M/S. RADHA EXPORTS (INDIA) PVT. LIMITED versus K.P. JAYARAM & ANR. on 28 August 2020

SUPREME COURT REPORTS

[2020] 8 S.C.R.

AM/S. RADHA EXPORTS (INDIA) PVT. LIMITED

v.

K.P. JAYARAM & ANR.

(Civil Appeal No. 7474 of 2019)

AUGUST 28, 2020

B[ARUN MISHRA AND INDIRA BANERJEE, JJ.]

Insolvency and Bankruptcy Code, 2016 – s.7 – CompaniesAct, 1956 – Limitation Act, 1963 – Clauses (19) to (21) of Part II ofthe Schedule – The respondents filed a petition on 25.04.2018u/s.7 of the IBC, as ‘Financial creditor’, claiming principal amountCof Rs.2.10 crores together with interest – According to the appellantcompany, Rs.80,40,000/- was repaid to the respondents between2003 to 2004 – Further, respondents requested to convertRs.90,00,000/- from the outstanding loan as share application moneyfor issuance of shares in the appellant company in name ofDrespondent no. 2, which was later requested to be treated as thesaid share application of ‘MK’ and to treat the same as loan fromrespondent no. 2 – Also, during the period from 2004 to 2006, theappellant company paid Rs.43,25,000/- to the respondents and withthat payment the loan liability was completely liquidated – The NCLTvide its judgment and order dated 19.12.2018 held that theErespondents were not Financial creditors of the appellant companyand the claim of the respondents was barred by limitation – Further,it was held that the respondents had failed to prove that there wasany debt due from the appellant company to the respondents,observing that the appellant company had produced proof ofFpayments – By the impugned judgment and order dated 02.09.2019the Appellate Tribunal set aside the order dated 19.12.2018 of theNCLT – On appeal, held: Under clauses (19) to (21) of Part II ofthe Schedule of the Limitation Act 1963, the period of limitation forinitiation of a suit for recovery of money lent, is three years fromthe date on which the loan is paid – In the instant case, the last loanGwas advanced in 2004-2005 – Apparently, the debt was barred bylimitation even in the year 2012, when winding up proceedings ofthe appellant company were initiated in the Madras High Court bythe respondents – The NCLT rightly refused to admit the applicationu/s. 7 of the IBC, holding the same barred by limitation – The H

Appellate Tribunal erred in law in reversing the judgment and orderof the earlier Adjudicating Authority – Disputes as to whether thesignatures of the respondents are forged or whether records werefabricated can be adjudicated upon evidence including forensicevidence in a regular suit and not in proceedings u/s. 7 of IBC –Even otherwise, the application u/s. 7 of the IBC was notmaintainable – As the payment received for shares, duly issued to athird party at the request of the payee as evident from official records,cannot be a debt, not to speak of financial debt – The NCLT rightlyheld that there was not financial debt in existence – Thus, impugnedjudgment and order of the Appellate Tribunal is set aside and theorder of the Adjudicating Authority dismissing application isrestored.

Allowing the appeal, the Court

HELD: 1. It was for the applicant invoking the CorporateInsolvency Resolution Process, to prima facie show the existencein his favour, of a legally recoverable debt. In other words, therespondent had to show that the debt is not barred by limitation,which they failed to do. [Para 36][286-E]

2. Under clauses (19) to (21) of Part II of the Schedule ofthe Limitation Act 1963, the period of limitation for initiation of asuit for recovery of money lent, is three years from the date onwhich the loan is paid. The last loan amount is said to have beenadvanced in 2004-2005. In the winding up petition, there is not awhisper of any agreed date by which the alleged loan was to berepaid to the Respondents. In the instant case, apparently thedebt was barred by limitation even in the year 2012, when windingup proceedings were initiated in the Madras High Court.[Para 37][286-E-G]

3. The NCLT rightly refused to admit the application underSection 7 of the Insolvency Bankruptcy Code, 2016, holding thesame to be barred by limitation. The Appellate Tribunal has erredin law in reversing the judgment and order of the earlierAdjudicating Authority. The Adjudicating Authority rightlyrejected the application as barred by limitation. The AppellateAuthority patently erred in law in reversing the decision of theadjudicating authority and admitting the application. [Para 38][286-G]

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A4. As recorded in the said order dated 19[th] December, 2018passed by the NCLT Chennai, the Respondent Nos. 1 and 2 jointlyaddressed the letter dated 11[th] January, 2011 to the Income TaxDepartment confirming that the Respondent No.1 had requestedthe Appellant Company to transfer a sum of Rs.90 lakhs to hiswife, the Respondent No.2 for allotment of shares in the AppellantBCompany and further acknowledged that the amount outstandingfrom the erstwhile firm to the Respondent was Rs.1,39,60,000/-as on 31[st] March, 2004. The said letter has been extracted in fullin Paragraph (9) of the judgment and order dated 19[th] December,2018 of NCLT. [Para 39][287-A-C]

