ANALYSIS OF THE ORDER OF THE HON’BLE NCLAT IN THE MATTER OF
V.PADMAKUMAR VS. STRESSED ASSETS STABILISATION FUND (SASF) & ANR.
By Mr. VVSN Raju, Mr. AVP Reddy and Ms. Shreya Kurudi
The ‘Industrial Development Bank of India’ (‘IDBI’) granted a loan of Rs. 600 lacs by way of Term Loan Agreement to ‘M/s. Uthara Fashion Knitwear Limited’ (‘Corporate Debtor’) and the loan disbursed was primarily secured by hypothecation of plant and machinery together with machinery spares amongst others. The account of the Corporate Debtor was classified as a “Non-Performing Asset” on 29th May, 2002.
Subsequently, ‘M/s. Stressed Assets Stabilization Fund (SASF)’- (‘Financial Creditor’) (an assignee of IDBI) filed an application u/s 7 of the Insolvency and Bankruptcy Code, 2016 (“Code“) for initiation of ‘Corporate Insolvency Resolution Process’ (‘CIRP’) against the Corporate Debtor. The Adjudicating Authority (National Company Law Tribunal), Division Bench, Chennai, by its impugned order dated 21st November, 2019 admitted the application to CIRP.
An Appeal was preferred over the Order of the Adjudicating Authority before the Hon’ble National Company Law Appellate Tribunal (“NCLAT”), wherein the preliminary plea that was taken by the Appellant is that the Demand Notice was not served before the order of admission was passed on 21st November, 2019. The Appellant stated that had a Demand Notice been issued, they would have shown that the application under Section 7 was barred by limitation, on the account of the Corporate Debtor having been declared as an NPA in the year 2009 and the Suit filed by Financial Creditor against the Corporate Debtor for Recovery of Debt u/s 19 of Recovery of Debts due to Banks and Financial Institutions Act, 1993 (‘RDDBFI’) which decreed in the year 2013.
Upon notice, the Respondents appeared and relied on decision of the three Hon’ble Members of this Appellate Tribunal dated 22nd January, 2020 in “M/s. Ugro Capital Limited v. M/s. Bangalore Dehydration and Drying Equipment Co. Pvt. Ltd. (BDDE)1”. In the said case, the Hon’ble Members of this Appellate Tribunal taking into consideration that the suit was decreed on 22nd May, 2015, held that non-payment of debt thereafter amounts to “committed default” in terms of Section 3(12) of the ‘I&B Code’ for the first time and in terms of Article 137 of the Limitation Act, 1963, for the purpose of filing application under Section 7 of the ‘I&B Code’ three years from the date the right to apply accrued for the first time from the date of default in terms of decree. The matter was referred to larger Bench to decide the issue.
Issues for consideration
The Issues that fell for consideration before the Hon’ble National Company Law Appellate Tribunal (“NCLAT”) can be broadly classified as follows:
(a) Whether the limitation period commences from the date of the amount falling due and payable or whether a fresh limitation period commences from the date of decree of any suit for recovery of debt.
(b) Whether reflection of debt in a Balance Sheet of the ‘Corporate Debtor’ prepared pursuant to Section 92 of the Companies Act, 2013 amounts to acknowledgment of debt.
The Hon’ble NCLAT through its five member bench delivered the judgment. Four Members were in favour of the judgment, and one member dissenting with their own judgment.
The majority judgment is described as hereunder.
With respect to the first issue that fell for consideration, the NCLAT referred to the Judgment of the Apex Court in B.K. Educational Services Private Limited v. Parag Gupta and Associates, wherein it was held that for the purpose of Section 7, the Limitation Act, 1963 is applied from the date of inception of the Code. In para 43, it was categorically held as extracted hereunder.
“42. It is thus clear that since the Limitation Act is applicable to applications filed under Sections 7 and 9 of the Code from the inception of the Code, Article 137 of the Limitation Act gets attracted. “The right to sue”, therefore, accrues when a default occurs. If the default has occurred over three years prior to the date of filing of the application, the application would be barred under Article 137 of the Limitation Act, save and except in those cases where, in the facts of the case, Section 5 of the Limitation Act may be applied to condone the delay in filing such application.”
