In the recent judgment in Dena Bank v. C. Shivakumar Reddy1, the Hon'ble Supreme Court held that the non-payment of an amount awarded under a decree, judgment, or an arbitral award would be covered under the scope of "financial debt" and give rise to a fresh cause of action to initiate insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 (IBC). The Apex Court also held that there is no bar to amend pleadings in an application filed under Section 7 of the IBC. The Apex Court observed that the applicant can file additional documents apart from the ones initially filed under Section 7 at any time before the passing of the final order. The present article briefly examines how the Hon'ble Supreme Court construed the key provisions of law to arrive at its judgment.
On 23 December 2011, Dena Bank (Appellant) sanctioned a term loan (Loan) in favor of the second respondent (Corporate Debtor) which was to be repaid in 24 quarterly installments two years after the date of disbursement. The Corporate Debtor defaulted in repayment of its dues under the Loan in September 2013. The account of the Corporate Debtor was declared to be a Non-Performing Asset (NPA) in December 2013. In December 2014, the Appellant issued a legal notice to the Corporate Debtor calling it to make payment of INR 52.12 Crores. The Corporate Debtor did not make the repayment. On 1 January 2015, the Appellant initiated proceedings before the Debt Recovery Tribunal, Bangalore (DRT) for recovery of its outstanding dues of approximately INR 52.12 Crores. By a letter dated 5 January 2015, the Corporate Debtor requested the Appellant to restructure the loan. Similarly, on 3 March 2017, the Corporate Debtor proposed a one-time settlement of the Loan which was rejected by the Appellant.
In March 2017, the DRT passed an order against the Corporate Debtor for recovery of outstanding dues. Accordingly, on 25 May 2017, the DRT issued a recovery certificate in favour of the Appellant. Thereafter, on 19 June 2017, the Corporate Debtor once again proposed a one-time settlement to mutually settle the loan amount. The unpaid dues of the Corporate Debtor were also reflected under liabilities in the annual reports for financial years 2016-2017 and 2017-2018.
In October 2018, the Appellant filed a petition under Section 7 of the IBC. Thereafter, in January 2019, the Appellant sought to place on record additional documents, including the final judgment and order of the DRT dated 27 March 2017 and the recovery certificate issued on 25 May 2017. This request of the Appellant came to be allowed. The Corporate Debtor in February 2019 filed its preliminary objection to the petition filed by the Appellant contending that the same was barred by limitation. In March 2019, the Appellant once again sought to place on record additional documents which included the proposals for one time settlement, and financial statements of the Corporate Debtor from 2016 to 2018 which was allowed.
By an order dated 21 March 2019, the National Company Law Tribunal (NCLT) admitted the petition under Section 7 of the IBC. The objection of Corporate Debtor on grounds of limitation was heard at length but was rejected by the NCLT. The first respondent filed an appeal before the National Company Law Appellate Tribunal (NCLAT) against the decision of the NCLT. The NCLAT allowed the appeal and dismissed the petition filed by the Appellant under Section 7 of the IBC holding that the said application was barred by limitation.
The matter eventually reached the Hon'ble Supreme Court where the moot questions were identified as follows:
- Whether a petition under Section 7 of the IBC would be barred by limitation on the sole ground that it was filed 3 years from the date of declaration of the loan account as NPA even though the Corporate Debtor might subsequently have acknowledged its liability?
- Whether the passing of a final judgment or decree of the DRT or issuance of a recovery certificate 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?
- Whether there is any bar in law on amendment of pleadings in a petition under Section 7 of the IBC or on the filing of additional documents?
At the outset, the Hon'ble Supreme Court in the instant matter referred to the object of the IBC. It was observed that the IBC is a beneficial legislation aimed at promoting inter alia investments and also resolution of insolvency of corporate persons. Reliance was placed on the decision in Swiss Ribbons Private Limited v. Union of India2 to reiterate that unlike coercive recovery litigation, the Corporate Insolvency Resolution Process (CIRP) under the IBC is not adversarial to the interests of the Corporate Debtor. Thus, the Apex Court held that the provisions of the IBC must be construed liberally in a purposive fashion to further the object of the IBC and not be given a narrow, pedantic interpretation which defeats the very purpose of the statute.
