Supreme Court settles Limitation for IBC Section 7 Applications in Radha Exports Case (2020)

Date of the Judgment: 28 August 2020

Citation: (2020) INSC 678

Judges: Arun Mishra, J., Indira Banerjee, J.

Can a claim under the Insolvency and Bankruptcy Code, 2016, be admitted if it is already time-barred? The Supreme Court of India recently addressed this critical question in a case involving M/s Radha Exports. The court clarified that the limitation period applies to applications under Section 7 of the IBC, meaning that claims that are time-barred cannot be admitted. This judgment provides clarity on the interplay between the IBC and the Limitation Act, 1963.

The bench comprised Justices Arun Mishra and Indira Banerjee, with Justice Banerjee authoring the judgment.

Case Background

The case revolves around a loan of ₹2.20 crores given by K.P. Jayaram and another (Respondents) to M/s Radha Exports, a proprietorship of Mrs. Radha Gouri, between 2002 and 2004. The loan was unsecured and interest-free. M/s Radha Exports repaid ₹80,40,000 between October 1, 2003, and March 18, 2004. By March 31, 2004, the outstanding loan was ₹1,39,60,000.

In 2004, M/s Radha Exports was incorporated as M/s Radha Exports (India) Pvt. Ltd. (Appellant Company) and took over the proprietorship’s assets and liabilities. The Respondents requested that ₹90,00,000 of the outstanding loan be converted to share application money in the name of Respondent No. 2. This was confirmed by the Respondents in a letter dated January 11, 2011. After this adjustment, the remaining loan was ₹21,85,350.

The Appellant Company claims to have repaid ₹43,25,000 to the Respondents between July 27, 2004, and March 23, 2006, which included the remaining loan. The last payment was allegedly made on March 23, 2006. In 2007, Respondent No. 2 resigned from the board and requested that the share application money be transferred to Mr. M. Krishnan, a promoter of the Appellant Company, as a personal loan from Respondent No. 2 to Mr. Krishnan. The Appellant Company issued shares worth ₹90,00,000 to Mr. Krishnan in 2008.

In 2012, the Respondents sent a legal notice demanding ₹1,49,60,000, which the Appellant Company refuted. The Respondents then filed a winding-up petition in the High Court of Madras, which was later transferred to the National Company Law Tribunal (NCLT). After the winding-up petition was dismissed, the Respondents filed a petition under Section 9 of the IBC as operational creditors, which was also withdrawn with liberty to file a fresh petition. Finally, the Respondents filed a petition under Section 7 of the IBC as financial creditors, claiming a principal amount of ₹2.10 crores along with interest, which was dismissed by the NCLT but allowed by the National Company Law Appellate Tribunal (NCLAT). The Appellant Company then appealed to the Supreme Court.

Timeline:

Course of Proceedings

Initially, the Respondents filed a winding-up petition in the High Court of Madras under Sections 433(e) & (f) and 434 of the Companies Act, 1956, which was later transferred to the Chennai Bench of the NCLT and re-numbered as TCP/301/(IB)/2017. The NCLT dismissed this petition on August 4, 2017, due to non-compliance with Section 7(3)(b) of the IBC, but granted the liberty to file a fresh petition.

Subsequently, the Respondents filed a petition under Section 9 of the IBC as operational creditors, claiming ₹2.10 crores as principal and ₹2,31,60,000 as interest. This petition was dismissed as withdrawn by a Single Bench of NCLT on April 12, 2018, with liberty to file a fresh petition. On April 25, 2018, the Respondents filed a fresh petition under Section 7 of the IBC as financial creditors, claiming ₹2.10 crores as principal and ₹4,41,60,000 as interest. The NCLT dismissed this petition on December 19, 2018, holding that the Respondents were not financial creditors and that the claim was barred by limitation. The NCLAT, however, allowed the appeal against the NCLT order on September 2, 2019, which led to the appeal before the Supreme Court.

