STATE BANK OF INDIA versus KRISHIDHAN SEEDS PRIVATE LIMITED on 18 April 2022

ORDER

1. The National Company Law Tribunal[1], by its judgment dated16 September 2020, rejected the application dated 19 September 2018[2]filed by the State Bank of India, the appellant, under Section 7 of theInsolvency and Bankruptcy Code 2016[3] against the respondent, thealleged Corporate Debtor, for initiation of the Corporate InsolvencyResolution Process[4].

2. The respondent received credit facilities from the appellantcommencing from 30 November 2006. According to the appellant, as on24 June 2013, the outstanding under the credit facilities extended to therespondent totaled to Rs 102.4 crores. In lieu of these credit facilities,the respondent (along with other persons) provided securities in favor ofthe appellant. The respondent allegedly failed to honor the terms of thesecredit facilities and defaulted on their repayments. Hence, the respondent’saccount with the appellant was classified as a Non-Performing Asset[5 ]on10 June 2014.

3. Thereafter, at various junctures, the appellant aimed to seekrecourse to Securitisation and Reconstruction of Financial Assets andEnforcement of Security Interest Act 2002 and Recovery of Debts Dueto Banks and Financial Institutions Act 1993, while continuing to engagein negotiations with the respondent. Thereafter, the respondent issuedletter dated 19 January 2016 to the appellant offering a one-timesettlement[6 ]of Rs 61 crores in lieu of its debts, which was conditionallyaccepted by the appellant. However, by a letter dated 18 September2017, the respondent unilaterally revised the OTS to Rs 40.6 crores,which was refused by the appellant.

4. The application for initiation of the CIRP was then filed by theappellanton the ground that there was a default on the part of therespondent in paying a financial debt in the amount of approximately Rs189 crores (calculated with interest as on 30 June 2018). The date ofdefault was mentioned as 10 June 2014, when the respondent’s accountwas declared as an NPA.

1 “NCLT”

2 TP No 82/2019 in CP (IB) No 500/7/NCLT/AHM/2018

3 “IBC”

4 “CIRP”

5 “NPA”

6 “OTS”

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A5. While rejecting the application under Section 7 of the IBC onthe ground of limitation, the NCLT observed that:

(i) The respondent’s loan account was declared to be an NPAon 10 June 2014, while the proceeding under Section 7 wasinstituted on 19 September 2018 beyond a period of threeByears from the date on which the right to apply accrued;

(ii) In the decision in the case of V Padmakumar v StressedAssets Stabilisation Fund and Another[7], the NCLAThas held that a statement contained in the balance sheetcannot be treated as an acknowledgement of liability underSection 18 of the Limitation Act 1963[8]; andC

(iii) The proposal for OTS which was submitted by therespondent on 18 September 2017 was also beyond threeyears from the date of default.

6. The order of the NCLT has been upheld in appeal[9] by theNational Company Law Appellate Tribunal[10] on 17 November 2020. InDappeal, the NCLAT held that limitation will be calculated in accordancewith Article 137 of the Limitation Act. Presently in the appellant’sapplication filed before the NCLT in the prescribed format, the date ofdefault was recorded as 10 June 2014. The NCLAT held that such adate could neither be shifted nor extended once the default occurred.EHence, the application under Section 7, which was instituted on 19September 2018, was held to be barred by limitation since it was filedbeyond four years from the date of default. The NCLAT further notedthat it was on the basis of such a default that the Financial Creditor hadmoved the Debt Recovery Tribunal[11] on 20 October 2015 and therecould not be two defaults in respect of the same debt; one for the purposeFof the DRT and another for the purpose of adjudication under the IBC.Finally, the NCLAT held that recourse to Section 18 of the LimitationAct was not available to the appellant.

7. In the present appeal, the appellant has appeared through MrNiranjan Reddy, senior counsel, while Mr Shyam Divan, senior counsel,Ghas appeared on behalf of the respondent.

7 2020 SCC Online NCLAT 417 (“V Padmakumar”)

8 “Limitation Act”

9 Company Appeal (AT) (Insolvency) No 972 of 2020

10 “NCLAT”H11 “DRT”

8. The NCLT placed reliance on the judgment in V Padmakumar(supra). The decision in the above case has been specifically overruledin a judgment of a three-Judge Bench of this Court in AssetReconstruction Company (India) Limited v Bishal Jaiswal andAnother[12], where Justice R F Nariman, speaking for the Bench, held:

“46. It is, therefore, clear that the majority decision of the FullBench in V. Padmakumar is contrary to the aforesaid catena ofjudgments. The minority judgment of Justice (Retd.) A.I.S.Cheema, Member (Judicial), after considering most of thesejudgments, has reached the correct conclusion. We, therefore,set aside the majority judgment of the Full Bench of Nclat dated12-3-2020”

9. Apart from the above decision, it is also necessary to note thatthe provisions of Section 18 of the Limitation Act were held applicableto IBC proceedings by a two-Judge Bench of this Court in Sesh NathSingh v Baidyabati Sheoraphuli Coop. Bank Ltd.[13].

