Subsequently Modified OTS Proposal Would Further Refresh The Limitation Period: NCLAT Chennai
The National Company Law Appellate Tribunal (“NCLAT”), Chennai Bench, comprising of Justice M. Venugopal (Judicial Member) and Shri Naresh Salecha (Technical Member), while adjudicating an appeal filed in M/s. State Bank of India v M/s. Hackbridge Hewittic and Easun Limited, has held that submission of a One Time Settlement (“OTS”) proposal is acknowledgement of debt in terms...
The National Company Law Appellate Tribunal (“NCLAT”), Chennai Bench, comprising of Justice M. Venugopal (Judicial Member) and Shri Naresh Salecha (Technical Member), while adjudicating an appeal filed in M/s. State Bank of India v M/s. Hackbridge Hewittic and Easun Limited, has held that submission of a One Time Settlement (“OTS”) proposal is acknowledgement of debt in terms of Section 18 of Limitation Act, 1963. Further, any fresh or subsequent/modified OTS proposal would further extend the limitation period by three years.
Background Facts
M/s Victory Electricals Ltd. (“Principal Borrower”) had availed financial facility from the State Bank of India (“Financial Creditor/Bank”). M/s. Hackbridge Hewittic and Easun Limited (“Guarantor”) being a 100% subsidiary of the Principal Borrower, the latter created security interest on immovable assets of the Guarantor as security for the loans availed by it. The Guarantor executed a declaration-cum-indemnity, undertaking to pay the loans of Principal Borrower with interest to the Bank.
The Principal Borrower furnished a One Time Settlement (“OTS”) proposal on 13.03.2014 which was rejected by the Bank. On 01.06.2016 the Bank along with the Principal Borrower executed a revival letter under Section 18 of the Limitation Act, 1963 for its debt and a loan agreement was executed.
On 06.10.2016, the Bank sanctioned the OTS of Principal Borrower and when payments were not received the OTS stood cancelled on 03.05.2018. The Bank argued that due to cancellation of the sanctioned OTS, a fresh default occurred on 03.05.2018, thus giving a fresh right to the Bank to take legal action against the Principal Borrower and the Guarantor.
Thereafter, the Principal Borrower was admitted into Corporate Insolvency Resolution Process (“CIRP”) on 10.04.2019 and eventually order for liquidation was passed on 19.11.2019. the Bank filed its claim for Rs. 348.68 Crores before the Liquidator. However, there was a huge gap between amount due and amount payable since the liquidation value of the Principal Borrower was only Rs. 27.95 Crores.
In view of the same, the Bank filed a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”), seeking initiation of CIRP against the Guarantor.
The Adjudicating Authority calculated the limitation period from 01.06.2012 onwards i.e. when the Bank obtained a copy of revival letter as per Section 18 of the Limitation Act, 1963. Accordingly, it was held that three years period from 01.06.2012 was long back over prior to OTS proposal dated 06.10.2016. The petition was rejected for being barred by limitation.
The Bank filed an appeal before the NCLAT against the order of dismissal and argued that each OTS proposal tantamount to fresh ‘acknowledgment of debt’ in terms of Section 18 of Limitation Act, 1963.
NCLAT Verdict
The Bench observed that Section 18(1) of the Limitation Act, 1963 provides that where before the expiration of the prescribed period for a suit/application in respect of any right, an acknowledgement of liability in respect of such right has been made in writing signed by the party against whom such right is claimed, a fresh period of limitation shall be computed from the time when the acknowledgement was signed.
It was observed that the Adjudicating Authority took a stand that OTS proposal does not extend the limitation period. On the same issue, the Bench held as under:
“In fact, the ‘impugned order’ takes into account only on 06.10.2016 when the Principal Borrower gave its ‘OTS’ proposal to the ‘Appellant’ which was accepted by the ‘Appellant’ herein issuing the sanction letter of Rs. 69.50 Crores. The ‘Adjudicating Authority’ therefore clearly erred in not considering that submission of the ‘OTS’ is clearly acknowledgement of debt by the Principal Borrower and any fresh or subsequent/ modified ‘OTS’ would further extend the limitation period by three years.”
It has been held that submission of an OTS proposal tantamount to acknowledgement of debt by the Principal Borrower and any subsequent modification of such proposal would further extend the limitation period by three years.
The Bench further noted that since the liability of Guarantor is co-extensive with debt of Principal Borrower, therefore, the acknowledgment of debt by OTS proposals were also deemed acknowledgements by the Guarantor of its liability as a guarantor on behalf of the Principal Borrowers.
The matter has been remitted back to the Adjudicating Authority for re-consideration.
Case Title: M/s. State Bank of India v M/s. Hackbridge Hewittic and Easun Limited
Case No.: Company Appeal (AT) (CH) (Ins.) No. 05 of 2021
Counsel For Appellant: Mr. Ramji Srinivasan, Sr. Advocate For Mr. A. Chatterjee, Advocate.
Counsel For Respondent: Mr. Prem Kumar Pothina, Advocate.