Money Decree/Certificate Of Recovery In Favour Of Financial Creditor Gives Fresh Cause Of Action To Initiate CIRP U/s 7 IBC: Supreme Court

The Supreme Court observed that a judgment and/or decree for money in favour of the Financial Creditor, or the issuance of a Certificate of Recovery in its favour, would give rise to a fresh cause of action for the Financial Creditor, to initiate proceedings under Section 7 of the IBC for initiation of the Corporate Insolvency Resolution Process. 

Such judgment/decree may be passed by the Debt Recovery Tribunal, or any other Tribunal or Court, and in such cases Insolvency Resolution Process can be initiated, within three years from the date of the judgment and/or decree or within three years from the date of issuance of the Certificate of Recovery, if the dues of the Corporate Debtor to the Financial Debtor, or any part thereof remained unpaid, the court held.

The bench comprising Justices Indira Banerjee and V. Ramasubramanian also observed that an application under Section 7 of the Insolvency and Bankruptcy Code 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 such a case, the period of limitation would get extended by a further period of three years, the court observed.

The court was considering an appeal against the judgment of National Company Law Appellate Tribunal in which the following issues were raised:

1. Whether a Petition under Section 7 of the IBC would be barred by limitation, on the sole ground that it had been filed beyond a period of 3 years from the date of declaration of the loan account of the Corporate 8 Debtor as NPA, even though the Corporate Debtor might subsequently have acknowledged its liability to the Appellant Bank, within a period of three years prior to the date of filing of the Petition under Section 7 of the IBC, by making a proposal for a One Time Settlement, or by acknowledging the debt in its statutory Balance Sheets and Books of Accounts?
2. Whether a final judgment and decree of the DRT in favour of the Financial Creditor, or the issuance of a Certificate of Recovery in favour of the Financial Creditor, would give rise to a fresh cause of action to the Financial Creditor to initiate proceedings under Section 7 of the IBC within three years from the date of the final judgment and decree, and/or within three years from the date of issuance of the Certificate of Recovery.
3. Whether there is any bar in law to the amendment of pleadings, in a Petition under Section 7 of the IBC, or to the filing of additional documents, apart from those filed initially, along with the Petition under Section 7 of the IBC in Form-1?

In this case, the Adjudicating Authority admitted the Petition under Section 7 of the IBC, filed by financial creditor and appointed an Interim Resolution Professional. In appeal, NCLAT held that the said application was barred by limitation. NCLAT also found that there was nothing on record that suggested that the Corporate Debtor had acknowledged its debt to the  Bank. In appeal, the bank contended that Section 18 of the Limitation Act applied to proceedings under the IBC.

To answer these issues, the bench noted that the period of limitation for making an application under Section 7 or 9 of the IBC is three years from the date of accrual of the right to sue, that is, the date of default. It also noted that, as per Section 18 of Limitation Act, an acknowledgement of present subsisting liability, made in writing in respect of any right claimed by the opposite party and signed by the party against whom the right is claimed, has the effect of commencing a fresh period of limitation from the date on which the acknowledgement is signed. Such acknowledgement need not be accompanied by a promise to pay expressly or even by implication. However, the acknowledgement must be made before the relevant period of limitation has expired. 

The bench also observed that in Sesh Nath Singh and Anr. v. Baidyabati Sheoraphuli, it was observed that the IBC does not exclude the application of Section 14 or 18 or any other provision of the Limitation Act. The bench also observed that the entries in books of accounts and/or balance sheets of a Corporate Debtor would amount to an acknowledgment under Section 18 of the Limitation Act. Referring to observations made in Ferro Alloys Corporation Limited v. Rajhans Steel Limited, the bench observed:

"132. We see no reason why the principles should not apply to an application under Section 7 of the IBC which enables a financial creditor to file an application initiating the Corporate Insolvency Resolution Process against a Corporate Debtor before the Adjudicating Authority, when a default has occurred. As observed earlier in this judgment, on a conjoint reading of the provisions of the IBC quoted above, it is clear that a final judgment and/or decree of any Court or Tribunal or any Arbitral Award for payment of money, if not satisfied, would fall within the ambit of a financial debt, enabling the creditor to initiate proceedings under Section 7 of the IBC

The bench therefore observed that order/decree of the DRT and the Recovery Certificate gave a fresh cause of action to the Appellant Bank to initiate a petition under Section 7 of the IBC

138. A final judgment and order/decree is binding on the judgment debtor. Once a claim fructifies into a final judgment and order/decree, upon adjudication, and a certificate of Recovery is also issued authorizing the creditor to realize its decretal dues, a fresh right accrues to the creditor to recover the amount of the final judgment and/or order/decree and/or the amount specified in the Recovery Certificate.. The Appellant Bank was thus entitled to initiate proceedings under Section 7 of the IBC within three years from the date of issuance of the Recovery Certificate. The Petition of the Appellant Bank, would not be barred by limitation at least till 24th May, 2020.", it said.

Offer of One Time Settlement of a live claim, made within the period of limitation, can be construed as an acknowledgment to attract Section 18 of the Limitation Act.

The bench further said that the Section 18 of the Limitation Act cannot also be construed with pedantic rigidity in relation to proceedings under the IBC. T

This Court sees no reason why an offer of One Time Settlement of a live claim, made within the period of limitation, should not also be construed as an acknowledgment to attract Section 18 of the Limitation Act.   

Observing thus, the bench concluded as follows:

"142. To sum up, in our considered opinion 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.

143. Moreover, a judgment and/or decree for money in favour of the Financial Creditor, passed by the DRT, or any other Tribunal or Court, or the issuance of a Certificate of Recovery in favour of the Financial Creditor, would give rise to a fresh cause of action for the Financial Creditor, to initiate proceedings under Section 7 of the IBC for initiation of the Corporate Insolvency Resolution Process, within three years from the date of the judgment and/or decree or within three years from the date of issuance of the Certificate of Recovery, if the dues of the Corporate Debtor to the Financial Debtor, under the judgment and/or decree and/or in terms of the Certificate of Recovery, or any part thereof remained unpaid."

Case: Dena Bank vs. C. Shivakumar Reddy ; CA 1650 OF 2020
Coram: Justices Indira Banerjee and V. Ramsubramanian
Counsel:  Sr. Adv Dhruv Mehta, Adv Goutham Shivshankar
Citation: LL 2021 SC 349

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