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Insolvency: No bar to amendment of Section 7 petition until final order

In Dena Bank (Now Bank Of Baroda) vs C. Shivakumar Reddy, the order of the NCLAT dismissing the Petition filed by the Appellant Bank under Section 7 of the IBC, holding that the said application was barred by limitation.  

The relevant dates and documents were -

1) Loan sanction - 23rd December, 2011 and execution of by the Corporate debtor (CD) various documents including Demand Promissory Notes, Letters of General Lien, etc. in favour of the Appellant Bank

2) Date of default - 20th September, 2013

3) Declared Non Performing Asset (NPA) on 31 st December 2013

4) Letter requesting restructuring the Term Loan by CD - 24th March 2014 (not accepted by bank)

5) Bank issued legal notice - 22nd December 2014

6) Application filed before DRT - 1st January 2015

7) Reply to legal notice - 5th January 2015

8) Proposal from CD for one time settlement - 3rd March 2017  (not accepted by bank)

9) Final judgment by DRT against CD - 27th March 2017

10) DRT issued a Recovery Certificate - 25th May 2017

11) Second proposal from CD for one time settlement - 19th June 2017  (not accepted by bank)

12) CD acknowledged its liability in Annual Reports for the financial years 2016- 2017 and 2017-2018

13) Bank issued demand notice to the Corporate Debtor in Form-3 of IBC - 1st October 2018

14) Petition filed before NCLT under Section 7 of the IBC - 12th October 2018

15) Application to place on record additional documents - 9th January 2019

16) Objection under Limitation Act from CD - 2nd February 2019

17) NCLT allows additional document - 4th February 2019

18) Second application to place on record additional documents - 5th March 2019

19) Objection of the bar of limitation rejected by NCLT and IRP appointed - 21st March 2019

On appeal filed before the NCLAT by CD, the NCLAT agreeing with the CD held that the application moved by ‘Corporate Debtor’ to restructure the debt or payment of the interest does not amount to acknowledgement of debt. There is nothing on record to suggest that the ‘Corporate Debtor’ or its authorized representative by its signature has accepted or acknowledged the debt within three years from the date of default or from the date when the account was declared NPA, i.e. on 31st December 2013. The Balance Sheet of the ‘Corporate Debtor’ for the year 2016-2017 filed after 31 st March 2017 cannot be termed to be a document of acknowledgment in terms of section 18 of the Limitation Act.

The Supreme Court decided that the following questions need answers :-

1) Whether a Petition under Section 7 of the IBC would be barred by limitation, on the sole ground that it had been filed beyond a period of 3 years from the date of declaration of the loan account of the Corporate Debtor as NPA, even though the Corporate Debtor might subsequently have acknowledged its liability to the Appellant Bank, within a period of three years prior to the date of filing of the Petition under Section 7 of the IBC, by making a proposal for a One Time Settlement, or by acknowledging the debt in its statutory Balance Sheets and Books of Accounts.

2) Whether a final judgment and decree of the DRT in favour of the Financial Creditor, or the issuance of a Certificate of Recovery in favour of the Financial Creditor, would give rise to a fresh cause of action to the Financial Creditor to initiate proceedings under Section 7 of the IBC within three years from the date of the final judgment and decree, and/or within three years from the date of issuance of the Certificate of Recovery.

3) Whether there is any bar in law to the amendment of pleadings, in a Petition under Section 7 of the IBC, or to the filing of additional documents, apart from those filed initially, along with the Petition under Section 7 of the IBC in Form-1.

The Supreme Court observed that limitation is a question of law and facts and a judgment is a precedent for the issue of law that is raised and decided and not any observations made in the facts of the case. In construing and/or interpreting any statutory provision one must look into the legislative intent of the statute. The intention of the statute has to be found in the words used by the legislature itself. In case of doubt it is always safe to look into the object and purpose of the statute or the reason and spirit behind it. Each word, phrase or sentence has to be construed in the light of the general purpose of the Act itself, as observed by Mukherjea J., in Popatlal Shah v. State of Madras and a plethora of other judgments of this Court. To quote Krishna Iyer J., the interpretative effort “ must be illumined by the goal, though guided by the words”.

When a question arises as to the meaning of a certain provision in a statute the provision has to be read in its context. The statute has to be read as a whole. The previous state of the law, the general scope and ambit of the statute and the mischief that it was intended to remedy are relevant factors.

On a careful reading of the provisions of the IBC and in particular the provisions of Section 7(2) to (5) of the IBC read with the 2016 Adjudicating Authority Rules there is no bar to the filing of documents at any time until a final order either admitting or dismissing the application has been passed.