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C5. There are, as observed above cogent records includingetters signed by the Respondent Nos. 1 and 2 which evince thaton 6[th] October, 2007, Respondent No.2 resigned from the Boardof the Appellant Company and at that time the Respondent No.2requested the Appellant Company to treat the share applicationDmoney of Rs.90,00,000/- as share application money of ‘MK’and to issue shares for aforesaid value to ‘MK’. The amount wasto be treated as a personal loan from the Respondent No.2 to‘MK’. A personal Loan to a Promoter or a Director of a companycannot trigger the Corporate Resolution Process under the IBC.Disputes as to whether the signatures of the Respondents areEforged or whether records have been fabricated can be adjudicatedupon evidence including forensic evidence in a regular suit andnot in proceedings under Section 7 of the IBC. [Para 40][287-C- E]

6.1 Even otherwise, the application under Section 7 of the FIBC was not maintainable. As rightly held by the NCLT therewas no financial debt in existence. [Para 42][287-G-H]

6.2 The payment received for shares, duly issued to a thirdparty at the request of the payee as evident from official records,cannot be a debt, not to speak of financial debt. Shares of acompany are transferable subject to restrictions, if any, in itsGArticles of Association and attract dividend when the companymakes profits. [Para 43][290-F]

Innoventive Industries Ltd. v. ICICI Bank and Anr.(2018) 1 SCC 407 : [2017] 8 SCR 33; B.K. EducationalServices Pvt. Ltd. v. Parag Gupta and Associates (2019)H11 SCC 633 : [2018] 12 SCR 794 – relied on.

Vashdeo R. Bhojwani v. Abhyudaya Co-operative BankLtd. (2019) 9 SCC 158 : [2019] 12 SCR 75 – referredto.

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Case Law Reference

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 7474of 2019.

From the Judgment and Order dated 02.09.2019 of the NationalCompany Law Appellate Tribunal, New Delhi in Company Appeal(AT)(INS) No. 224 of 2019.

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C. A. Sundaram, Sr. Adv., P. I. Jose, Prashant K. Sharma, JenisFrancis, Ramakrishnan N., Abhishek Gupta, Ms. Rohini Musa, ZafarInayat, Anupam Mishra, Advs. for the Appellant.M. K. S. Menon, Sashank Menon, Ms. Malini Poduval, Advs. forthe Respondents.

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The Judgment of the Court was delivered by INDIRA BANERJEE, J.

1. This appeal, under Section 62 of the Insolvency and BankruptcyCode, 2016, is against a judgment and order dated 2[nd] September, 2019of the National Company Law Appellate Tribunal (NCLAT), New Delhi,hereinafter referred to as “the Appellate Tribunal”, allowing CompanyAppeal (AT) (INS) No.224 of 2019 against an order dated 19[th] December,2018 passed by a Division Bench of the National Company Law Tribunal(NCLT) at Chennai, rejecting the application filed by the Respondentsunder Section 7 of the Insolvency and Bankruptcy Code, 2016, interalia, on the ground that the alleged claim of the Respondents was barredby limitation, on the date on which the said application had been filed.

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2. It is the case of the Appellant Company, that the Respondentswere closely acquainted with one Mr. M. Krishnan, and Mrs. RadhaGouri, who were the promoters of the Appellant Company.

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3. Between 1[st] November, 2002 and 12[th] September 2003, theRespondents had advanced an aggregate sum of Rs.2.10 crores, intranches, to M/s Radha Exports, a proprietorship concern of Mrs. RadhaGouri, for its business purposes.

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4. In 2004-2005, the Respondents advanced a further sum of Rs.10lakhs to the said proprietorship concern, M/s Radha Exports. The saidM/s Radha Exports thus obtained total loan of Rs.2.20 crores from theRespondents, during the period between 2002 and 2004. The loan wasunsecured and free of interest.

B5. According to the Appellant Company, M/s Radha Exports repaidRs.80,40,000/- to the Respondents between 1[st] October, 2003 to 18[th]March 2004. As recorded in the judgment and order dated 19[th] December,2018 of the NCLT, the Respondent Nos. 1 and 2 jointly wrote a letterdated 11[th] January, 2011 to the Deputy Commissioner of Income Tax,Company Circle V (3), Chennai, where they stated that, as on 31[st] March,C2004, the said proprietorship concern M/s Radha Exports had a loanliability of Rs.1,39,60,000/- (Rs.2,20,00,000/- less Rs.80,40,000/-) to theRespondents. The Respondents have, in the aforesaid letter, stated thatthey had given a further loan of Rs.10 lakhs to M/s Radha Exports,between 2004 and 2005. The said letter is reproduced in full, in theDjudgment and order dated 19[th] December, 2018, of the NCLT.

