Respondent submitted that the balance sheet and the letter relied upon by the Appellant did not constitute valid acknowledgments of liability.

Issues Framed by the Supreme Court

The Supreme Court considered the following issue:

1. Whether the application filed by the Appellant under Section 7 of the IBC was barred by limitation.

Treatment of the Issue by the Court

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

Authorities

The Supreme Court relied on the following authorities:

On the applicability of the Limitation Act to IBC proceedings:

• B.K. Educational Services Private Limited v. Parag Gupta and Associates (2019) 11 SCC 633: The Supreme Court held that Article 137 of the Limitation Act applies to applications under Sections 7 and 9 of the IBC.
  
  Ratio: The right to sue accrues when a default occurs. If the default occurred more than three years before the application, it is barred by limitation.
• Gaurav Hargovindbhai Dave v. Asset Reconstruction Company (India) Ltd. And Ors. (2019) 10 SCC 572: The Court reiterated that the limitation period starts when the account is declared NPA.
  
  Ratio: The limitation period for applications under Section 7 begins to run when the account is declared a Non-Performing Asset (NPA).
• Radha Export (India) Private Limited v. K.P. Jayaram (2020) 10 SCC 538: The Court emphasized that the applicant must show that the debt is not barred by limitation.
  
  Ratio: The applicant must demonstrate that the debt is legally recoverable and not barred by limitation.

On the interpretation of Section 18 of the Limitation Act:

• Khan Bahadur Shapoor Freedom Mazda v. Durga Prasad Chamaria and Others AIR 1961 SC 1236: This case explains the requirements for a valid acknowledgment of liability under Section 18 of the Limitation Act.
  
  Ratio: An acknowledgment must relate to a present subsisting liability and must indicate the existence of a jural relationship between the parties.

On the concept of continuing wrong:

• Balakrishna Savalram Pujari Waghmare v. Shree Dhyaneshwar Maharaj Sansthan 1959 Supp (2) SCR 476: The Court clarified that a continuing wrong is an act that creates a continuing source of injury, not merely the continuing effects of a completed wrong.
  
  Ratio: Section 23 of the Limitation Act applies to continuing wrongs, not to the continuing effects of a completed wrong.

On the purpose of the IBC:

• Mobilox Innovations Private Limited v. Kirusa Software Private Limited (2018) 1 SCC 353: The Court held that the IBC is not intended to be a substitute for a recovery forum.
  
  Ratio: The IBC is not a recovery mechanism but a mechanism for corporate insolvency resolution.
• Transmission Corporation of Andhra Pradesh Limited v. Equipment Conductors and Cables Limited (2019) 12 SCC 697: The Court reiterated that the IBC is not a substitute for a recovery forum.
  
  Ratio: The IBC is not a substitute for a recovery forum and cannot be invoked when there is a genuine dispute.

Judgment

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

How each authority was viewed by the Court?

• The Court relied on B.K. Educational Services Private Limited v. Parag Gupta & Associates [CITATION](2019) 11 SCC 633* to reiterate that Article 137 of the Limitation Act applies to applications under Section 7 of the IBC.
• The Court followed Gaurav Hargovindbhai Dave v. Asset Reconstruction Company (India) Ltd. And Ors. [CITATION](2019) 10 SCC 572* to emphasize that the limitation period starts when the account is declared NPA.
• The Court referred to Radha Export (India) Private Limited v. K.P. Jayaram [CITATION](2020) 10 SCC 538* to highlight that the applicant must prove that the debt is not barred by limitation.
• The Court explained Khan Bahadur Shapoor Freedom Mazda v. Durga Prasad Chamaria and Others [CITATION]AIR 1961 SC 1236* to clarify the requirements for a valid acknowledgment of liability.
• The Court used Balakrishna Savalram Pujari Waghmare v. Shree Dhyaneshwar Maharaj Sansthan [CITATION]1959 Supp (2) SCR 476* to distinguish between a continuing wrong and the continuing effects of a completed wrong.
• The Court relied on Mobilox Innovations Private Limited v. Kirusa Software Private Limited [CITATION](2018) 1 SCC 353* and Transmission Corporation of Andhra Pradesh Limited v. Equipment Conductors and Cables Limited [CITATION](2019) 12 SCC 697* to reiterate that the IBC is not a substitute for a recovery forum.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following:

• The clear timeline of events, particularly the date of default (April 1, 1993) and the date of the application under Section 7 of the IBC (July 27, 2018), which was well beyond the three-year limitation period.
• The lack of valid acknowledgment of liability by the Corporate Debtor within the limitation period.
• The established legal principle that the IBC is not a substitute for a recovery forum.
• The need to adhere to the principles of limitation to ensure legal certainty and prevent endless litigation.

Sentiment Analysis of Reasons Given by the Supreme Court

Fact:Law Ratio

Logical Reasoning:

The Court rejected the Appellant’s argument that the settlement agreement, the amended Recovery Certificate, and the balance sheet/letter constituted valid acknowledgments of liability under Section 18 of the Limitation Act. The Court emphasized that the acknowledgment must be a clear admission of a present subsisting liability, which was not the case here.

The Court also rejected the argument that the default was a continuing wrong, relying on Balakrishna Savalram Pujari Waghmare v. Shree Dhyaneshwar Maharaj Sansthan [CITATION]1959 Supp (2) SCR 476*, which clarified that a continuing wrong is an act that creates a continuing source of injury, not merely the continuing effects of a completed wrong.

The Supreme Court reaffirmed that the IBC is not a substitute for a recovery forum, citing Mobilox Innovations Private Limited v. Kirusa Software Private Limited [CITATION](2018) 1 SCC 353* and Transmission Corporation of Andhra Pradesh Limited v. Equipment Conductors and Cables Limited [CITATION](2019) 12 SCC 697*. The Court emphasized that the IBC is primarily meant for corporate insolvency resolution, not for the recovery of debts.

The Court concluded that the application under Section 7 of the IBC was clearly barred by limitation and that the Appellant was not without remedy, as there were pending proceedings in the DRT.

“The right to sue 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.”

“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.”

“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.”

Key Takeaways

• Financial creditors must be vigilant about the limitation period when initiating proceedings under the IBC.
• A default is considered to have occurred when the account is declared NPA, and the limitation period starts from that date.
• Settlement agreements and recovery certificates do not automatically extend the limitation period for IBC proceedings.
• Any acknowledgment of debt must be clear, in writing, and signed by the debtor within the limitation period to extend the limitation.
• The IBC is not a substitute for a recovery forum, and creditors should not use it as a tool for debt recovery.
• The judgment reinforces the importance of adhering to the principles of limitation to ensure legal certainty and prevent endless litigation.

Directions

The Supreme Court did not give any specific directions in this case. The appeal was dismissed, and the order of the NCLAT was upheld.

Specific Amendments Analysis

There is no discussion of any specific amendment in this judgment.

Development of Law

The ratio decidendi of this case is that an application under Section 7 of the IBC is barred by limitation if it is filed more than three years after the date of default, which is when the account is declared NPA, and there is no valid acknowledgment of liability within the limitation period. This judgment reinforces the existing position of law by reiterating the applicability of the Limitation Act to IBC proceedings and clarifying the requirements for a valid acknowledgment of liability.

Conclusion

The Supreme Court dismissed the appeal filed by Reliance Asset Reconstruction Company, upholding the NCLAT’s decision that the application under Section 7 of the IBC was barred by limitation. The Court emphasized that the limitation period starts when the account is declared NPA, and the IBC cannot be used as a substitute for a recovery forum. This judgment reinforces the importance of timely action by creditors and adherence to the principles of limitation in insolvency proceedings.