In the recent judgment given in the case of Neelkanth Township and Construction Pvt. Ltd. Vs. Urban Infrastructure Trustees Limited on 11th August, 2017, the National Company Law Appellate Tribunal (“NCLAT”) had to deal with the subject of admission of insolvency application filed by a financial creditor against the corporate debtor in connection with default of redemption of debentures. Interestingly, as the debentures matured in years 2011, 2012 and 2013, the limitation period of 3 years for seeking remedy had expired since the date of maturity, but still the financial creditor filed the insolvency application before the National Company Law Tribunal (“NCLT”).
In the said case, NCLAT had to adjudicate upon two very important and interesting issues, as under:-
i. Whether the provisions of Limitation Act apply to proceedings initiated under Insolvency & Bankruptcy Code, 2016 (“Code”)?
ii. Whether, in absence of record of default as recorded with the information utility or any other “record or evidence of default” specified by the Insolvency Board, an application under Section 7 of the Code is maintainable or not?
NCLAT held that the provisions of Limitation Act, 1963 were not applicable to the proceedings initiated under the provisions of the Code. The ruling effectively allows parties to initiate insolvency proceedings for time barred debts (i.e. debts which could not be
recovered due to expiry of limitation period).
Taking into consideration that the corporate debtor had issued debenture certificates and also that the corporate debtor had acknowledged the debt in its financial statements which were prepared after the default, NCLAT considered the same to be sufficient and admissible evidence to establish a default of debt under Section 7 of the Code.
Facts & Background of the Case
The financial creditor initiated insolvency resolution proceedings against the corporate debtor alleging that the corporate debtor defaulted in redeeming the debentures which matured in years 2011, 2012 and 2013 and the same were being acknowledged in the balance sheets of the corporate debtor. The redemption value aggregated to about INR 51 crores.
Amongst other things, the corporate debtor argued that the limitation period of 3 years for seeking remedy had expired since the date of maturity and hence the petition was liable to be dismissed. It also argued that the showing of default in the balance sheet did not amount to acknowledgement of debt under both laws, i.e. the Code & section 18 of the Limitation Act, and that application under section 7 of the Code could be filed only when there was a record of evidence of default with the Information Utility, which was not fulfilled in the present case. It argued that, – “record or evidence of default” appearing in section 7(3)(a) could in any manner be read to mean any other document or any other evidence except as specified in the relevant regulations, whereby the procedure laid under the rules and regulations could not be waived of in granting relief.
On the point of debt being time barred under Limitation Act, NCLT held that admission appearing in the financial statement of the company is an acknowledgement covered by section 18 of the Limitation Act. An acknowledgement need not be given to the financial creditor stating that debt is owed to him. If such debt is shown as due in the financial statements of the company, it is to be construed as an acknowledgement of default. Since there was an express admission that the company has defaulted in repayment of principal toward the money received by issuing debenture certificates, the debt could be called as time barred debt.
Based on provisions of Regulation 8 of the Insolvency Resolution Process for Corporate Persons, Regulations, 2016, NCLT held that there were three kinds of showing is required to prove default, one is recording by the information utility, since the information utility has not come into existence it can’t be an argument of the corporate debtor that since information utility has not yet been created, NCLT could pass an order. Second option is that NCLT can pass an order by looking at the financial contract showing the claim as debt, a record evidencing the amounts committed by the financial creditor to the corporate debtor under a facility has been drawn by the corporate debtor, and if that evidence is also not available then the third option is the financial creditor can show any court order adjudicating non-payment of a debt. NCLT observed that,- as the financial creditor filed debenture certificates issued by the corporate debtor and also annual reports stating that the company failed to make payment to the debenture holder despite the debentures matured on the respective dates as mentioned above; the corporate debtor could not say that there was no “record or evidence of default”.
The corporate debtor filed an appeal before the NCLAT against the NCLT Order which had allowed the commencement of insolvency proceedings on the action of the financial creditor.
Briefly about the relevant provisions of Limitation Act, 1963
The Limitation Act prescribes the time-limit for different suits within, which an aggrieved person can approach the court for redress or justice. The suit, if filed after the expiration of time-limit, is struck by the law of limitation. It’s basically meant to indirectly punish persons who go into a long slumber over their rights. The principle that pervades statutes of limitation at common law is that ‘limitation extinguishes the remedy, but not the right’ this means that the legal right itself is not defeated, but only the right to claim it in a court of law is extinguished.