6. The Appellant Company was incorporated under the CompaniesAct, 1956 on or about 19[th] July, 2004, to take over the business of theproprietorship concern, M/s Radha Exports, along with its assets andliabilities. The Appellant Company states that as on 19[th] July, 2004, theproprietorship concern, M/s Radha Exports had a loan liability ofERs.1,11,85,350/-, which was taken over by the Appellant Company.

7. On 19[th] July, 2004, when the Appellant Company wasincorporated as a Private Limited Company, to take over and continuethe business of the proprietorship concern, M/s Radha Exports, theRespondents requested the Appellant Company to convert a sum ofFRs.90,00,000/- from out of the said outstanding loan as share applicationmoney for issuance of shares in the Appellant Company, in the name ofthe Respondent No.2, and the same was confirmed by the Respondents,by their aforesaid letter dated 11[th] January, 2011 addressed to the DeputyCommissioner of Income Tax, Company Circle V(3), Chennai. The saidletter, a copy of which is enclosed to the Paper Book, reads:G

“..I have requested to transfer a sum of Rs. 90,00,000/- (RupeesNinety Lakhs) to my wife A/c. Mrs. Shoba Jayaram forallotment of shares in Radha Exports (I) Pvt. Ltd...”

8. Accordingly, a sum of Rs.90,00,000/- was adjusted by theAppellant Company, as share application money, for issuance of sharesH

in a Appellant Company in the name of the Respondent No.2. Thereafter,the balance loan liability of the company was Rs.21,85,350/-.

9. According to the Appellant Company, during the period from27[th] July, 2004 to 23[rd] March, 2006, the Appellant Company paidRs.43,25,000/- to the Respondents, which included the balance loan ofRs.21,85,350/- payable by M/s Radha Exports. The loan liability, whichthe Appellant Company had taken over from the proprietorship concernwas, according to the Appellant Company, completely liquidated byMarch, 2006. Particulars of the payments have been given in detail inparagraph (12) of the judgment and order of the NCLT dated 19[th]December, 2018 and are supported by Bank Statements being AnnexureA1 filed before the NCLT. The last payment appears to have beenmade on 23.03.2006.

10. On or about 6[th] October, 2007, the Respondent No.2 resignedfrom the Board of the Appellant Company. At the time of resignation,the Respondent No.2 requested the Appellant Company to treat the shareapplication money of Rs.90,00,000/- as share application money ofMr. M Krishnan and to issue shares of the value of Rs.90,00,000/- in thename of Mr. M. Krishnan. The amount of share application money ofRs.90,00,000/- transfered to Mr. M. Krishnan, was to be treated as apersonal loan from the Respondent No.2 to the said Mr. M. Krishnan.

11. By another letter dated 11[th] January, 2011 addressed to theDeputy Commissioner of Income Tax, Company Circle V(3), Chennai,being Annexure A-4 to the reply filed by the Appellant Company, theRespondent No.2 confirmed that she had requested the AppellantCompany to allot shares in the name of the said Mr. M. Krishnan againsther share application money, which the said M. Krishnan had agreed totreat, as his personal loan from the Respondent No.2 and pay her theamount at a later date.

12. The Appellant Company claims to have issued shares of thevalue of Rs.90,00,000/- in the name of Mr. M. Krishnan in 2008. Accordingto the Appellant Company, there is thus, no further liability to be dischargedby the Appellant Company to the Respondents. After 23[rd] March, 2006,there had been no financial transaction between the Appellant Companyand the Respondents.

13. However, by a legal notice dated 19[th] November, 2012, theRespondents called upon the Appellant Company to repay to theRespondents a sum of Rs.1,49,60,000/- alleged to be the outstanding AB

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Adebt of the Appellant Company, repayable to the Respondents as on 19[th]July, 2004.

14. By a letter dated 5[th] December, 2012, the Appellant Companyrefuted the claim of the Respondents, whereupon the Respondents filedpetition being CP No.335 of 2013 in the High Court of Madras underBSections 433 (e) & (f) and 434 of the Companies Act 1956, for windingup of the Appellant Company. The said petition was transferred to theChennai Bench of NCLT and re-numbered TCP/301/(IB)/2017.

15. The averments made in the winding up petition ex facie showthat the claim of the Respondents was hotly disputed. In that theRespondents claimed that letters attributed to them, even lettersCaddressed by them to the Income Tax Authorities were forged. Some ofthe averments are extracted hereinbelow:

“6. …….The petitioners state that the respondent’s directorswho pretended to be the well-wishers of the petitioners, knewall the facts and stopped paying the interest intermittently till2007. Adding insult to the injury, the respondent’s companycreated a fraudulent sale deed and the sale consideration isa circuitous fraudulent transaction which will clearly provethe fraud, cheating, forgery and various other criminaloffences of the respondent. The respondent have illegallygrabbed the residential house of the petitioners. Thepetitioners had already filed a Civil Suit in C.S. No.66 of2013 in the Original Side of the Hon’ble High Court ofJudicature at Madaras.