The NCLAT also referred to the judgment of the Apex Court in the matter of Jignesh Shah and Anr. vs. Union of India and Anr., it was held while taking into consideration the fact of filing of an application under Sections 433 and 434 of the Companies Act, 2013, wherein it inter alia observed the following:
“21. The aforesaid judgments correctly hold that a suit for recovery based upon a cause of action that is within limitation cannot in any manner impact the separate and independent remedy of a winding-up proceeding. In law, when time begins to run, it can only be extended in the manner provided in the Limitation Act. For example, an acknowledgment of liability under Section 18 of the Limitation Act would certainly extend the limitation period, but a suit for recovery, which is a separate and independent proceeding distinct from the remedy of winding up would, in no manner, impact the limitation within which the winding-up proceeding is to be filed, by somehow keeping the debt alive for the purpose of the winding-up proceeding.
Also, referring to the recent decision of the Apex Court in the matter of Gaurav Hargovindbhai Dave vs. Asset Reconstructions Company (India) Limited and Anr. In the said case, Apex Court noticed that the Respondent was declared an NPA on 21st July, 2011. The Bank had filed two OAs before the Debts Recovery Tribunal in 2012 to recover the total debt. Taking into consideration the facts, the Apex Court held that the default having taken place and as the account was declared NPA on 21st July, 2011, the application under Section 7 which was filed on 3-10-2017 was barred by limitation., wherein it was held that Article 62 of the Limitation Act, 1963 is out of the way on the ground that it would only apply to suits. The present case being “an application” which is filed under Section 7, would fall only within the residuary Article 137 of the Limitation Act, 1963. It further held in favour of the Appellants that the time, therefore, begins to run on 21-7-2011, as a result of which the application filed under Section 7 would clearly be time-barred, wherein a reliance was also placed on the Report of the Insolvency Law Committee which itself stated that the intent of the Code could not have been to give a new lease of life to debts which are already time-barred.
In Vashdeo R. Bhojwani vs. Abhyudaya Co-operative Bank Limited and Anr., the Apex Court referring to B.K. Education (Supra) observed that the this was a case covered by the judgment of Apex Court in B.K. Educational Services (P) Ltd. v. Parag Gupta and Associates.
The aforesaid decisions of the Apex Court and NCLAT make it clear that for the purpose of computing the period of limitation of application under Section 7, the date of default is ‘NPA’ and hence a crucial date.
The NCLAT further held that the following.
“Suit for recovery of money can be filed only when there is a default of dues. Even if the decree is passed, the date of default cannot be shift forward to the date of decree or date of payment for execution as a decree can be executed within specified period i.e. 12 years. If it is executable within the period of limitation, one cannot allege that there is a default of decree or payment of dues.
Therefore, we hold that a Judgment or a decree passed by a Court for recovery of money by Civil Court/Debt Recovery Tribunal cannot shift forward the date of default for the purpose of computing the period for filing an application under Section 7 of the ‘I&B Code’.”
The First Issue was thus decided as, that the limitation period starts from the date of the amount falling due and payable and not from the date of decree or from any other subsequent action and that S.7 of the Code is an independent Action and does not rise from any other proceeding.
With respect to the Second issue that fell for consideration, the decision of NCLAT in Sh. G Eswara Rao v. Stressed Assets Stabilisation Fund, it was noticed the provision of acknowledgment in writing under Section 18 of the Limitation Act, 1963 and Section 92 of the Companies Act, 2013. This Appellate Tribunal also noticed the decree passed by the Debt Recovery Tribunal to find out whether the same can be held to be acknowledgment of debt under Section 18 of the Limitation Act, 1963, upon examining the provisions, i.e. S.18 of the Limitation Act, 1963 and S. 92 of the Companies Act, 1963, held as hereunder.
