Decree Holder Is “Financial Creditor” Under IBC, Limitation For Filing Section 7 Petition Is Extendable On Acknowledgment Of Debt: NCLAT
The National Company Law Appellate Tribunal (NCLAT) New Delhi bench comprising Justice Yogesh Khanna (Judicial member) and Arun Baroka (Technical member) has held that a decree holder falls within the definition of "Financial Creditor" under Section 5(7) and Section 5(8) of the Insolvency and Bankruptcy Code (IBC) if the decree is based on a financial debt. The Tribunal observed that...
The National Company Law Appellate Tribunal (NCLAT) New Delhi bench comprising Justice Yogesh Khanna (Judicial member) and Arun Baroka (Technical member) has held that a decree holder falls within the definition of "Financial Creditor" under Section 5(7) and Section 5(8) of the Insolvency and Bankruptcy Code (IBC) if the decree is based on a financial debt. The Tribunal observed that the cause of action for initiating proceedings under Section 7 of the IBC arises when the debt is acknowledged by the debtor. The Tribunal noted that the Petition filed by the Appellant was within the limitation period as the Respondent had acknowledged the debt, extending the limitation period under Section 18 of the Limitation Act, 1963. It initiated the Corporate Insolvency Resolution Process (CIRP) against the Respondent.
Background Facts:
There was a litigation going on between the parties including a suit for recovery filed by the Appellant before the Delhi High Court. Disputes were referred to Mediation which culminated in a Settlement Agreement. The Respondent agreed to pay Rs. 15.23 crores to the Appellant, issuing four cheques; however, the cheque for Rs. 10 crores was dishonoured. The Delhi High Court attached the Respondent's bank accounts and immovable property to enforce the decree and appointed a Court Auctioneer for the sale of a plot in Pratap Vihar, Ghaziabad. The Respondent failed to pay the debt of Rs. 10 cr. despite the decree of the Delhi High Court. This led to filing of a Petition under Section 7 of IBC. The Adjudicating Authority dismissed the Section 7 petition on the ground that it is barred by limitation.
The Appellant filed the appeal under Section 61 of the Code against the impugned order passed by the Adjudicating Authority i.e., NCLT, New Delhi.
Issues:
- Whether the Petition is barred by limitation?
- Whether a Decree Holder qualifies as a "Financial Creditor" under the IBC?
Contentions of the Parties:
The Appellant contended that in Swaroop Kumar Huggi, Suspended Director Mahendra Investment Advisors Pvt Ltd vs Simplex Infrastructure Limited (FC) and Ors, the Tribunal has held that a Decree Holder is a Financial Creditor.
Appellant contended that the Petition was within the limitation as the Respondent has admitted its liability to pay the Appellant on various occasions. The cause of action arose when the cheque issued by the Respondent was dishonoured on 07.04.2016. The cause of action was continuing one as the Respondent admitted its liability before the High Court on various dates.
Per contra, the Respondent contended that the debt is barred by limitation as the mediation settlement was finalized on 11.09.2014 and the cheque bounced on 07.04.2016 which clearly show that the petition was filed in October 2019.
The Respondent also contended that a a decree holder is included within the definition of "Creditor" under Section 3(10) of the Insolvency and Bankruptcy Code (IBC), but does not fall within the class of creditors as "Financial Creditor" under Section 5(7) of the IBC. The Respondent relied upon Sh. Sushil Ansal vs Ashok Tripathi and Ors., where it was observed:
"The answer to the question whether a decree-holder would fall within the definition of 'Financial Creditor' has to be an emphatic 'No' as the amount claimed under the decree is an adjudicated amount and not a debt disbursed against the consideration for the time value of money and does not fall within the ambit of any of the clauses enumerated under Section 5(8) of the 'I&B Code'."
In Digamber Bhondwe vs JM Financial Asset Reconstruction Company Limited, it was held that decree-holders cannot initiate an application under Section 7 of the IBC.
Respondent further contended that when execution proceedings are pending, simultaneous insolvency proceedings cannot be admitted before the Adjudicating Authority.
Observations:
The Tribunal observed that based on the definition of Creditor under section 3(10) of IBC, a Decree holder is undoubtedly a creditor. The said provision reads as under:
"(10) "creditor" means any person to whom a debt is owed and includes a financial creditor, an operational creditor, a secured creditor, an unsecured creditor and a decree-holder.”
The Tribunal referred to the judgment of the Supreme Court in Dena Bank (now Bank of Baroda) vs. C. Shivakumar Reddy & Anr., where it was held that a decree holder falls within the purview of a "Financial Creditor" under the IBC if the decree is based on a financial debt. The Tribunal found that the Appellant's status as a Decree Holder does not preclude him from being recognised as a Financial Creditor. The decree did not alter the character of the underlying financial debt.
With regard to the issue of limitation, it was observed in Dena Bank as under:
“...delay in filing a Petition in the NCLT is condonable Under Section 5 of the Limitation Act unlike delay in filing a suit. … Section 14 and 18 of the Limitation Act are also applicable to proceedings under the IBC.”
“...an application Under Section 7 of the IBC would not be barred by limitation, on the ground that it had been filed beyond a period of three years from the date of declaration of the loan account of the Corporate Debtor as NPA, if there were an acknowledgement of the debt by the Corporate Debtor before expiry of the period of limitation of three years, in which case the period of limitation would get extended by a further period of three years.”
The Tribunal also referred to the judgment of the Supreme Court in Laxmi Pat Surana vs Union of India wherein it was held that Section 18 of the Limitation Act gets attracted the moment acknowledgement in writing signed by the parties against whom such right to initiate resolution process under Section 7 of IBC ensues.
The Tribunal observed that even though the cause of action for the Appellant arose when the cheque issued by the Respondent was dishonoured yet under Section 18 of the Limitation Act, 1963, a fresh period of limitation begins from the date of acknowledgement of the liability. The Tribunal found that the Appellant's petition filed on 11.10.2019 was within the limitation perioddue to the acknowledged debt.
Further, the Tribunal stated that the fact that the Appellant/Financial Creditor had also taken other steps of execution proceedings before the Delhi High Court was no ground to reject the Section 7 Petition.
The Tribunal held that the Appellant is a Financial Creditor within the meaning of Section 5(7) and Section 5(8) of IBC. It also held that the Petition under Section 7 is within the period of limitation. It allowed the appeal. The application filed by the Appellant under Section 7 of the IBC was admitted and the CIRP was initiated against the Respondent, M/s. ADTV Communications Pvt Ltd.
Case Title: Mr. Rakesh Kumar Jain vs. M/s ADTV Communications Private Limited
Case Number: Company Appeal (AT) (Insolvency) No. 849 of 2023 & I.A. No. 2894, 2895 of 2023
For Appellant : Mr. Sunil Dalal, Sr. Advocate with Mr. Tarun Diwan, Ms. Pyari, Mr. Chandra Prakash, Mr. Chiraayu Trehan and Mr. Nikhil Beniwal, Advocates.
For Respondent : Mr. Anish, Proxy Counsel.
Date of Judgment: 17.12.2024