Supreme Court Upholds IBC Application: Axis Bank vs. Naren Sheth (2023)

Date of the Judgment: September 12, 2023

Citation: 2023 INSC 820

Judges: Vikram Nath, J. and Ahsanuddin Amanullah, J.

Can a financial creditor initiate insolvency proceedings against a corporate debtor even if the initial debt claim is time-barred, provided the debtor has acknowledged the debt within the extended limitation period? The Supreme Court of India recently addressed this critical question in a case involving Axis Bank and a corporate debtor, clarifying the interplay between the Insolvency and Bankruptcy Code (IBC) and the Limitation Act. The Court examined whether repeated acknowledgments of debt, including through balance sheets and one-time settlement (OTS) proposals, could extend the limitation period for initiating insolvency proceedings. This judgment, authored by Justice Vikram Nath, with Justice Ahsanuddin Amanullah concurring, provides significant clarity on the application of limitation laws in IBC cases.

Case Background

The case revolves around a dispute between Axis Bank Limited (the appellant) and Shreem Corporation Limited (SCL), formerly known as Rajput Retail Ltd. (RRL), the corporate debtor, and State Bank of India (SBI), the financial creditor (Respondent No. 2). Axis Bank had a leave and license agreement with Universal Premises and Textiles Private Limited (Universal Premises) for premises in a building named Solaris “C”. Axis Bank provided a security deposit of Rs. 87,56,24,381 between June 23, 2007, and November 3, 2008. Universal Premises also created a simple mortgage in favor of Axis Bank for seven floors of the building on November 6, 2008.

On May 2, 2011, Universal Premises sold the land, including the building, to RRL, with the leave and license agreements with Axis Bank being protected under the sale deed. RRL obtained credit facilities from SBI, creating an equitable mortgage on June 29, 2011, on the land beneath Solaris “C”. In 2012, Universal Premises merged with RRL, which was then renamed SCL. Between June 2012 and October 17, 2013, Axis Bank issued notices for the refund of its security deposit. When the refund was not made, Axis Bank filed eight summary suits in the Bombay High Court between December 14, 2012, and December 24, 2013, for the refund of the security deposit with interest.

SBI declared SCL as a Non-Performing Asset (NPA) on June 28, 2013, with effect from March 31, 2013. The Bombay High Court granted conditional leave to defend to SCL in the summary suits on July 27, 2015, subject to the deposit of the security amount. Subsequently, the suits were decreed in favor of Axis Bank on December 2 and 15, 2015. According to Axis Bank, SCL was shown as an inactive company since 2016, with the last Annual General Meeting (AGM) on September 26, 2016. Axis Bank initiated recovery proceedings in the Bombay High Court, which were opposed by SBI. However, the High Court rejected SBI’s objections on March 18, 2019, and ordered a sale proclamation in favor of Axis Bank.

SBI filed a petition under Section 7 of the IBC against SCL on January 22, 2020, along with an application under Section 5 of the Limitation Act for condoning a delay of 1392 days. SBI later revised the delay to 662 days, based on the acknowledgment of debt in SCL’s balance sheet for the financial year ending March 31, 2015. The Adjudicating Authority condoned the delay and admitted the petition on September 22, 2021. Aggrieved by this order, Axis Bank filed an appeal before the National Company Law Appellate Tribunal (NCLAT), which was dismissed on January 4, 2022, leading to the present appeal before the Supreme Court.

Timeline:

Course of Proceedings

The Adjudicating Authority (NCLT) condoned the delay of 662 days in filing the Section 7 application by SBI, based on the acknowledgment of debt in the corporate debtor’s balance sheet for the financial year ending March 31, 2015. The NCLT admitted the application and appointed an Interim Resolution Professional (IRP). Axis Bank, aggrieved by this decision, appealed to the NCLAT, arguing that the application was time-barred. The NCLAT upheld the NCLT’s decision, stating that the delay was rightly condoned. This led to Axis Bank filing the present appeal before the Supreme Court.

Legal Framework

The Supreme Court considered the following legal provisions:

• Section 3(1) of the Limitation Act, 1963: This section states that any suit, appeal, or application made after the prescribed period of limitation shall be dismissed, even if limitation is not raised as a defense. The section reads as follows:

  “3. Bar of limitation.—(1) Subject to the provisions contained in sections 4 to 24 (inclusive), every suit instituted, appeal preferred, and application made after the prescribed period shall be dismissed, although limitation has not been set up as a defence.”