10. While the observation in Sesh Nath Singh (supra) was obiterdicta, the matter has been set at rest in a decision of a three-JudgeBench of this Court in Laxmi Pat Surana v Union Bank of India andAnother[14], where, speaking for the Bench, Justice A M Khanwilkarhas held:

“42. Notably, the provisions of the Limitation Act have been madeapplicable to the proceedings under the Code, as far as may beapplicable. For, Section 238-A predicates that the provisions ofthe Limitation Act shall, as far as may be, apply to the proceedingsor appeals before the adjudicating authority, NCLAT, the DRT orthe Debt Recovery Appellate Tribunal, as the case may be. Afterenactment of Section 238-A IBC on 6-6-2018, validity whereofhas been upheld by this Court, it is not open to contend that thelimitation for filing application under Section 7 IBC would be limitedto Article 137 of the Limitation Act and extension of prescribedperiod in certain cases could be only under Section 5 of theLimitation Act. There is no reason to exclude the effect ofSection 18 of the Limitation Act to the proceedings initiatedunder the Code.

12 (2021) 6 SCC 366 (“Asset Reconstruction Company”)

13 (2021) 7 SCC 313 (“Sesh Nath Singh”)

14 (2021) 8 SCC 481 (“Laxmi Pat Surana”)

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43. Ordinarily, upon declaration of the loan account/debt as NPAthat date can be reckoned as the date of default to enable thefinancial creditor to initiate action under Section 7 IBC. However,Section 7 comes into play when the corporate debtor commits“default”. Section 7, consciously uses the expression “default”— not the date of notifying the loan account of the corporateperson as NPA. Further, the expression “default” has been definedin Section 3(12) to mean non-payment of “debt” when whole orany part or instalment of the amount of debt has become due andpayable and is not paid by the debtor or the corporate debtor, asthe case may be. In cases where the corporate person had offeredguarantee in respect of loan transaction, the right of the financialcreditor to initiate action against such entity being a corporatedebtor (corporate guarantor), would get triggered the moment theprincipal borrower commits default due to non-payment of debt.Thus, when the principal borrower and/or the (corporate) guarantoradmit and acknowledge their liability after declaration of NPA butbefore the expiration of three years therefrom including the freshperiod of limitation due to (successive) acknowledgments, it is notpossible to extricate them from the renewed limitation accruingdue to the effect of Section 18 of the Limitation Act. Section 18of the Limitation Act gets attracted the moment acknowledgmentin writing signed by the party against whom such right to initiateresolution process under Section 7 IBC enures. Section 18 ofthe Limitation Act would come into play every time whenthe principal borrower and/or the corporate guarantor(corporate debtor), as the case may be, acknowledge theirliability to pay the debt. Such acknowledgment, however,must be before the expiration of the prescribed period oflimitation including the fresh period of limitation due toacknowledgment of the debt, from time to time, forinstitution of the proceedings under Section 7 IBC. Further,the acknowledgment must be of a liability in respect of whichthe financial creditor can initiate action under Section 7IBC.”

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(emphasis supplied)

11. An acknowledgement in a balance sheet without a qualificationcan be relied upon for the purpose of the proceedings under the IBC.HThis principle also emerges from the decision in Asset Reconstruction Company (supra), which noted the decisions in Sesh Nath Singh (supra)and Laxmi Pat Surana (supra). This Court held:

“35. A perusal of the aforesaid sections would show that there isno doubt that the filing of a balance sheet in accordance with theprovisions of the Companies Act is mandatory, any transgressionof the same being punishable by law. However, what is ofimportance is that notes that are annexed to or forming part ofsuch financial statements are expressly recognised by Section134(7). Equally, the auditor’s report may also enter caveats withregard to acknowledgments made in the books of accountsincluding the balance sheet. A perusal of the aforesaid would showthat the statement of law contained in Bengal Silk Mills, thatthere is a compulsion in law to prepare a balance sheet but nocompulsion to make any particular admission, is correct in law asit would depend on the facts of each case as to whether an entrymade in a balance sheet qua any particular creditor is unequivocalor has been entered into with caveats, which then has to beexamined on a case by case basis to establish whether anacknowledgment of liability has, in fact, been made, therebyextending limitation under Section 18 of the Limitation Act.”