“13. As the Decree passed by DRT on 17th August, 2018 cannot be said to be an acknowledgement of debt by the ‘Corporate Debtor’ in terms of Section 18 of the Limitation Act, 1963 learned Counsel for the Respondent relied on Balance Sheet of the ‘Corporate Debtor’ for the years ending 2014-15, 2015-16 and 2016-2017 to suggest that the ‘Corporate Debtor’ admitted the liability in its Independent Auditor’s Report and Balance Sheet.
- As the filing of Balance Sheet/Annual Return being mandatory under Section 92(4), failing of which attracts penal action under Section 92(5) & (6), the Balance Sheet/Annual Return of the ‘Corporate Debtor’ cannot be treated to be an acknowledgement under Section 18 of the Limitation Act, 1963.
- If the argument is accepted that the Balance Sheet/Annual Return of the ‘Corporate Debtor’ amounts to acknowledgement under Section 18 of the Limitation Act, 1963 then in such case, it is to be held that no limitation would be applicable because every year, it is mandatory for the ‘Corporate Debtor’ to file Balance Sheet/Annual Return, which is not the law.”
The Second Issue was decided and held that the mentioning of the liability in the Balance Sheet/Annual Return of the ‘Corporate Debtor’ amounts to acknowledgement of debt and that limitation would not be maintainable.
The NCLAT held that, since the account of the ‘Corporate Debtor’ was declared NPA on 31st October, 2002 and that the decree was passed on 19th June, 2009/31st August, 2009, NCLAT held that the application under Section 7 filed by Financial Creditor against the Corporate Debtor was barred by limitation and was not maintainable. Thus, setting aside the impugned order dated 21st November, 2019 passed by the Adjudicating Authority (National Company Law Tribunal), Division Bench, Chennai.
The NCLAT also held that the entire proceedings subsequent to impugned order of admission of Corporate Debtor to CIRP have been declared as illegal and have been set aside, restoring the powers of the Board of Directors with immediate effect. The fee for Interim Resolution professional and CIRP Cost was to be borne by the Financial Creditor as determined by the Adjudicating Authority.
The Dissenting Judgment
The dissenting judgment was limited only to the issue of Balance Sheet/Annual Returns of Companies and where entries in the same have been treated as “acknowledgement of debt” and even accepted the same for the purpose of Section 18 of the Limitation Act, 1963.
The NCLAT in its dissenting judgment has referred to various judgment of Supreme Court and High Courts, including the decision of the Apex Court in the matter of Mahabir Cold Storage vs Commissioner Of Income Tax, Patna, in which it was held as extracted hereunder.
“The entries in the books of accounts of the appellant would amount to an acknowledgement of the liability to Messrs. Prayagchand Hanumanmal within the meaning of Section 18 of the Limitation Act, 1963, and extend the period of limitation for the discharge of the liability as debt.
In several judgments of this Court, this legal position has been accepted.”
The Judgment Supra was mentioned in the judgment of the Delhi High Court in the matter of Sheetal Fabrics Vs. Coir Cushions Ltd.. The NCLAT further referred to its decision in the matter of Mr. Gouri Prasad Goenka Vs. Punjab National Bank and Anr., wherein it was held that held that a letter emanating from Corporate Debtor in that matter, addressed to the Financial Creditor where Corporate Debtor agreed to settle all outstanding dues of the Financial Creditor on “One Time Settlement (OTS) basis” amounted to acknowledgment of outstanding debt in writing.
It has also discussed about its judgment in the matter of “Gautam Sinha Versus UV Asset Reconstruction Company Limited and Ors..
Further, much reliance was placed upon the judgment of the Apex Court in the matter of ITC Limited vs. Blue Coast Hotels Ltd. and Ors., which is extracted as hereunder.