Legal Framework

The judgment primarily deals with the interpretation of the Insolvency and Bankruptcy Code, 2016 (IBC), and its interaction with the Limitation Act, 1963. Key provisions include:

• Section 3(6) of the IBC: Defines “claim” as “a right to payment, even if it is disputed.”
• Section 3(11) of the IBC: Defines “debt” as “a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt.”
• Section 3(12) of the IBC: Defines “default” as “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.”
• Section 5(7) of the IBC: Defines “financial creditor” as “any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to.”
• Section 5(8) of the IBC: Defines “financial debt” as “a debt along with interest, if any, which is disbursed against the consideration for the time value of money.”
• Section 7 of the IBC: Deals with the initiation of the corporate insolvency resolution process by a financial creditor.
• Article 137 of the Limitation Act, 1963: Provides a limitation period of three years for applications where no specific period is provided.

The Court also referred to clauses (19) to (21) of Part II of the Schedule of the Limitation Act 1963, which specify a three-year limitation period for the recovery of money lent, starting from the date the loan is paid.

Arguments

Appellant’s Submissions:

• The Appellant Company argued that the Respondents were not financial creditors under Section 5(7) of the IBC.
• They contended that the loan amount had been fully repaid by March 2006, and no further liability existed.
• The Appellant Company submitted that the claim was barred by limitation, as the last payment was made in 2006, and the application under Section 7 of the IBC was filed in 2018.
• They argued that the share application money of ₹90,00,000 was transferred to Mr. M. Krishnan at the request of the Respondent No. 2 and was to be treated as a personal loan from the Respondent No. 2 to Mr. Krishnan, which cannot trigger the Corporate Resolution Process under the IBC.
• They relied on letters from the Respondents to the Income Tax Department, which acknowledged the loan amount and the share transfer.

Respondents’ Submissions:

• The Respondents claimed that they were financial creditors, as they had disbursed money to M/s Radha Exports, which was later taken over by the Appellant Company.
• They argued that the outstanding debt was ₹1,49,60,000 as of July 19, 2004.
• The Respondents disputed the payments made by the Appellant Company and claimed that certain payments were not towards the dues owed to them.
• They argued that the letters attributed to them were forged and that the signatures on the documents were forged.

[TABLE] of Submissions:

Innovativeness of the argument: The Appellant Company’s argument that the transfer of share application money to a third party at the request of the creditor should not be considered a debt was a novel point.

Issues Framed by the Supreme Court

The Supreme Court considered the following issues:

1. Whether the application under Section 7 of the IBC was maintainable.
2. Whether the claim of the Respondents was barred by limitation.
3. Whether the Respondents were financial creditors of the Appellant Company.

Treatment of the Issue by the Court

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

Authorities

The Court considered the following authorities:

Cases:

• Innoventive Industries Ltd. v. ICICI Bank and Anr. [(2018) 1 SCC 407] – The Supreme Court of India held that the insolvency resolution process begins when a default takes place, which is when a debt becomes due and is not paid. It also clarified that a ‘claim’ means a right to payment even if it is disputed.
• B.K. Educational Services Pvt. Ltd. v. Parag Gupta and Associates [(2019) 11 SCC 633] – The Supreme Court of India held that the Limitation Act applies to applications under Sections 7 and 9 of the IBC, and Article 137 of the Limitation Act gets attracted. The right to sue accrues when a default occurs, and if the default occurred over three years before filing the application, it would be barred by limitation.
• Vashdeo R. Bhojwani v. Abhyudaya Co-operative Bank Ltd. [(2019) 9 SCC 158] – The Supreme Court of India reiterated the applicability of the Limitation Act to IBC proceedings, relying on the judgment in B.K. Educational Services Pvt. Ltd.

Statutes:

• Insolvency and Bankruptcy Code, 2016 (IBC): The Court examined Sections 3(6), 3(11), 3(12), 5(7), 5(8), and 7 of the IBC.
• Limitation Act, 1963: The Court considered Article 137 and clauses (19) to (21) of Part II of the Schedule of the Limitation Act, 1963.

[TABLE] of Authorities:

Judgment

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

How each authority was viewed by the Court?

• The Court followed Innoventive Industries Ltd. v. ICICI Bank and Anr. [(2018) 1 SCC 407]* to explain the scheme of the IBC but clarified that it does not mean that a petition under Section 7 of the IBC has to be admitted, even if the claim is ex facie barred by limitation.
• The Court followed B.K. Educational Services Pvt. Ltd. v. Parag Gupta and Associates [(2019) 11 SCC 633]* to hold that the Limitation Act applies to applications under Sections 7 and 9 of the IBC.
• The Court relied on Vashdeo R. Bhojwani v. Abhyudaya Co-operative Bank Ltd. [(2019) 9 SCC 158]* to reiterate the applicability of the Limitation Act to IBC proceedings.

