2025 (1) TMI 550 - AT - IBC

Admission of Section 7 proceedings as against the present Appellant - time barred claim - whether, the proceeding under Section 7 of the I B Code, 2016, could at all be sustained when the claim, which formed the basis for institution of the proceeding under Section 7 of the Code, is allegedly a Time-barred claim? - HELD THAT - The proceedings under Section 7 of I B Code which has been drawn herein, cannot be said to be barred by limitation, owing to the ratios as laid down in the Judgment of Dena Bank 2021 (8) TMI 315 - SUPREME COURT and particularly, owing to the peculiar facts and circumstances of the instant case, wherein there is an admitted contract to pay a time barred debt under Section 25(3) of the Contract Act. There is a very fine distinction, which has been drawn between the acknowledgment and promise . Acknowledgment , is relevant for the purposes of determining the period of Limitation under Section 18 of the Limitation Act, while, for the purposes of a promise , Section 25(3) of the Contract Act, will come into play, which may not be relevant for the purposes of determination of limitation under Section 18 herein. Thus, date of acknowledgment would be determined from the date, when the Settlement was entered into ensuring for remittance of the amount and thereafter when it was defaulted, it was on account of the default committed by the Appellant, despite of the settlement agreement. For the purposes of determining the limitation in the instant case, it would be the acknowledgment of dues, under the provisions of Section 18 of the Limitation Act, which is relevant and hence, the revival of the proceedings 04.03.2022 under Section 7 of I B Code, which was left open by the learned NCLT, while permitting the withdrawal of Section 7 of I B Code proceedings initiated on 27.06.2019 will be taken as to within the limitation period as the cut off date, for drawing the proceedings under Section 7 of I B Code. Thus, the proceedings under Section 7 of I B Code will be 22.12.2020 and not 21.05.2013 as contended by the Appellant. Thus, the proceedings under Section 7 of I B Code, would not be barred by limitation. Conclusion - i) The proceedings under Section 7 of the I B Code were not barred by limitation. ii) The acknowledgment of debt in the balance sheets and the Memorandum of Compromise extended the limitation period, validating the Section 7 application. There are no hesitation to hold that the proceedings drawn under Section 7 of I B Code, 2016, owing to a peculiar facts and circumstances of the instant case, is well within the limitation period, because, the acknowledgment herein for the purposes of limitation, would be determined from the date of Memorandum of Compromise and not from the date of issuance of the Recovery Certificate and thus, the Company Appeal lacks merit and the same is accordingly dismissed. Appeal dismissed.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

Whether the proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016 (I&B Code) are barred by limitation due to the claim being time-barred.
Whether the acknowledgment of debt in the balance sheets and settlement proposals extends the limitation period under Section 18 of the Limitation Act, 1963.
Whether the Memorandum of Compromise constitutes a valid acknowledgment or promise to pay a time-barred debt under Section 25(3) of the Contract Act.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Limitation Period for Section 7 Proceedings

Legal Framework and Precedents: The limitation period for filing an application under Section 7 of the I&B Code is governed by Article 137 of the Limitation Act, which prescribes a three-year limitation period from the date of default. Section 18 of the Limitation Act allows for the extension of this period if there is an acknowledgment of debt.
Court's Interpretation and Reasoning: The court considered whether the acknowledgment of debt in balance sheets and settlement proposals extended the limitation period. It emphasized that the acknowledgment must be in writing and signed by the debtor.
Key Evidence and Findings: The court noted the acknowledgment of debt in the balance sheets from 2014-2018 and the settlement proposals made by the debtor, which were considered sufficient under Section 18 of the Limitation Act.
Application of Law to Facts: The court applied Section 18, concluding that the acknowledgment of debt extended the limitation period, making the Section 7 application timely.
Treatment of Competing Arguments: The appellant argued that the limitation should be reckoned from the date of the recovery certificate (21.05.2013), while the respondent contended that subsequent acknowledgments reset the limitation period. The court favored the respondent's position.
Conclusions: The court concluded that the proceedings under Section 7 of the I&B Code were not barred by limitation due to the acknowledgment of debt.

Issue 2: Acknowledgment of Debt and Extension of Limitation

Legal Framework and Precedents: Section 18 of the Limitation Act and Section 25(3) of the Contract Act were pivotal. The former pertains to acknowledgment of debt, while the latter deals with promises to pay time-barred debts.
Court's Interpretation and Reasoning: The court interpreted these provisions to determine whether the debtor's actions constituted a valid acknowledgment or promise, thereby extending the limitation period.
Key Evidence and Findings: The court found that the debtor's acknowledgment in the balance sheets and the settlement proposal constituted a valid acknowledgment under Section 18.
Application of Law to Facts: By acknowledging the debt, the debtor effectively reset the limitation period, allowing the creditor to file the Section 7 application within the extended timeframe.
Treatment of Competing Arguments: The appellant's argument that the acknowledgment was insufficient was countered by the court's reliance on established precedents supporting the sufficiency of balance sheet entries as acknowledgment.
Conclusions: The court concluded that the acknowledgment of debt extended the limitation period, validating the Section 7 application.

Issue 3: Memorandum of Compromise as Acknowledgment

Legal Framework and Precedents: The court examined whether the Memorandum of Compromise constituted a promise under Section 25(3) of the Contract Act.
Court's Interpretation and Reasoning: The court reasoned that the Memorandum, being a written promise to pay, constituted a valid contract and acknowledgment of debt.
Key Evidence and Findings: The Memorandum of Compromise and subsequent default by the debtor were pivotal in the court's analysis.
Application of Law to Facts: The Memorandum was deemed a valid acknowledgment, further extending the limitation period for the Section 7 application.
Treatment of Competing Arguments: The appellant's contention that the Memorandum did not affect the limitation was dismissed based on legal precedents affirming such documents as valid acknowledgments.
Conclusions: The Memorandum of Compromise was a valid acknowledgment, supporting the timeliness of the Section 7 application.

3. SIGNIFICANT HOLDINGS

Verbatim Quotes of Crucial Legal Reasoning: "Section 18 of the Limitation Act cannot also be construed with pedantic rigidity in relation to proceedings under the IBC. 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."
Core Principles Established: Acknowledgment of debt, whether through balance sheets or settlement proposals, can extend the limitation period under Section 18 of the Limitation Act. The Memorandum of Compromise can constitute a valid acknowledgment or promise under Section 25(3) of the Contract Act.
Final Determinations on Each Issue: The proceedings under Section 7 of the I&B Code were not barred by limitation. The acknowledgment of debt in the balance sheets and the Memorandum of Compromise extended the limitation period, validating the Section 7 application.

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