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7. The Petitioners issued a statutory notice of demand on19.11.2012 for claiming the amount from the respondentcompany and its directors and they gave a reply on05.12.2012 making unwanted, unnecessary and defamatoryallegations against the 1[st] petitioner, who had helped thedirectors of the respondent company for purchasing a flat inwhich they presently reside and for the entire capital forrunning the respondent company. In para 3 of the said reply,the respondent asked for details of the payments made by thepetitioners to the respondent. But in para 12, the respondentcompany had stated that the transactions have been placedbefore the Income Tax Department, for which the petitionershad signed the affidavits. The allegations are contradictory F

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to each other and it reveals rank forgery committed by therespondents to 1 to 3.

8. The Petitioners had not signed any documents or blankpapers or any affidavits to the respondent or its directors.The directors of the respondent company are capable offorging the signatures of the petitioners, which has beenproved on various occasions...”

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10. The petitioners state that from the reply notice given bythe advocate, it is clearly understood that the respondent andits directors had forged the signatures of the petitioners tothe Income Tax Department….

11. The petitioners states that the petitioners had verified therecords of the Registrar of Companies, Chennai and foundthat the 2[nd] petitioner’s signature had been forged in theresignation letter, which has been forged immediately afterthe fraudulent sale deed. The respondent company anddirectors had even forged the signatures in the applicationfor Director’s Identification Number and the forgery is thepeak of fraud and cheating committed by the respondentcompany and its directors not only against the petitioners,but also against the Government Departments.

15. The petitioner states that the directors of the respondentcompany had forged the signatures of the 2[nd] petitioner. Inall the documents submitted to the Registrar of Companiesfrom the inception of the respondent company including theresignation and the DIN Application form and obtained DINnumber to remove the 2[nd] petitioner from the directorship,which the directors of the respondent company made the 2[nd]petitioner as a director to their convenience.”

16. Allegations of forgery and fraud are not decided in proceedingsunder Sections 433 and 434 of the Companies Act 1956 for winding upof a company. Such disputes necessarily have to be adjudicated in aregular suit, on the basis of evidence, including forensic examinationreports.

17. By an order dated 4[th] August 2017 the NCLT dismissed thesaid winding up petition, on the ground that the Respondents had failedto comply with the provisions of Section 7(3)(b) of the Insolvency and A

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ABankruptcy code, 2016, hereinafter “IBC”, with the liberty to file a freshpetition, if so advised.

18. On 7[th] December 2017, the Respondents issued a fresh demandnotice to the Appellant Company. By a letter dated 14[th] December 2017,the Appellant Company refuted the claims in the demand notice datedB7[th] December 2017, inter alia claiming that all amounts due and payableby the Appellant Company or its predecessor-in-interest to theRespondents, had duly been paid within 2007 and 2008.

19. The Respondents, thereafter, filed a petition being CP/77/(IB)/CB/2018 under Section 9 of the IBC, in the NCLT (Chennai Bench)claiming to be an operational creditor of the Appellant Company, withinCthe meaning of Section 9 of the IBC and claiming from the AppellantCompany Rs.2.10 Crores as principal and Rs.2,31,60,000/- towardsinterest at the rate of 24% per annum , from the year 2007.

20. For the purpose of this appeal, it is not necessary for thisCourt to examine the discrepancies between the claim in the winding upDpetition and the claim in the petition under Section 9 of the IBC.

21. By an order dated 12[th] April 2018, a Single Bench of NCLTdismissed CP/77/(IB)/CB/2018 filed by the Respondent No.1, claiminghimself to be an ‘Operational Creditor’ under Section 9 of the IBC, aswithdrawn, with liberty to file a fresh petition in accordance with law.E22. Thereafter, on 25[[th]] April 2018, the Respondents filed a fresh E22. Thereafter, on 25[[th]] April 2018, the Respondents filed a freshpetition being WC.P. No.770/IB/CB/C-II/2018 before the NCLT (ChennaiBench) under Section 7 of the IBC, as “Financial Creditor”, claimingprincipal amount of Rs.2.10 Crores together with interest @ 24% perannum from 2007, amounting to Rs. 4,41,60,000/-. The AppellantCompany filed its counter statement in CP No.770/IB/2018 before theFNCLT.

23. By a judgment and order dated 19[th] December 2018, the NCLTmeticulously recorded details of the payments made by the AppellantCompany and/or its predecessor in interest to the Respondents,considered the letters written by the Respondents to the Income TaxGAuthorities and dismissed CP No. 770/IB/CB/2018, being the petitionfiled by the Respondents under Section 7 of the IBC, inter alia, holdingthat the Respondents were not Financial Creditors of the AppellantCompany, and in any case the claim of the Respondents was hopelesslybarred by limitation. The NCLT held that the Respondents had failed toHprove that there was any debt due from the Appellant Company, to the Respondents, observing that the Appellant Company had produced proofof payments.