The time stipulation of fourteen days in Section 7(4) to ascertain the existence of a default is apparently directory not mandatory. The proviso inserted by amendment with effect from 28 th December, 2019 provides that if the Adjudicating Authority has not ascertained the default and passed an order under sub-section (5) of Section 7 of the IBC within the aforesaid time, it shall record its reasons in writing for the same. No other penalty is stipulated.

Furthermore, the proviso to Section 7(5)(b) of the IBC obliges the Adjudicating Authority to give notice to an applicant, to rectify the defect in its application within seven days of receipt of such notice from the Adjudicating Authority, before rejecting its application under Clause(b) of sub-section (5) of Section 7 of the IBC. When the Adjudicating Authority calls upon the applicant to cure some defects that defect has to be rectified within seven days. There is no penalty prescribed for inability to cure the defects in an application within seven days from the date of receipt of notice, and in an appropriate case, the Adjudicating Authority may accept the cured application, even after expiry of seven days, for the ends of justice.

The only reasonable construction of the Code is the balance to be maintained between timely completion of the corporate insolvency resolution process, and the corporate debtor otherwise being put into liquidation.

Even in the case of Section 12 of the IBC, this Court taking note of the workload of the Adjudicating Authority, in effect held that the time stipulation was directory. This Court observed that failure to complete the Resolution Process within stipulated time should not result in corporate death by shelving of an otherwise good resolution plan. This Court emphasized the need to maintain balance between timely completion of the Corporate Insolvency Resolution Process and the Corporate Debtor otherwise being put into liquidation, for failure to maintain the time schedule.

As per Section 18 of Limitation Act, an acknowledgement of present subsisting liability, made in writing in respect of any right claimed by the opposite party and signed by the party against whom the right is claimed, has the effect of commencing a fresh period of limitation from the date on which the acknowledgement is signed. Such acknowledgement need not be accompanied by a promise to pay expressly or even by implication. However, the acknowledgement must be made before the relevant period of limitation has expired. Even if the writing containing the acknowledgment is undated, evidence might be given of the time when it was signed. The explanation clarifies that an acknowledgment may be sufficient even though it is accompanied by refusal to pay, deliver, perform or permit to enjoy or is coupled with claim to set off, or is addressed to a person other than a person entitled to the property or right. ‘Signed’ is to be construed to mean signed personally or by an authorised agent.

To come under section 19 an acknowledgement of a debt need not be made to the creditor nor need it amount to a promise to pay the debt.

In the instant case, Rs.111 lakhs had been paid towards outstanding interest on 28th March, 2014 and the offer of One Time Settlement was within three years thereafter. In any case, NCLAT overlooked the fact that a Certificate of Recovery has been issued in favour of Appellant Bank on 25 th May 2017. The Corporate Debtor did not pay dues in terms of the Certificate of Recovery. The Certificate of Recovery in itself gives a fresh cause of action to the Appellant Bank to institute a petition under Section 7 of IBC. The petition under Section 7 IBC was well within three years from 28th March 2014.

An application under Section 7 or 9 of the IBC may be time barred, even though some other recovery proceedings might have been instituted earlier, well within the period of limitation, in respect of the same debt. However, it would have been a different matter, if the applicant had approached the Adjudicating Authority after obtaining a final order and/or decree in the recovery proceedings, if the decree remained unsatisfied. This Court held that a decree and/or final adjudication would give rise to a fresh period of limitation for initiation of the Corporate Insolvency Resolution Process.

The Supreme Court held that it is clear that a final judgment and/or decree of any Court or Tribunal or any Arbitral Award for payment of money, if not satisfied, would fall within the ambit of a financial debt, enabling the creditor to initiate proceedings under Section 7 of the IBC.

It is true that, when the petition under Section 7 of IBC was filed, the date of default was mentioned as 30 th September 2013 and 31st December 2013 was stated to be the date of declaration of the Account of the Corporate Debtor as NPA. However, it is not correct to say that there was no averment in the petition of any acknowledgment of debt. Such averments were duly incorporated by way of amendment, and the Adjudicating Authority rightly looked into the amended pleadings.

Even assuming that documents were brought on record at a later stage, as argued by the CD, the Adjudicating Authority was not precluded from considering the same. The documents were brought on record before any final decision was taken in the Petition under Section 7 of IBC.

A final judgment and order/decree is binding on the judgment debtor. Once a claim fructifies into a final judgment and order/decree, upon adjudication, and a certificate of Recovery is also issued authorizing the creditor to realize its decretal dues, a fresh right accrues to the creditor to recover the amount of the final judgment and/or order/decree and/or the amount specified in the Recovery Certificate.

The Appellant Bank was thus entitled to initiate proceedings under Section 7 of the IBC within three years from the date of issuance of the Recovery Certificate. 

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