Financial Creditor Has To Prove That Application Filed U/s 7 IBC Is Not Barred By Limitation; But Materials Produced By Corporate Debtor Can Be Examined: Supreme Court

The Supreme Court observed that adjudicating authority can examine the material placed on record by the corporate debtor to determine whether an application filed by financial creditor is not beyond the period of limitation.

The court clarified that the burden of prima facie proving occurrence of the default and that the application filed under Section 7 of the Insolvency and Bankruptcy Code is within the period of limitation, is entirely on the financial creditor.

"While the decision to admit an application under Section 7 is typically made on the basis of material furnished by the financial creditor, the Adjudicating Authority is not barred from examining the material that is placed on record by the corporate debtor to determine that such application is not beyond the period of limitation.", the bench of justices L. Nageswara Rao, BR Gavai and BV Nagarathna observed.

In this case, the Financial Creditor filed an application under Section 7 of the Code seeking initiation of corporate insolvency resolution process. The Adjudicating authority admitted the application while rejecting the corporate debtor's contention that the application under Section 7 of the Code was not maintainable as it was filed by a power of attorney holder and that it was barred by limitation.

In appeal, the appellant Corporate debtor brought to the notice of the Apex court that the date of default is shown as 30.09.2014 in the application filed under Section 7 of the Code and therefore the said application filed on 25.04.2019 was barred by limitation as it was not filed within three years from the date of default. It was further submitted that no other information has been provided by the Financial Creditor to show that the application under Section 7 was filed within the period of limitation.

Examining the records, the court noticed that the Corporate Debtor had, in its reply before the Adjudicating Authority, placed on record a letter dated 17.11.2018, which detailed the amount repaid till 30.09.2018 and acknowledged the amount outstanding as on 30.09.2018. On the basis of this letter and the record showing that the Corporate Debtor had executed various documents amounting to acknowledgement of the debt even in the financial year 2019-20, the NCLT was of the opinion that the application was filed within the period of limitation, the court noted.

Taking note of this, the bench observed:

23. We have already held that the burden of prima facie proving occurrence of the default and that the application filed under Section 7 of the Code is within the period of limitation, is entirely on the financial creditor. While the decision to admit an application under Section 7 is typically made on the basis of material furnished by the financial creditor, the Adjudicating Authority is not barred from examining the material that is placed on record by the corporate debtor to determine that such application is not beyond the period of limitation. Undoubtedly, there is sufficient material in the present case to justify enlargement of the extension period in accordance with Section 18 of the Limitation Act and such material has also been considered by the Adjudicating Authority before admitting the application under Section 7 of the Code. The plea of Section 18 of the Limitation Act not having been raised by the Financial Creditor in the application filed under Section 7 cannot come to the rescue of the Appellants in the facts of this case. It is clarified that the onus on the financial creditor, at the time of filing an application under Section 7, to prima facie demonstrate default with respect to a debt, which is not time-barred, is not sought to be diluted herein. "

The court said that, in the present case, if the documents constituting acknowledgement of the debt  had not been brought on record by the Corporate Debtor, the application would have been fit for dismissal on the ground of lack of any plea by the Financial Creditor before the Adjudicating Authority with respect to extension of the limitation period and application of Section 18 of the Limitation Act.

The court also made the following observations in the judgment:

Section 18 of the Limitation Act is applicable to applications filed under Section 7 of the Code

21....It is no more res integra that Section 18 of the Limitation Act is applicable to applications filed under Section 7 of the Code. In case the application under Section 7 is filed beyond the period of three years from the date of default and the financial creditor furnishes the required information relating to the acknowledgement of debt, in writing by the corporate debtor, before the Adjudicating Authority, with  such acknowledgement having taken place within the initial period of three years from the date of default, a fresh period of limitation commences and the application can be entertained, if filed within this extended period.

Responsibility of the financial creditor to give all particulars relating to the debt due

20. There can be no doubt that it is the responsibility of the financial creditor to give all particulars relating to the debt due and the date of default, along with the requisite documents, at the time of filing of an application under Section 7 of the Code. A plain reading of Section 7, Rule 4 of the 2016 Rules and Form 1 makes it clear that the Adjudicating Authority may admit an application under Section 7 only if he is satisfied that a default has occurred. The definition of 'default' under Section 3 (12) of the Code refers to non-payment of debts which are "due and payable" in law, meaning thereby that an application under Section 7 of the Code is maintainable only with respect to debts that are not time-barred. (See: B.K. Educational Services Private Limited v. Parag Gupta and Associates 6 ) The primary obligation of making out a prima facie case of default is on the financial creditor. There is no necessity for the corporate debtor to provide any information at the stage of admission of the application under Section 7 of the Code, as the burden of showing non-payment of a legally recoverable debt, which is not time-barred, is on the financial creditor. At the same time, it is clear from the judgments of this Court in Asset Reconstruction (supra) and Dena Bank (supra) that non-furnishing of information by the financial creditor at the time of filing an application under Section 7 of the Code need not necessarily entail in dismissal of the application. An opportunity can be provided to the financial creditor to provide additional information required for satisfaction of the Adjudicating Authority with respect to the occurrence of the default.

Application filed after the prescribed period of limitation shall be dismissed in spite of limitation not being set up as a defence,

19. Any suit, appeal or application filed after the prescribed period of limitation shall be dismissed in spite of limitation not being set up as a defence, as per Section 3 of the Limitation Act. Section 238A of the Code makes the provisions of the Limitation Act applicable to the proceedings before the Adjudicating Authority, as far as may be. Therefore, the Adjudicating Authority is duty-bound to scrutinise the application filed under Section 7 of the Code and come to a conclusion on whether such application is barred by limitation, even in the absence of any plea with respect to limitation. (See: Noharlal Verma v. District Cooperative Central Bank Limited, Jagdalpur )

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