24. The relevant parts of the said judgment and order of theChennai Bench of NCLT are extracted herein below for convenience.

“9. To prove that Rs.90,00,000 was treated as shareapplication money, the Corporate Debtor filed a letter(Annexure-A2) these Applicants together addressed to theIncome Tax Department on 11.01.2011 confirming the firstapplicant requesting the corporate debtor to transfer a sumof Rs.90,00,000 to his wife (Second Applicant) for allotmentof shares in the Corporate Debtor. Not only about this request,the corporate debtor counsel says, the Applicants themselvesstated that they advanced monies to M/s. Radha Exportsduring the Financial Years 2001-2002, 2002-2003 and 2003-2004 and amount outstanding from the said the partnershipfirm on 31.03.2004 is Rs.1,39,60,000. The letter dated11.01.2011 addressed by the Applicants to the DeputyCommissioner of Income Tax is as follows:...”

10. In addition to the above letter, the Corporate Debtor hasalso placed another letter dated 11.01.2011 Second Applicantaddressed to the Deputy Commissioner of Income Taxconfirming that she requested the Corporate Debtor to allotshares in the name of First Applicant against her shareapplication money Rs.90,00,000 on the agreement that herhusband would pay that money to her later. The corporatedebtor has annexed this letter as Annexure-A4 to the replyaffidavit filed by the Corporate Debtor.

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17. Now going through the observations we have noted, nowthe points for consideration are, as to whether any financialdebt is in existence in between the parties as on the date offiling petition u/s 7 of the Code and as to whether, assumingthe financial debt is in existence, the debt is barred by limitationor not.

18. It is evident from the facts that first Applicant advancedRs.2,10,00,000/- Rs.2,20,00,000/- as the case may be, to apartnership firm during the period in between 2002 and 2003.It is also evident on record by 4.07.2004, the same partnership A

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firm repaid Rs.1,08,14,650. To show that it has been paid,the Corporate debtor has placed proof by submitting copiesof the statement of the statement of accounts of various banksreflecting payments made to these Applicants, on the contrary,these Applicants have not placed any material showing as towhether these payments were made or not.

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25. In this case, if we go by the case of the Applicant, it is aclaim made basing on the money disbursed by way of chequepayment in the year 2002 & 2003. This money was also notdisbursed to this Corporate Debtor, it was given to apartnership firm.

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26. This Applicant, has not even placed any material disclosinghow this debt is still alive after lapse of three years from thedate of disbursement. Whenever any claim is made, when it isbeyond three years period as envisaged under Article 136 ofthe Limitation Act, the person making claim is bound to discloseand explain as to how the debt claim is not barred by limitation.No such effort has been made by these Applicants to provethat this is within limitation. Assuming that filing of thisCompany Petition is continuation to the winding upproceedings filed before the Hon’ble High Court i.e.15.02.2013, then also, since these Applicants have claimedmoney was disbursed in the year 2002 to 2003, if the limitationperiod is computed from the date of disbursement, filing ofwinding up proceedings would be beyond the period oflimitation from the date of disbursement.

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27. Given the historical facts available on record, even if theFCorporate Debtor statement is taken as true, the limitationwould start running from the year 2007. Since the windingup petition was filed in the year 2013, even from the year2007, these Applicants could have filed winding proceedingswithin three years from thereof, not in the year 2013,Conceding everything as stated by the applicants, then alsoGthe debt claim would remain barred by limitation.

25. On or about 13[th] February 2019, the Respondents filedCompany Appeal (AT) (INS) NO.224/19 before the Appellate Tribunal,challenging the order dated 19[th] December 2018 passed by the NCLT,dismissing the petition of the Respondents under Section 7 of the IBC.

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26. The Appellant Company filed a Counter Statement before theAppellate Tribunal, and the Respondents filed a Rejoinder thereto.Pursuant to the directions of the Appellate Tribunal, additional pleadingswere also filed.

27. On 13.08.2019 the Appellant Company caused ‘Notice toProduce Documents’ to be issued to the Respondents calling uponRespondents to produce certified true copies of the Statement ofAccounts of the Respondents maintained with HSBC Bank, PunjabNational Bank and Indian Overseas Bank, from which the Respondentsclaimed to have advanced money to the Appellant Company and alsocertified true copies of the Statement of Accounts of the Banks, in whichthe cheques issued by M/s Radha Exports (proprietary concern) weredeposited and encashed. It is alleged that the Respondents replied to theNotice to Produce Documents, but did not furnish the documents and/orthe details called for by the Appellant Company.

