Summary
Kotak Mahindra Bank declared a borrower's account NPA in September 2015 and recalled the loans. In December 2018 the borrower made successive one-time settlement offers, the last accepted in signed terms of settlement for Rs 24.55 crore payable by 31 December 2018, which it did not pay. The NCLT admitted the bank's Section 7 IBC application in 2019, but the NCLAT held it time-barred as no acknowledgment was made within three years of default. The Court reaffirmed that a Section 18 acknowledgment extends the three-year limit only if made within it. But a written, signed promise to pay a time-barred debt is a valid, enforceable contract under Section 25(3) of the Contract Act, which neither tribunal considered. The NCLAT also closed the CIRP without letting the bank show sufficient cause for delay or file further documents. The appeal was allowed and the application remitted to the NCLT.
Issues
- Whether a Section 7 IBC application filed more than three years after default could be saved by one-time settlement offers and signed terms of settlement made after the limitation period expired.
- Whether the NCLAT could close the corporate insolvency resolution process as time-barred without considering Section 25(3) of the Contract Act or giving the creditor an opportunity to show sufficient cause or cure defects.
Provisions considered
- Section 25(3), Indian Contract Act, 1872A written promise signed by the debtor to pay all or part of a time-barred debt is an enforceable contract and gives a fresh starting point. Whether the December 2018 terms of settlement were such an agreement had to be examined. (¶¶ 28, 29, 30, 31, 32, 33)
- Sections 5 and 18; Article 137, Limitation Act, 1963Article 137 gives three years from default for a Section 7 application, and a Section 18 acknowledgment extends time only if made within limitation. Delay may be condoned under Section 5 for sufficient cause, even without a formal application. (¶¶ 51, 53, 55, 56, 57, 62, 66)
- Sections 7(5) and 238A, Insolvency and Bankruptcy Code, 2016Section 238A applies the Limitation Act as far as may be. Under Section 7(5)(b), notice must be given to rectify defects before rejection, and as an appeal continues the original proceeding, the NCLAT should have allowed the creditor that opportunity. (¶¶ 39, 40, 50, 54, 70)
Held
- In a Section 7 application, the Adjudicating Authority considers whether a financial debt exceeding the threshold is owed, whether it is in default and whether the application is within limitation. Pre-existing disputes are immaterial, unlike under Section 9. Time spent under the SARFAESI Act or other recovery law is not excluded from limitation. (¶¶ 14, 15, 16)
- Under Article 137 of the Limitation Act, read with Section 238A of the IBC, a Section 7 application must be made within three years of default. A Section 18 acknowledgment of subsisting liability starts time afresh only if made before limitation expires. Here there was none within three years of the NPA declaration or loan recall. (¶¶ 55, 56, 57, 62, 63, 66)
- Under Section 25(3) of the Contract Act, a distinct written promise signed by the debtor to pay a time-barred debt is a valid contract enforceable within three years of the date payment is due. Unlike a Section 18 acknowledgment, it need not be made within limitation, but must be an express promise to pay. Whether the December 2018 terms of settlement were such an agreement had not been considered. (¶¶ 29, 30, 31, 32, 33, 67, 69)
- The IBC is a beneficial statute aimed at reviving the corporate debtor, not a mere recovery law. Limitation is a mixed question of law and fact, and a Section 7 application in the statutory form is not judged like a plaint. Documents and additional affidavits may be filed until the application is finally decided. (¶¶ 42, 43, 46, 49, 60, 61)
- The NCLAT erred in closing the insolvency proceedings without considering condonation of delay under Section 5 or giving the creditor a chance to show sufficient cause. As an appeal continues the original proceeding, the notice requirement of Section 7(5)(b) applied, and the creditor could have rectified defects by further pleadings and documents. (¶¶ 53, 69, 70)
Result
Appeal allowed. The NCLAT's order is set aside to the extent it closed the insolvency proceedings, and the NCLT is to decide the Section 7 application afresh after allowing both sides to file additional affidavits and documents.