It was noted that a financial creditor was required to apply under Section 7 of the IBC, under statutory "Form 1" which allowed the applicant to fill only the specified particulars. Therefore, there was no scope for elaborate pleadings as in case of plaints in a suit. Consequently, the Hon'ble Supreme Court observed that a Section 7 petition could not be viewed through the same lens as a plaint in a suit. The provisions under Sections 7(2) to 7(5) were then referred to hold that the adjudicating authority is obligated to ascertain the existence of the default on the basis of the records of an information utility or evidence furnished by the financial creditor. It was clarified that the 14-day period stipulated in Section 7(4) to ascertain the existence of a default was only directory in nature and not mandatory. Based on these observations, the Hon'ble Supreme Court held that on a careful reading of the provisions of the IBC specifically Sections 7(2) to 7(5) with the Insolvency and Bankruptcy (Application to Adjudicating Authority Rules), 2016, there was no bar on filing of documents at any time until a final order either admitting or dismissing the application was passed. However, it was clarified that where there was an inordinate delay, the adjudicating authority may at its discretion decline the request to file additional pleadings or documents and proceed to pass a final order.
The Apex Court then clarified that the decision in Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries Private Limited3 was not an authority for the proposition that there can be no amendment of pleadings at the fag end of the NCLT proceeding. Moreover, it was observed that in the instant matter, the amendments were made within 2-3 months of the initiation of the proceedings before the admission of the Section 7 petition.
On limitation, it was observed by the Hon'ble Supreme Court that as per Section 18 of Limitation Act, 1963 (Limitation Act) an acknowledgement of a subsisting liability made in writing had 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 Hon'ble Supreme Court relied on the decision in Sesh Nath Singh v. Baidyabati Sheoraphuli Cooperative Bank Ltd.4 to reiterate that the IBC does not exclude the application of the Limitation Act. Therefore, there was no reason to suppose that Section 18 of the Limitation Act would not apply to proceedings under Section 7 or 9 of the IBC. Further, the Apex Court observed that it was well settled that 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.
Therefore, the Hon'ble Supreme Court concluded that the finding of the NCLAT was not sustainable in law. The Apex Court relied upon the statement of accounts, balance sheets, and offer for one time settlement to hold that the petition under Section 7 was well within the limitation period of three years. Moreover, it was also noted that the Corporate Debtor had failed to pay the dues in terms of the recovery certificate issued by DRT in the instant matter which also gave a fresh cause of action to the Appellant. Resultantly, the Apex Court held that a final judgment, and/ or decree of any court or tribunal, or any arbitral award for money, if not satisfied would fall within the ambit of a financial debt enabling a financial creditor with a fresh cause of action to initiate proceedings under Section 7 of the IBC.
Therefore, the Hon'ble Supreme Court concluded that the decision of the NCLT to allow the request of the Appellant for filing of additional documents with supporting pleadings, and to consider such documents and pleadings did not call for interference in appeal. Accordingly, the appeal was allowed and the order of the NCLAT was set aside.
The present judgement rightly highlights the common misconception that insolvency proceedings are adversarial in nature and an alternative to coercive recovery litigation. Rather, the entire object of insolvency proceedings is to enable the corporate debtor stand back up on its feet and recover from financial ill-health. Given that the IBC is a beneficial legislation, a hyper technical approach must be avoided while resolving corporate insolvencies. The adjudicating authority must act in furtherance of the ultimate object of reviving the corporate debtor.
The judgment will act as a sigh of relief for the financial creditors who were granted a favourable decision in recovery litigation, or arbitral proceedings and yet have failed to receive their dues. Such financial creditors can now seek recourse under the IBC to resolve the insolvency of the corporate debtor.
However, this judgment would not come to the rescue of operational creditors when a decree, judgment or an arbitral award is put to a challenge in an appeal. The Hon'ble Supreme Court has clarified in K. Kishan v. Vijay Nirman Company Private Limited5 that the pendency of any objections or appeal would amount to the existence of a pre-existing dispute barring the operational creditor from initiating proceedings under the IBC.
1 Dena Bank v. C. Shivakumar Reddy, 2021 SCC Online SC 543.
2 Swiss Ribbons Private Limited v. Union of India, 2019 4 SCC 17.
3 Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries Private Limited, 2020 SCC OnLine SC 647.
4 Sesh Nath Singh v. Baidyabati Sheoraphuli Coop. Bank Ltd., 2021 SCC OnLine SC 244.
5 K. Kishan v. Vijay Nirman Company Pvt. Ltd., (2018) 17 SCC 662.
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