• Section 5 of the Limitation Act, 1963: This section allows for the extension of the prescribed limitation period if the appellant or applicant can demonstrate sufficient cause for not filing the appeal or application within the prescribed time. The section reads as follows:

  “5. Extension of prescribed period in certain cases.—Any appeal or any application, other than an application under any of the provisions of Order XXI of the Code of Civil Procedure, 1908 (5 of 1908), may be admitted after the prescribed period if the appellant or the applicant satisfies the court that he had sufficient cause for not preferring the appeal or making the application within such period. Explanation.—The fact that the appellant or the applicant was misled by any order, practice or judgment of the High Court in ascertaining or computing the prescribed period may be sufficient cause within the meaning of this section.”

• Section 18 of the Limitation Act, 1963: This section provides that if a party acknowledges a liability in writing before the expiration of the limitation period, a fresh period of limitation is computed from the time the acknowledgment was signed. The section reads as follows:

  “18. Effect of acknowledgment in writing.—(1) Where, before the expiration of the prescribed period for a suit or application in respect of any property or right, an acknowledgment of liability in respect of such property or right has been made in writing signed by the party against whom such property or right is claimed, or by any person through whom he derives his title or liability, a fresh period of limitation shall be computed from the time when the acknowledgment was so signed. (2) Where the writing containing the acknowledgment is undated, oral evidence may be given of the time when it was signed; but subject to the provisions of the Indian Evidence Act, 1872 (1 of 1872), oral evidence of its contents shall not be received. Explanation.—For the purposes of this section,— (a) an acknowledgment may be sufficient though it omits to specify the exact nature of the property or right, or avers that the time for payment, delivery, performance or enjoyment has not yet come or is accompanied by a refusal to pay, deliver, perform or permit to enjoy, or is coupled with a claim to set off, or is addressed to a person other than a person entitled to the property or right, (b) the word “signed” means signed either personally or by an agent duly authorised in this behalf, and (c) an application for the execution of a decree or order shall not be deemed to be an application in respect of any property or right.”

• Section 7 of the Insolvency and Bankruptcy Code, 2016: This section deals with the initiation of the corporate insolvency resolution process by a financial creditor.

The Court analyzed how these provisions interact, particularly focusing on whether acknowledgments of debt under Section 18 of the Limitation Act could extend the limitation period for initiating proceedings under Section 7 of the IBC.

Arguments

Arguments by the Appellant (Axis Bank):

• Axis Bank contended that SBI’s application under Section 7 of the IBC was time-barred. SBI had initially admitted a delay of 1392 days, calculated from the date SCL was declared an NPA on June 28, 2013. The limitation period, which is three years, would have expired on March 31, 2016.
• Axis Bank argued that SCL was an inactive company since 2016, with its last AGM on September 26, 2016, indicating a lack of activity and acknowledgment of debt.
• SBI later revised the delay to 662 days, relying on the acknowledgment of debt in SCL’s balance sheet for the financial year ending March 31, 2015. Axis Bank argued that even with this acknowledgment, the limitation period would have expired on March 31, 2018.
• Axis Bank pointed out that SBI had participated in proceedings before the Bombay High Court, objecting to Axis Bank’s recovery proceedings, and had failed. The Section 7 petition was filed much later on January 22, 2020.
• Before the NCLAT, SBI further relied on an OTS proposal dated February 16, 2019, which Axis Bank argued was beyond the limitation period and therefore of no assistance to SBI.
• Axis Bank objected to SBI filing additional documents before the Supreme Court, including two OTS proposals dated March 16, 2017, and January 1, 2018, which were not presented before the NCLT or NCLAT. Axis Bank argued that these documents should not be entertained as additional evidence in a Civil Appeal.
• Axis Bank argued that SBI had been improving its case from time to time, which is not permissible under law and amounted to an abuse of process.
• Axis Bank raised concerns about the veracity of the additional documents, stating that they were inconsistent, lacked unequivocal acknowledgment, did not mention the quantum of debt, and lacked proper company seals and board resolutions. They also argued that the OTS was never accepted by SBI.

