2020 (8) TMI 336 - AT - Insolvency and Bankruptcy

Maintainability of application - initiation of CIRP - Time limitation - Section 7 of the I B Code - HELD THAT - The Form-1 of the Application, (Part 4 at serial No.2) records the date of default as 31st December 2007. This Application under Section 7 is filed on 26th February 2019, i.e. after more than 11 years. The Financial Creditor has also admitted in the statutory Form-1 that the consequence of default is that all the interest amount became due and payable forthwith. Hence, the period of limitation admittedly started on 31st December 2007. This Appellate Tribunal in case of Gauri Prasad Goenka Vs. Punjab National Bank Others 2020 (5) TMI 65 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, NEW DELHI has held that Section 3 of the Limitation Act is a mandatory provision and it is obligatory on the Tribunal to examine the issue of limitation. Further, if the claim is barred by limitation, the Corporate Debtor cannot be held to have committed a default. Admittedly, in this case, the Applicant/Financial Creditor has stated that default started from 31st December 2007 and the Application for initiation of Corporate Insolvency Resolution Process is filed on 26th February 2019. The Financial Creditor has also admitted that the consequence of default is that all the interest amount became due and payable immediately. Hence, the period of limitation began from 31st December, 2007. As per the terms of Agreement, the subscription to the debentures was done for a period of 84 months. Interest @ 12% p.a. and in case of default, an additional interest of 6% p.a. was required to be paid. In the entire duration of the Agreement, the Corporate Debtor paid interest amounting to ₹ 39,86,371/- only once, i.e. for the Quarter ending 31st September 2007. It is further contended that the Corporate Debtor defaulted on the payment of interest till the time stipulated in the Agreement, i.e. up to 20th May 2014. Thus, it is clear that the default started on 31st December 2007. Thereafter, the default continued till 20th May 2014, i.e. the expiry of the period as stipulated in the Agreement - Therefore, the right to sue accrued from the moment, default first occurred on 31st December 2007. Since the default has occurred over three years prior to the date of filing of the Application, it would be barred by limitation under Article 137 of the Limitation Act. Therefore, the right to sue accrued from the moment, default first occurred on 31st December 2007. Since the default has occurred over three years prior to the date of filing of the Application, it would be barred by limitation under Article 137 of the Limitation Act. The Adjudicating Authority erred in admitting the Application filed under Section 7 of the I B Code, even though it was time-barred - Appeal allowed.

Summary

Issues Involved:
1. Whether the Application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (I&B Code) is barred by limitation.
2. Whether the acknowledgment of debt in the Memorandum of Agreement dated 18th April 2017 extends the limitation period.

Issue-wise Detailed Analysis:

1. Barred by Limitation:
The primary issue in this appeal is whether the Application filed under Section 7 of the I&B Code is barred by limitation. The Financial Creditor and the Corporate Debtor had entered into a Debenture Subscription Agreement and a Master Facility Agreement on 21st May 2007. The subscription to the debentures was for 84 months, with interest payable at 12% per annum and an additional 6% per annum in case of default. The Corporate Debtor defaulted in paying the interest after the first payment for the quarter ending 31st September 2007. The Financial Creditor filed the Application on 26th February 2019, with the date of default recorded as 31st December 2007. The Adjudicating Authority admitted the Application without addressing the limitation issue.

The Appellant argued that the Application is time-barred as it was filed more than 11 years after the default. The Financial Creditor admitted that the interest amount became due and payable immediately after the default on 31st December 2007. Therefore, the limitation period started on that date. Even if the default date is considered as 20th May 2014 (the expiry of the Agreement period), the Application filed on 26th February 2019 is still time-barred.

The Tribunal referenced the case of B.K. Educational Services (P) Limited Vs. Parag Gupta & Associates (2018), where the Supreme Court held that the Limitation Act applies to applications filed under Sections 7 and 9 of the I&B Code from the inception of the Code. The right to sue accrues when a default occurs, and if the default occurred over three years prior to the date of filing the Application, it would be barred under Article 137 of the Limitation Act.

2. Acknowledgment of Debt:
The Financial Creditor contended that the limitation period was renewed by the acknowledgment of debt in the Memorandum of Agreement dated 18th April 2017. According to Section 18 of the Limitation Act, an acknowledgment of liability in writing before the expiration of the prescribed period extends the limitation period from the date of acknowledgment.

However, the Tribunal found that the acknowledgment in the Memorandum of Agreement came after the lapse of 11 years from the initial default in December 2007. Thus, a fresh period of limitation does not accrue from 18th April 2017. The Tribunal referenced the case of Jignesh Shah v. Union of India (2019), where the Supreme Court held that time for limitation can only be extended in the manner provided under the Limitation Act, and a separate suit for recovery does not impact the limitation for IBC proceedings.

The Tribunal concluded that the Adjudicating Authority erred in admitting the Application under Section 7 of the I&B Code as it was time-barred. The appeal succeeded, and the impugned Order was set aside. The Tribunal directed the Adjudicating Authority to pass an appropriate Order regarding the payment of Corporate Insolvency Resolution Process (CIRP) costs, and the Corporate Debtor Company would be governed by its Board of Directors.