Supreme Court Upholds Admission of Insolvency Application Based on Acknowledgment of Debt: Rajendra Narottamdas Sheth vs. Chandra Prakash Jain (2021)

Introduction

Date of the Judgment: 30 September 2021

Citation: (2021) INSC 668

Judges: L. Nageswara Rao, J., B. R. Gavai, J., B. V. Nagarathna, J.

Can a financial creditor’s application for initiating insolvency proceedings be rejected simply because it was filed by a power of attorney holder? What happens if the application is filed after the usual three-year limitation period? The Supreme Court of India recently addressed these critical questions in a case involving R.K. Infratel Ltd. The court clarified that a power of attorney holder can file such applications and that the limitation period can be extended if the corporate debtor acknowledges the debt. This judgment provides clarity on key aspects of the Insolvency and Bankruptcy Code, 2016.

The Supreme Court bench comprised Justices L. Nageswara Rao, B. R. Gavai, and B. V. Nagarathna. The majority opinion was authored by Justice L. Nageswara Rao.

Case Background

R.K. Infratel Ltd. (the Corporate Debtor) was in the business of setting up underground fiber networks and providing related services. Union Bank of India (the Financial Creditor) had sanctioned loans to the Corporate Debtor. While initial loans were repaid, subsequent loans were not, leading to the Corporate Debtor’s account being declared a non-performing asset (NPA) on 30 September 2014. The Financial Creditor initiated recovery proceedings before the Debt Recovery Tribunal and also filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (the Code) on 25 April 2019, seeking to initiate corporate insolvency resolution process against the Corporate Debtor. The Financial Creditor claimed an outstanding amount of Rs. 24.62 crore as of 31 March 2019. The Corporate Debtor argued that the application was time-barred and that the application filed by the power of attorney holder was not maintainable.

Timeline

Course of Proceedings

The National Company Law Tribunal (NCLT), Ahmedabad bench, admitted the application under Section 7 of the Code on 1 June 2020, holding that the application was not barred by limitation. The NCLT considered the debit balance confirmation letter dated 7 April 2016 and regular credit entries made after that date, as well as a letter dated 17 November 2018 from the Corporate Debtor acknowledging the outstanding amount. The NCLT also noted the Corporate Debtor’s admission of payment of Rs. 16.17 lakh during the financial year 2019-20. The National Company Law Appellate Tribunal (NCLAT) upheld the NCLT’s decision, finding no error in the order of the Adjudicating Authority.

Legal Framework

The case primarily revolves around Section 7 of the Insolvency and Bankruptcy Code, 2016, which deals with the initiation of the corporate insolvency resolution process by a financial creditor. Specifically, Section 7(2) states that the financial creditor shall make an application in the prescribed form and manner, accompanied by the required fee. Rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, specifies that the application should be in Form 1, signed by the “person authorized to act on behalf of the financial creditor”.

The Limitation Act, 1963, is also relevant, particularly Section 18, which deals with the effect of acknowledgment in writing. Section 18(1) states that if, before the expiration of the prescribed limitation period, an acknowledgment of liability is made in writing, a fresh period of limitation starts from the time of such acknowledgment.

Section 3(12) of the Code defines ‘default’ as non-payment of debt when it becomes due and payable.

Section 238A of the Code makes the provisions of the Limitation Act applicable to proceedings before the Adjudicating Authority.

Arguments

Appellants’ (Corporate Debtor) Submissions:

• The application under Section 7 of the Code was not maintainable as it was filed by a power of attorney holder, not an authorized person. The Appellants relied on the NCLAT judgment in Palogix Infrastructure Private Limited v. ICICI Bank Limited, which held that a power of attorney holder is not competent to file such an application.
• The application was barred by limitation. The date of default was 30 September 2014, and the application was filed on 25 April 2019, which is beyond the three-year limitation period. The debit balance confirmation letter dated 7 April 2016 was not sufficient to extend the limitation period.
• Payments made after the account was declared NPA could not extend the limitation period.
• The “cut back offer” could not be considered for the purpose of Section 19 of the Limitation Act.
• Section 18 of the Limitation Act was not applicable to the facts of the case.

Respondents’ (Financial Creditor) Submissions:

• The power of attorney executed in favor of Mr. Praveen Kumar Gupta authorized him to file the application under Section 7. The power of attorney was perused by both the NCLT and NCLAT, and they found it valid.
• The application was filed within the prescribed time. The debit balance confirmation letter, the “cut back arrangement,” and other documents demonstrated acknowledgment of debt, extending the limitation period.
• The Corporate Debtor’s acknowledgment of debt till 2019 made the application within the period of limitation under Section 18 of the Limitation Act.

The innovativeness of the argument by the Appellants was that they relied on the interpretation of the term “authorized person” by the NCLAT in Palogix Infrastructure Private Limited v. ICICI Bank Limited to contend that a power of attorney holder is not an authorized person.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether the application under Section 7 of the Code filed by a power of attorney holder is maintainable.
2. Whether the application was barred by limitation.