12. The decisions in Sesh Nath Singh (supra), Laxmi Pat Surana(supra) and Asset Reconstruction Company (supra) have subsequentlybeen followed in numerous decisions of this Court delivered by two-JudgeBenches, namely: (i) Dena Bank v C. Shivakumar Reddy[15]; (ii) StateBank of India v Vibha Agro Tech Limited[16]; (iii) Devas MultimediaPrivate Ltd. v Antrix Corporation Ltd. and Another[17]; and (iv) SVGFashions Pvt. Ltd. (Earlier Known As SVG Fashions Ltd.) v RituMurli Manohar Goyal and Another[18]. Besides the above decisions,there is a more recent decision of a three-Judge Bench of this Court inRajendra Narottamdas Sheth and Another v Chandra Prakash Jainand Another[19], where, speaking for the Bench, Justice L NageswaraRao held:

15 (2021) 10 SCC 330

16 2021 SCC OnLine SC 1297

17 2022 SCC OnLine SC 46

18 2022 SCC OnLine SC 373

19 2021 SCC OnLine SC 843

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A“25. We have already held that the burden of prima facie provingoccurrence of the default and that the application filed underSection 7 of the Code is within the period of limitation, is entirelyon the financial creditor. While the decision to admit an applicationunder Section 7 is typically made on the basis of material furnishedby the financial creditor, the Adjudicating Authority is not barredBfrom examining the material that is placed on record by thecorporate debtor to determine that such application is not beyondthe period of limitation. Undoubtedly, there is sufficient materialin the present case to justify enlargement of the extension periodin accordance with Section 18 of the Limitation Act and suchCmaterial has also been considered by the Adjudicating Authoritybefore admitting the application under Section 7 of the Code. Theplea of Section 18 of the Limitation Act not having been raised bythe Financial Creditor in the application filed under Section 7 cannotcome to the rescue of the Appellants in the facts of this case. It isclarified that the onus on the financial creditor, at the time of filingDan application under Section 7, to prima facie demonstrate defaultwith respect to a debt, which is not time-barred, is not sought tobe diluted herein. In the present case, if the documents constitutingacknowledgement of the debt beyond April, 2016 had not beenbrought on record by the Corporate Debtor, the application wouldEhave been fit for dismissal on the ground of lack of any plea bythe Financial Creditor before the Adjudicating Authority withrespect to extension of the limitation period and application ofSection 18 of the Limitation Act.”

13. In view of the above decisions, the position of law has beenFset at rest. Neither the NCLT nor the NCLAT had the benefit ofadjudicating upon the factual controversy in the context of the decisionsof this Court. The principles which emerge are that:

(i) The provisions of Section 18 of the Limitation Act are notalien to and are applicable to proceedings under the IBC;and G

(ii) An acknowledgement in a balance sheet without aqualification can furnish a legitimate basis for determiningas to whether the period of limitation would stand extended,so long as the acknowledgement was within a period ofHthree years from the original date of default.

14. At this stage, we may also note that Mr Niranjan Reddy hasrelied upon documentary material to indicate that the acknowledgementsof liability were within a period of three years from the date of defaultand, hence, the applicant filed by the appellant under Section 7 of theIBC was within limitation. Reliance has also been placed on the letter ofrevival dated 26 April 2015 and the offer of OTS on 6 November 2015.

15. Since we are inclined to restore the proceedings back to theNCLT for fresh adjudication in view of the decisions of this Court notedabove, we are not entering upon the factual dispute on whether theapplication filed under Section 7 of the IBC would result in an initiationof the CIRP in the present case. The appropriate course of action wouldbe to keep open all rights and contentions of the parties on merits to beadjudicated upon before the NCLT.

16. With the above clarification, we allow the appeal and set asidethe impugned judgment and order of the NCLAT dated 17 November2020 and of the NCLT dated 16 September 2020. The proceedings shallstand restored to the file of the NCLT for adjudication afresh, keepingall rights and contentions of the parties open on the factual aspects ofthe controversy.

17. As the application under Section 7 of the IBC was institutedbefore the NCLT on 19 September 2018, the NCLT shall expeditiouslydispose it, no later than within three months from the date of this order.

18. Pending application(s), if any, stand disposed of.

Divya Pandey(Assisted by : Deepak Panwar, LCRA)

Appeal allowed.

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