28. On or about 20[th] August 2019, the Appellant Company filedan Additional Reply Statement, enclosing true copies of the Statementof Accounts of M/s Radha Exports (Proprietary concern), the AppellantCompany and Mr. M. Krishnan reflecting the payments made to theRespondents. Under the direction of the Appellate Tribunal, the AppellantCompany also filed a Correlation Statement of payment entries, reflectedin the Bank Statements and the statements given in the Additional CounterStatement.

29. By the impugned judgment and order dated 2[nd] September2019 the Appellate Tribunal allowed the appeal of the Respondents andset aside the order dated 19[th] December 2018 of the NCLT, dismissingthe application under Section 7 of the IBC.

30. It appears that the Appellate Authority was not inclined toaccept the submission of the Appellant Company, that the entire amounthad been paid, for two purported reasons. The first reason was that theCorrelation Statement showed payments of certain amounts amountingto Rs.53,05,000/- in favour of Customs, Chennai and payments amountingto Rs.1,75,000/- in favour of one Mr. Kulasekaran. The Respondents, asFinancial Creditors had disputed that these payments were towards thedues of the Financial Creditors. The second reason was that, if the totalamount had been paid, there was no reason for the Appellant Companyto take the plea that the amount was not payable, the same being barredby limitation.

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31. It is well settled in law that alternative defences are permissibleto contest a claim. It was thus open to the Appellant Company, to refutethe claim of the Respondents by taking the plea of limitation and also tocontend that no amount was in fact due and payable by the AppellantCompany to the Respondents.

32. In Innoventive Industries Ltd. v. ICICI Bank and Anr.[1],the Supreme Court observed and held:-

“27. The scheme of the Code is to ensure that when a defaulttakes place, in the sense that a debt becomes due and is notpaid, the insolvency resolution process begins. Default isdefined in Section 3(12) in very wide terms as meaning non-payment of a debt once it becomes due and payable, whichincludes non-payment of even part thereof or an instalmentamount. For the meaning of “debt”, we have to go to Section3(11), which in turn tells us that a debt means a liability ofobligation in respect of a “claim” and for the meaning of“claim”, we have to go back to Section 3(6) which defines“claim” to mean a right to payment even if it is disputed. TheCode gets triggered the moment default is of rupees one lakhor more (Section 4). The corporate insolvency resolutionprocess may be triggered by the corporate debtor itself or afinancial creditor or operational creditor. A distinction is madeby the Code between debts owed to financial creditors andoperational creditors. A financial creditor has been definedunder Section 5(7) as a person to whom a financial debt isowed and a financial debt is defined in Section 5(8) to meana debt which is disbursed against consideration for the time value of money. As opposed to this, an operational creditormeans a person to whom an operational debt is owed and anoperational debt under Section 5 (21) means a claim in respectof provision of goods or services.

28. When it comes to a financial creditor triggering theprocess, Section 7 becomes relevant. Under the explanationto Section 7(1), a default is in respect of a financial debtowed to any financial creditor of the corporate debtor – itneed not be a debt owed to the applicant financial creditor.Under Section 7(2), an application is to be made under sub-

section (1) in such form and manner as is prescribed, whichtakes us to the Insolvency and Bankruptcy (Application toAdjudicating Authority) Rules, 2016. Under Rule 4, theapplication is made by a financial creditor in Form 1accompanied by documents and records required therein. Form1 is a detailed form in 5 parts, which requires particulars ofthe applicant in Part I, particulars of the corporate debtor inPart II, particulars of the proposed interim resolutionprofessional in part III, particulars of the financial debt inpart IV and documents, records and evidence of default inpart V. Under Rule 4(3), the applicant is to dispatch a copyof the application filed with the adjudicating authority byregistered post or speed post to the registered office of thecorporate debtor. The speed, within which the adjudicatingauthority is to ascertain the existence of a default from therecords of the information utility or on the basis of evidencefurnished by the financial creditor, is important. This it mustdo within 14 days of the receipt of the application. It is at thestage of Section 7(5), where the adjudicating authority is tobe satisfied that a default has occurred, that the corporatedebtor is entitled to point out that a default has not occurredin the sense that the “debt”, which may also include a disputedclaim, is not due. A debt may not be due if it is not payable inlaw or in fact. The moment the adjudicating authority issatisfied that a default has occurred, the application must beadmitted unless it is incomplete, in which case it may givenotice to the applicant to rectify the defect within 7 days ofreceipt of a notice from the adjudicating authority. Undersub-section (7), the adjudicating authority shall thencommunicate the order passed to the financial creditor andcorporate debtor within 7 days of admission or rejection ofsuch application, as the case may be.”