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:

• Palogix Infrastructure Private Limited v. ICICI Bank Limited [2017 SCC Online NCLAT 266] – National Company Law Appellate Tribunal: The court approved the view taken by the NCLAT in this case, which held that a general authorization given to an officer of the financial creditor by means of a power of attorney, would not disentitle such officer to act as the authorized representative of the financial creditor while filing an application under Section 7 of the Code.
• Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries Private Limited & Anr. [(2020) 15 SCC 1] – Supreme Court of India: The court distinguished this case, stating that in the present case, there was sufficient material to justify the extension of the limitation period, unlike in the cited case.
• Dena Bank v. C. Shivkumar Reddy & Anr. [2021 SCC Online SC 543] – Supreme Court of India: The court referred to this case to state that there is no bar for filing of documents as required under Section 7, until a final order either admitting or dismissing the application has been passed.
• Asset Reconstruction Company (India) Limited v. Bishal Jaiswal & Anr. [(2021) 6 SCC 366] – Supreme Court of India: The court referred to this case to state that non-furnishing of information by the financial creditor at the time of filing an application under Section 7 of the Code need not necessarily entail in dismissal of the application.
• Noharlal Verma v. District Cooperative Central Bank Limited, Jagdalpur [(2008) 14 SCC 445] – Supreme Court of India: The court referred to this case to state that the Adjudicating Authority is duty-bound to scrutinize the application filed under Section 7 of the Code and come to a conclusion on whether such application is barred by limitation.
• B.K. Educational Services Private Limited v. Parag Gupta and Associates [(2019) 11 SCC 633] – Supreme Court of India: The court referred to this case to state that an application under Section 7 of the Code is maintainable only with respect to debts that are not time-barred.

Legal Provisions Considered by the Court:

• Section 7 of the Insolvency and Bankruptcy Code, 2016: Deals with initiation of corporate insolvency resolution process by a financial creditor.
• Section 18 of the Limitation Act, 1963: Deals with the effect of acknowledgment in writing on the limitation period.
• Section 3(12) of the Insolvency and Bankruptcy Code, 2016: Defines ‘default’.
• Section 238A of the Insolvency and Bankruptcy Code, 2016: Makes the provisions of the Limitation Act applicable to proceedings before the Adjudicating Authority.
• Rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016: Specifies the procedure for filing an application under Section 7.

Authority Table

Judgment

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the acknowledgment of debt by the Corporate Debtor. The Court emphasized that the Corporate Debtor’s letter dated 17 November 2018, which detailed the amount repaid and acknowledged the outstanding amount, was crucial in extending the limitation period. The Court also noted that the Corporate Debtor had executed various documents amounting to acknowledgment of the debt even in the financial year 2019-20. This acknowledgment triggered Section 18 of the Limitation Act, allowing the application to be considered within the extended period.

The Court also considered the fact that the application was filed by an authorized person, as the power of attorney granted to Mr. Praveen Kumar Gupta was comprehensive enough to cover the filing of such applications. Additionally, the Court noted that the Adjudicating Authority is not barred from examining the material placed on record by the corporate debtor to determine if the application is within the period of limitation.

The Court rejected the argument that the financial creditor needed to specifically plead Section 18 of the Limitation Act in the application, stating that the Adjudicating Authority can consider the material on record to determine if the application is within limitation.

The Court observed:

“There can be no doubt that it is the responsibility of the financial creditor to give all particulars relating to the debt due and the date of default, along with the requisite documents, at the time of filing of an application under Section 7 of the Code.”

“In case the application under Section 7 is filed beyond the period of three years from the date of default and the financial creditor furnishes the required information relating to the acknowledgement of debt, in writing by the corporate debtor, before the Adjudicating Authority, with such acknowledgement having taken place within the initial period of three years from the date of default, a fresh period of limitation commences and the application can be entertained, if filed within this extended period.”

“Undoubtedly, there is sufficient material in the present case to justify enlargement of the extension period in accordance with Section 18 of the Limitation Act and such material has also been considered by the Adjudicating Authority before admitting the application under Section 7 of the Code.”

Key Takeaways

✓ A power of attorney holder can file an application under Section 7 of the Insolvency and Bankruptcy Code, 2016, if the power of attorney is comprehensive enough to authorize such action.

✓ The limitation period for filing an application under Section 7 can be extended if the corporate debtor acknowledges the debt in writing before the expiration of the initial limitation period.

✓ The Adjudicating Authority is not barred from examining the material placed on record by the corporate debtor to determine if the application is within the period of limitation.

✓ Financial creditors should ensure that all necessary documents and information, including any acknowledgment of debt, are provided at the time of filing the application.

Directions

No specific directions were given by the Supreme Court in this judgment.

Development of Law

The ratio decidendi of this case is that a power of attorney holder can file an application under Section 7 of the Insolvency and Bankruptcy Code, 2016, if the power of attorney is comprehensive enough to authorize such action, and the limitation period for filing such an application can be extended if the corporate debtor acknowledges the debt in writing before the expiration of the initial limitation period. This judgment clarifies the interpretation of Section 7 of the Code and Section 18 of the Limitation Act, providing guidance on the maintainability and limitation aspects of insolvency applications. There is no change in the previous position of law, but the judgment clarifies the procedure and interpretation of the law.

Conclusion

The Supreme Court dismissed the appeal, upholding the decisions of the NCLT and NCLAT. The Court clarified that a power of attorney holder can file an application under Section 7 of the Insolvency and Bankruptcy Code, 2016, and that the limitation period can be extended if the corporate debtor acknowledges the debt in writing. This judgment provides clarity on key aspects of the insolvency process and emphasizes the importance of acknowledging debts.