Letter of Undertaking “Without Prejudice”
- Much was sought to be made of the words “without prejudice” in the letter containing the undertaking that if the debt was not paid, the creditor could take over the secured assets. The submission on behalf of the debtor that the letter of undertaking was given in the course of negotiations and cannot be held to be an evidence of the acknowledgement of liability of the debtor, apart from being untenable in law, reiterates the attempt to evade liability and must be rejected. The submission that the letter was written without prejudice to the legal rights and remedies available under any law and therefore the acknowledgement or the undertaking has no legal effect must likewise be rejected. This letter is reminiscent of a letter that fell for consideration in Spencer’s case as pointed out by Mr. Harish Salve, “as a Rule the debtor who writes such letters has no intention to bind himself further than is bound already, no intention of paying so long as he can avoid payment, and nothing before his mind but a desire, somehow or other, to gain time and avert pressure.”
It was argued in a subsequent case that an acknowledgment made “without prejudice” in the case of negotiations cannot be used as evidence of anything expressly or impliedly admitted.
The House of Lords observed as follows:
“But when a statement is used as acknowledgement for the purpose of Section 29(5), it is not being used as evidence of anything. The statement is not an evidence of an acknowledgement. It is the acknowledgement.”
Therefore, the without prejudice Rule could have no application.
Here, the respondent, Mr. Rashid was not offering any concession. On the contrary, he was seeking one in respect of an undisputed debt. Neither an offer of payment nor actual payment.
We, thus, find that the mere introduction of the words “without prejudice” have no significance and the debtor clearly acknowledged the debt even after action was initiated under the Act and even after payment of a smaller sum, the debtor has consistently refused to pay up.”.
The NCLAT held that even though the judgment cited supra, there was no aspect of Limitation Act but the substance emanating is that even “Letter of Undertaking” issued “without prejudice” clause could contain an “acknowledgement of debt”, which could give rise to limitation.
The NCLAT further briefly discussed about the judgment of the Apex Court in A.V. Murthy vs. B.S. Nagabasavanna wherein the Apex Court while dealing with a matter u/s 138 of the Negotiable Instruments Act, 1881 without going into the merits opined that the amount borrowed by the respondent if shown in the balance sheet, may amount to an acknowledgement and that the creditor might have a fresh period of limitation from the date on which the acknowledgement was made. The judgment supra was reaffirmed by the Apex Court in the matter of S. Natarajan vs. Sama Dharman.
The NCLAT opined that the Annual Returns/Audited Balance Sheets, one time settlement proposals, proposals to restructure loans, by whatever names called, cannot be simply ignored as debarred from consideration and in every given matter, further opined that it would be a question of applying the facts to the law and vice versa, to see whether or not the specific contents, spell out an acknowledgement under the Limitation Act.
The NCLAT in the said dissenting judgment decided to remit the matter back to the Adjudicating Authority for consideration whether or not the audited Balance Sheets and OTS proposals referred would on facts read with the law, amount to acknowledgements, so as to save limitation.
There are a catena of judgments on the Taxation side, which specifically goes in favour of the Dissenting Judgment, providing for acknowledgment of debt, which the majority judgment ought to have taken into consideration. However, since the present judgement has been pronounced by a full bench of the Hon’ble NCLAT, it can only be overruled if an appeal is preferred before the Hon’ble Apex Court and the Apex Court takes a differing view.
As per the Reserve Bank of India’s guidelines relating to Non Performing Assets, Banks and other Financial Institutions have to invariably declare loan accounts as NPA if borrowers default in payment of interest, instalments etc. for a specified period. Thereafter, after exhausting various efforts and steps, general practice among bankers etc. in the form of negotiations, granting time, pressure tactics for regularizing accounts in addition to OTS schemes, compromise offers, SARFAESI proceedings etc. the Banks as a last measure, resort to NCLT proceedings under Section 7 of the Code. The interim period between the date of NPA and resorting to the last steps is always more than 3 years, during which lot of correspondence to achieve the aforesaid steps take place. Unless such correspondence documents are recognized as acknowledgement for the purpose of Section 18 of the Limitation Act, the purpose of Section 7 of the Code could not be achieved.