33. The proposition of law which emerges from InnoventiveIndustries Ltd. (supra) is that the Insolvency Resolution Process beginswhen a default takes place. In other words, once a debt or even partthereof becomes due and payable, the resolution process begins. Section3(11) defines ‘debt’ as a liability or obligation in respect of a claim andthe claim means a right to payment even if it is disputed. The Code getstriggered the moment default is of Rs.1,00,000/- or more. Once the ABC

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AAdjudicating Authority is satisfied that a default has occurred, theapplication must be admitted, unless it is otherwise incomplete and not inaccordance with the rules. The judgment is however, not an authorityfor the proposition that a petition under Section 7 of the IBC has to beadmitted, even if the claim is ex facie barred by limitation.

B34. On the other hand, in B.K. Educational Services Pvt. Ltd. v.Parag Gupta and Associates[2], this Court held:- “42. It is thus clear that since the Limitation Act is applicableto applications filed under Sections 7 and 9 of the Code fromthe inception of the Code, Article 137 of the Limitation Actgets attracted. “The right to sue”, therefore, accrues when aCdefault occurs. If the default has occurred over three yearsprior to the date of filing of the application, the applicationwould be barred under Article 137 of the Limitation Act, saveand except in those cases where, in the facts of the case,Section 5 of the Limitation Act may be applied to condone theDdelay in filing such application.”

35. The judgment in B.K. Educational Services Pvt. Ltd. (supra)was referred to and relied upon by the Court in Vashdeo R. Bhojwani v.Abhyudaya Co-operative Bank Ltd.[3].

36. It was for the applicant invoking the Corporate InsolvencyEResolution Process, to prima facie show the existence in his favour, ofa legally recoverable debt. In other words, the respondent had to showthat the debt is not barred by limitation, which they failed to do.

37. Under clauses (19) to (21) of Part II of the Schedule of theLimitation Act 1963, the period of limitation for initiation of a suit forrecovery of money lent, is three years from the date on which the loanFis paid. The last loan amount is said to have been advanced in 2004-2005. In the winding up petition, there is not a whisper of any agreeddate by which the alleged loan was to be repaid to the Respondents. Inthe instant case, apparently the debt was barred by limitation even in theyear 2012, when winding up proceedings were initiated in the MadrasGHigh Court.

38. The NCLT rightly refused to admit the application underSection 7 of the IBC, holding the same to be barred by limitation. TheAppellate Tribunal has erred in law in reversing the judgment and order 2 (2019) 11 SCC 633H3 (2019) 9 SCC 158

of the earlier Adjudicating Authority. The Adjudicating Authority rightlyrejected the application as barred by limitation. The Appellate Authoritypatently erred in law in reversing the decision of the adjudicating authorityand admitting the application.

39. As recorded in the said order dated 19[th] December, 2018 passedby the NCLT Chennai, the Respondent Nos. 1 and 2 jointly addressedthe letter dated 11[th] January, 2011 to the Income Tax Departmentconfirming that the Respondent No.1 had requested the AppellantCompany to transfer a sum of Rs.90 lakhs to his wife, the RespondentNo.2 for allotment of shares in the Appellant Company and furtheracknowledged that the amount outstanding from the erstwhile firmM/s. Radha Exports to the Respondent was Rs.1,39,60,000/- as on 31[st]March, 2004. The said letter has been extracted in full in Paragraph (9)of the judgment and order dated 19[th] December, 2018 of NCLT.

40. There are, as observed above cogent records including letterssigned by the Respondent Nos. 1 and 2 which evince that on 6[th] October,2007, Respondent No.2 resigned from the Board of the AppellantCompany and at that time the Respondent No.2 requested the AppellantCompany to treat the share application money of Rs.90,00,000/- as shareapplication money of Mr. M. Krishnan and to issue shares for aforesaidvalue to Mr. M. Krishnan. The amount was to be treated as a personalloan from the Respondent No.2 to Mr. M. Krishnan. A personal Loan toa Promoter or a Director of a company cannot trigger the CorporateResolution Process under the IBC. Disputes as to whether the signaturesof the Respondents are forged or whether records have been fabricatedcan be adjudicated upon evidence including forensic evidence in a regularsuit and not in proceedings under Section 7 of the IBC.

41. It is, however, made clear that the observations made above,with regard to limitation are based on the pleadings and annexures in thewinding up proceedings under Sections 433/434 of the Companies Act,1956 filed in Madras High Court, which were transferred to the NCLTand also the pleadings in CP/77/ (IB)/CB/2018 and WCP No. 770/IB/CB/C-II/2018 filed before the Chennai Bench of NCLT. Any suit filedby the Respondents against Mr. Krishnan or against the company willbe decided on its own merits without being swayed by the observationsmade in this judgment.

42. Even otherwise, the application under Section 7 of the IBCwas not maintainable. As rightly held by the NCLT there was no financialdebt in existence. In this context, it would be pertinent to refer to thefollowing provisions of the IBC:- A

B

C

D

E

F

G

H

A“3. Definitions.- In this Code, unless the context otherwiserequires,—

…….