Under the Indian Limitation Act, the limitation period to file for a civil recovery suit is 3 years from the date of debt becomes due. Under section 18 of limitation act 1963, if there is an acknowledgement in writing of the debt to the bank and such acknowledgement is made before expiry of 3 years from the date when money was payable then the period of limitation will be extended by acknowledgment in respect of liability concerning property or right before the expiry of the period of limitation and should be in writing and signed by the borrower.
Briefly about the relevant provisions of the Code
Process of initiation of Insolvency Resolution by a financial creditor is provided in Section 7 of the Code – As per sub-section (1) of Section 7 of the Code, the trigger for filing of an application by a financial creditor before NCLT is when a default in respect of any financial debt has occurred. Sub-section (2) of Section 7 of the Code provides that the financial creditor shall make an application in prescribed form and manner and with prescribed documents, including “record of the default” recorded with the information utility or such other record or evidence of default as specified. As per Rule 41 of the Insolvency & Bankruptcy (Application to Adjudicating Authority) Rules, 2016, the application is required to be made under ‘Form – 1’. Part V of Form-1 deals with particulars of ‘Financial Debt’ (documents, record and evidence of default).
Once the application is filed by the ‘Financial Creditor’ with the NLCT, the NCLT, within 14 days of the receipt of the application under sub-section (2) of Section 8 required to ascertain the existence of default from the records of an information utility or on the basis of other evidence furnished by the ‘financial creditor’ under sub-section (3)(a) of Section 7. Where NCLT is satisfied that a default has occurred and the application under sub-section (2) is complete, and there are no disciplinary proceedings pending against the proposed resolution professional, it can admit such application and in case the application is incomplete, required to provide 7 days’ time to complete the record and on failure is to dismiss the application.
Regulation 8 of the Insolvency Resolution Process for Corporate Persons, Regulations, 2016, which relates to claims by ‘Financial Creditor’ – As per the said regulation, the existence of debt due to the financial creditor may be proved on the basis of- (a) the records available with an information utility, if any; or (b) other relevant documents, including – (i) a financial contract supported by financial statements as evidence of the debt; (ii) a record evidencing that the amounts committed by the financial creditor to the corporate debtor under a facility has been drawn by the corporate debtor;(iii) financial statements showing that the debt has not been repaid; or (iv) an order of a court or tribunal that has adjudicated upon the non-payment of a debt, if any.
With respect to the point whether provisions of Limitation Act apply to proceedings initiated under the Code?
NCLAT held that there was nothing on the record that Limitation Act, 1963 is applicable to Code. The Code is not an Act for recovery of money claim, it relates to initiation of Corporate Insolvency Resolution Process. If there is a debt which includes interest and there is default of debt and having continuous course of action, the argument that the claim of money is barred by Limitation cannot be accepted.
With respect to the point whether in absence of record of default as recorded with the information utility or any other “record or evidence of default” specified by the Insolvency Board, an application under Section 7 of the Code is maintainable or not?
It is well settled that rules of procedure are to be construed not to frustrate or obstruct the process of adjudication under the substantive provisions of law. A procedural provision cannot override or affect the substantive obligation of the adjudicating authority to deal with applications under Section 7. The evidence of default, records and documents prescribed under Part V of the Form – 1 will be sufficient to determine default of debt under Section 7 of the Code.
Analysis & Comments (In brief)
While the judgment of allowing initiation of insolvency proceedings for time barred debts seems to be rational and instilling more confidence in the investors in debt securities, the same is susceptible to be negatively used as a recovery tool for such debts.
Even when the NCLAT did not categorically mention in its Judgment, but it is inferred that because the corporate debtor mentioned about the outstanding liability in the financial statements which were prepared even after the maturity, the same was taken as an acknowledgment of debt under section 18 of the Limitation Act. Strange as it may sound, but, assuming due to some reason, the unpaid matured (but time barred) debt is not acknowledged in the financial statements of the corporate debtor, then will the same make any difference to the admissibility of insolvency application, is a question which may come up for consideration.
The other point which may also come up for consideration is where, if not the law of limitation, will the NCLAT / Courts apply the principle of “Doctrine of Laches” to preclude claims that were not brought in a reasonable time.
It may also be noted that as per section 433 of Companies Act, 2013, the provisions of the Limitation Act, 1963 shall, as far as may be, apply to proceedings or appeals before the NCLT or the NCLAT. This too may come up for exploring in future.