Arguments by the Respondent (State Bank of India):

• SBI argued that the limitation period had not expired, and the Section 7 petition was well within time. SBI relied on the fact that SCL was declared an NPA on June 28, 2013.
• SBI highlighted that it had issued notices under Section 13(2) and 13(4) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) on July 2, 2013, and November 23, 2013, respectively.
• SBI filed an Original Application before the Debt Recovery Tribunal (DRT) on June 3, 2014.
• SBI emphasized that SCL acknowledged its liability in the balance sheet dated September 4, 2015, for the financial year ending March 31, 2015.
• SBI obtained an order under Section 14 of the SARFAESI Act on March 9, 2017.
• SBI presented three OTS proposals from SCL: March 16, 2017, January 1, 2018, and May 16, 2019, arguing that each proposal extended the limitation period.
• SBI stated that the mortgaged property was put on auction sale on December 12, 2019, and February 26, 2020, but no bids were received.
• SBI argued that it was a Secured Creditor/Financial Creditor with dues of more than Rs. 681 crores, while Axis Bank was an unsecured creditor with a liability of approximately Rs. 87 crores.
• SBI contended that the limitation period was extended due to repeated acknowledgments by SCL, entitling SBI to the benefit of Sections 5, 14, and 18 of the Limitation Act.
• SBI argued that the NCLT and NCLAT rightly rejected the objection regarding the petition being time-barred and rightly admitted the petition under Section 7 of the IBC.

Submissions Table:

Issues Framed by the Supreme Court

The Supreme Court considered the following key issue:

1. Whether the Respondent No.2 (State Bank of India) would be entitled to the benefit of Section 18 of the Limitation Act, 1963, and whether Section 5 of the Limitation Act would also be applicable in the facts of the present case.

Treatment of the Issue by the Court

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

Authorities

The Supreme Court considered the following authorities:

Cases:

Legal Provisions:

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 the following authorities:

• Kotak Mahindra Bank Limited vs. Kew Precision Parts Private Limited and Ors. [2022 9 SCC 364]*: The Court relied on this case to support the view that a balance sheet acknowledging debt is valid for extending the limitation period.
• Asset Reconstruction Company (India) Limited vs. Bishal Jaiswal and Another [2021 6 SCC 366]*: The Court relied on this case to support the view that a balance sheet acknowledging debt is valid for extending the limitation period.
• Dena Bank (Now Bank of Baroda) vs. C. Sivakumar Reddy and Another [2021 10 SCC 330]*: The Court relied on this case to support the view that a settlement offer (OTS) is a valid acknowledgment of debt and can be introduced at the appellate stage.
• Sesh Nath Singh and Another vs. Baidyabati Sheoraphuli Co-Operative Bank Limited and Another [2021 7 SCC 313]*: The Court relied on this case to support the view that a settlement offer (OTS) is a valid acknowledgment of debt and can be introduced at the appellate stage.

The Court distinguished the other cases cited by the Appellant on the ground that in the present case, the application was not time-barred due to the acknowledgments of debt.

Decision

The Supreme Court dismissed the appeal filed by Axis Bank, upholding the decisions of the NCLT and NCLAT. The Court held that:

• The acknowledgments of debt made by the Corporate Debtor in its balance sheet and through One-Time Settlement (OTS) proposals extended the limitation period under Section 18 of the Limitation Act, 1963.
• The delay in filing the Section 7 application by SBI was rightly condoned by the NCLT under Section 5 of the Limitation Act.
• The additional documents, including the OTS proposals, were rightly considered by the NCLAT, as they were valid acknowledgments of debt and could be introduced at the appellate stage.
• The Court observed that the issue of genuineness of the OTS proposals should be raised by the Corporate Debtor before the Adjudicating Authority.

The Court concluded that the Section 7 application filed by SBI was within the limitation period and the Corporate Insolvency Resolution Process (CIRP) was rightly initiated against SCL.

Implications

This judgment has significant implications for the application of limitation laws in insolvency proceedings under the IBC. The key takeaways are:

• Acknowledgment of Debt Extends Limitation: The Supreme Court has reaffirmed that acknowledgments of debt, whether through balance sheets or OTS proposals, can extend the limitation period for initiating insolvency proceedings. This provides clarity to financial creditors regarding the validity of their claims.
• Section 18 of the Limitation Act is Applicable: The Court has clarified that Section 18 of the Limitation Act applies to proceedings under the IBC, allowing for the extension of limitation periods based on acknowledgments of debt.
• Additional Documents Can Be Introduced: The judgment confirms that additional documents, including OTS proposals, can be introduced at the appellate stage, provided they are valid acknowledgments of debt.
• Flexibility in Adjudication: The Court emphasized that issues regarding the genuineness of documents should be raised before the Adjudicating Authority, highlighting the flexibility in the adjudication process under the IBC.
• Balancing Rights: The judgment balances the rights of financial creditors to recover their dues with the need for timely resolution of insolvency proceedings, ensuring that valid claims are not barred by technicalities.

Flowchart of Key Events