(8) “corporate debtor” means a corporate person who owes adebt to any person; B…….

(10) “creditor” means any person to whom a debt is owed andincludes a financial creditor, an operational creditor, a securedcreditor, an unsecured creditor and a decree-holder;

(11) “debt” means a liability or obligation in respect of a claimCwhich is due from any person and includes a financial debt andoperational debt;

(12) “default” means non-payment of debt when whole or anypart or instalment of the amount of debt has become due andpayable and is not paid by the debtor or the corporate debtor, asDthe case may be.

xxxxxx

xxx

5. Definitions.- In this Part, unless the context otherwiserequires,-

……...

E

(7) “financial creditor” means any person to whom a financialdebt is owed and includes a person to whom such debt has beenlegally assigned or transferred to;

(8) “financial debt” means a debt alongwith interest, if any, whichis disbursed against the consideration for the time value of moneyFand includes—

(a) money borrowed against the payment of interest; (b) any amount raised by acceptance under any acceptance creditfacility or its de-materialised equivalent;

(c) any amount raised pursuant to any note purchase facility orGthe issue of bonds, notes, debentures, loan stock or any similarinstrument; (d) the amount of any liability in respect of any lease or hirepurchase contract which is deemed as a finance or capital leaseunder the Indian Accounting Standards or such other accountingstandards as may be prescribed;H

(e) receivables sold or discounted other than any receivables soldon nonrecourse basis; (f) any amount raised under any other transaction, including anyforward sale or purchase agreement, having the commercial effectof a borrowing; (g) any derivative transaction entered into in connection withprotection against or benefit from fluctuation in any rate or priceand for calculating the value of any derivative transaction, onlythe market value of such transaction shall be taken into account; (h) any counter-indemnity obligation in respect of a guarantee,indemnity, bond, documentary letter of credit or any other instrumentissued by a bank or financial institution;

(i) the amount of any liability in respect of any of the guarantee orindemnity for any of the items referred to in sub-clauses (a) to (h)of this clause; xxxxxx xxx

7. Initiation of corporate insolvency resolution process byfinancial creditor.- (1) A financial creditor either by itself orjointly with other financial creditors, or any other person on behalfof the financial creditor, as may be notified by the Central Govt.may file an application for initiating corporate insolvency resolutionprocess against a corporate debtor before the AdjudicatingAuthority when a default has occurred.

xxx

xxx

xxx

8. Insolvency resolution by operational creditor.- (1) Anoperational creditor may, on the occurrence of a default, deliver ademand notice of unpaid operational debtor copy of an invoicedemanding payment of the amount involved in the default to thecorporate debtor in such form and manner as may be prescribed.(2) The corporate debtor shall, within a period of ten days of thereceipt of the demand notice or copy of the invoice mentioned insub-section (1) bring to the notice of the operational creditor—

(a) existence of a dispute, if any, on record of the pendency ofthe suit or arbitration proceedings filed before the receipt ofsuch notice or invoice in relation to such dispute; (b) the payment of unpaid operational debt—

A

B

C

D

E

F

G

H

[2020] 8 S.C.R.

A

(i) by sending an attested copy of the record of electronictransfer of the unpaid amount from the bank account of thecorporate debtor; or

(ii) by sending an attested copy of record that the operationalcreditor has encashed a cheque issued by the corporatedebtor.B

Explanation.—For the purposes of this section, a “demand notice”means a notice served by an operational creditor to the corporatedebtor demanding payment of the operational debt in respect ofwhich the default has occurred.”

C43. The definition of ‘financial debt’ in Section 5(8) makes itclear that ‘financial debt’ means a debt along with interest, if any,disbursed against the consideration for time value of money andwould include money raised or borrowed against the payment of interest;amount raised by acceptance under any acceptance credit facility or itsde-materialised equivalent; amount raised pursuant to any noteDpurchase facility or the issue of bonds, notes, debentures, loanstock or any similar instrument; the amount of any liability in respectof any lease or hire purchase contract which is deemed as a finance orcapital lease under the Indian Accounting Standards or such otheraccounting standards as may be prescribed; receivables sold ordiscounted other than any receivables sold on non-recourse basis or anyEamount raised under any other transaction, including any forward saleor purchase agreement, having the commercial effect of a borrowing.Explanation to Section 5(8) which relates to real estate projects is of norelevance in the facts and circumstances of this case. The paymentreceived for shares, duly issued to a third party at the request of theFpayee as evident from official records, cannot be a debt, not to speak offinancial debt. Shares of a company are transferable subject to restrictions,if any, in its Articles of Association and attract dividend when the companymakes profits.

44. The appeal is, for the reasons discussed above, allowed. TheGimpugned judgment and order of the Appellate Tribunal is set aside andthe order of the Adjudicating Authority dismissing the application, isrestored.

H

Ankit Gyan