What weighed in the mind of the Court?

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

• Limitation: The Court emphasized that the Limitation Act applies to applications under Section 7 of the IBC. The Court noted that the last loan amount was advanced in 2004-2005 and that the debt was barred by limitation even in 2012 when winding up proceedings were initiated.
• Definition of Financial Debt: The Court clarified that a financial debt under Section 5(8) of the IBC must be disbursed against the consideration for the time value of money. The Court held that the payment received for shares, duly issued to a third party at the request of the payee, cannot be a debt, not to speak of financial debt.
• Evidence of Repayment: The Court took note of the payments made by the Appellant Company, as well as the letters from the Respondents to the Income Tax Department, which acknowledged the loan amount and the share transfer.

[TABLE] of Sentiment Analysis of Reasons:

Fact:Law Ratio Table:

The court’s reasoning was primarily based on the interpretation of the law, particularly the IBC and the Limitation Act, with factual aspects of the case playing a secondary role.

Logical Reasoning:

The Court considered alternative interpretations but rejected them based on the clear provisions of the IBC and the Limitation Act. The Court emphasized that the IBC is not intended to revive time-barred claims.

The Court’s decision was clear and accessible: the application under Section 7 of the IBC was not maintainable because the claim was barred by limitation and the Respondents were not financial creditors. The Court emphasized the importance of adhering to the limitation period and the definition of financial debt under the IBC.

Key reasons for the decision included:

• The claim was barred by limitation under the Limitation Act, 1963.
• The Respondents did not qualify as financial creditors under Section 5(7) of the IBC.
• The money was not disbursed against consideration for the time value of money.
• The share application money was not a debt.

The Court quoted the following from the judgment:

• “The scheme of the Code is to ensure that when a default takes place, in the sense that a debt becomes due and is not paid, the insolvency resolution process begins.”
• “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 payment received for shares, duly issued to a third party at the request of the payee as evident from official records, cannot be a debt, not to speak of financial debt.”

There was no dissenting opinion. The decision was unanimous.

The Court’s reasoning was based on a strict interpretation of the law and its application to the facts. The Court emphasized the importance of adhering to the limitation period and the definition of financial debt under the IBC. The Court also clarified that the IBC is not intended to revive time-barred claims.

The implications for future cases are significant. The judgment clarifies that the limitation period applies to applications under Section 7 of the IBC, and claims that are time-barred cannot be admitted. This will prevent the revival of old claims under the guise of insolvency proceedings. The judgment also provides a clear interpretation of the term “financial debt” under Section 5(8) of the IBC.

No new doctrines or legal principles were introduced. The Court reiterated the existing legal principles relating to limitation and financial debt under the IBC.

Key Takeaways

• The Limitation Act, 1963, applies to applications under Section 7 of the Insolvency and Bankruptcy Code, 2016.
• Claims that are time-barred cannot be admitted under Section 7 of the IBC.
• A “financial debt” under Section 5(8) of the IBC must be disbursed against the consideration for the time value of money.
• Payment received for shares, duly issued to a third party at the request of the payee, is not a debt.
• The IBC is not intended to revive time-barred claims.

The judgment will have a significant impact on insolvency proceedings, ensuring that only valid and legally enforceable claims are admitted. It will also prevent the misuse of the IBC to revive old, time-barred debts.

Directions

The Supreme Court set aside the judgment and order of the National Company Law Appellate Tribunal and restored the order of the National Company Law Tribunal, dismissing the application under Section 7 of the IBC.

Development of Law

The ratio decidendi of the case is that the Limitation Act, 1963, applies to applications under Section 7 of the Insolvency and Bankruptcy Code, 2016, and that claims that are time-barred cannot be admitted. This judgment clarifies the interplay between the IBC and the Limitation Act, reinforcing the principle that the IBC is not a mechanism to revive time-barred claims. The judgment also provides a clear interpretation of the term “financial debt” under Section 5(8) of the IBC, emphasizing that it must be disbursed against the consideration for the time value of money. This ruling has strengthened the legal framework surrounding insolvency proceedings in India, ensuring that only valid and legally enforceable claims are admitted.