2022 (8) TMI 329 - SC - Insolvency and Bankruptcy

Initiation of CIRP - NCLT admitted the application - NCLAT quashed the proceedings - Financial Creditors - Period of limitation - HELD THAT - It is clear that any agreement to pay a time barred debt, would be enforceable in law, within three years from the due date of payment, in terms of such agreement. It appears that Section 25(3) of the Indian Contract Act was not brought to the notice of the NCLAT. The NCLAT also did not consider the aforesaid Section. Under Section 25(3), a debtor can enter into an agreement in writing, to pay the whole or part of a debt, which the creditor might have enforced, but for the limitation of a suit in law. A written promise to pay the barred debt is a valid contract. Such a promise constitutes novation and can form the basis of a suit independent of the original debt, for it is well settled that the debt is not extinguished, the remedy gets barred by passage of time - Section 25(3) applies only where the debt is one which would be enforceable against the defendants, but for the law of limitation. Where a debt is not binding on the defendant for other reasons, and consequentially not enforceable against him, there is no question of applicability of Section 25(3). The provisions of the IBC are designed to ensure that the business and/or commercial activities of the Corporate Debtor are continued by a Resolution Professional, post imposition of a moratorium, which would give the Corporate Debtor some reprieve from coercive litigation, which could drain the Corporate Debtor of its financial resources. This is to enable the Corporate Debtor to improve its financial health and at the same time repay the dues of its creditors - The IBC is not just another statute for recovery of debts. Nor is it a statute which merely prescribes the modalities of liquidation of a Corporate body, unable to pay its debts. It is essentially a statute which works towards the revival of a Corporate body, unable to pay its debts, by appointment of a Resolution Professional. IBC has overriding effect over other laws. Section 238 of the IBC provides that the provisions of the IBC shall have effect, notwithstanding anything inconsistent therewith contained in any other law, for the time being in force, or any other instrument, having effect by virtue of any such law - the IBC is a beneficial legislation for equal treatment of all creditors of the Corporate Debtor, as also the protection of the livelihoods of its employees/workers, by revival of the Corporate Debtor through the entrepreneurial skills of persons other than those in its management, who failed to clear the dues of the Corporate Debtor to its creditors. It only segregates the interests of the Corporate Debtor from those of its promoters/persons in management. When a question arises as to the meaning of a certain provision in a statute, the provision has to be read in its context. The statute has to be read as a whole. The previous state of the law, the general scope and ambit of the statute and the mischief that it was intended to remedy are relevant factors - As per Section 18 of Limitation Act, an acknowledgement of present subsisting liability, made in writing in respect of any right claimed by the opposite party and signed by the party against whom the right is claimed, has 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. An acknowledgement made in writing within the period of limitation extends the period of limitation. In this case, there was no acknowledgement of debt within three years from the period on which the account of the Corporate Debtor was declared NPA or within three years from the date on which the loan facilities were recalled. This Court is of the view that the Appellate Tribunal (NCLAT erred in closing the CIRP proceedings without giving the Appellant Financial Creditor the opportunity to explain if there was sufficient cause for the delay in approaching the NCLT. An appeal being the continuation of original proceedings, the provision of Section 7(5)(b) of the IBC, of notifying the Financial Creditor before rejection of a claim, would be attracted - The impugned judgment and order of the NCLAT is set aside to the extent that the CIRP proceedings have been closed. Appeal allowed.

Summary

Issues Involved:

1. Whether the application under Section 7 of the Insolvency and Bankruptcy Code (IBC) was barred by limitation.
2. Whether the acknowledgment of debt by the Corporate Debtor extended the period of limitation.
3. Applicability of Section 25(3) of the Indian Contract Act to the case.
4. The role of the National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) in adjudicating the matter.
5. The significance of the Corporate Insolvency Resolution Process (CIRP) under the IBC.

Detailed Analysis:

1. Limitation Period for Application under Section 7 of IBC:
The primary issue was whether the application filed by the Appellant Financial Creditor for initiating CIRP against the Corporate Debtor was within the limitation period. The NCLAT held that the application was barred by limitation as it was filed beyond the three-year period prescribed under Article 137 of the Limitation Act, 1963, which governs applications for which no specific period is provided.

2. Acknowledgment of Debt:
The Appellant Financial Creditor argued that the Corporate Debtor had acknowledged its debt through various offers of one-time settlement made in December 2018. The NCLAT, however, found that there was no acknowledgment of debt within the three-year limitation period from the date of default, which occurred in June 2015. The acknowledgment must be made within the limitation period to extend it, and the acknowledgment of debt made in December 2018 was beyond the three-year period from the default date.

3. Applicability of Section 25(3) of the Indian Contract Act:
The Supreme Court highlighted Section 25(3) of the Indian Contract Act, which allows for the enforcement of a time-barred debt if there is a written and signed promise to pay the debt. The Court noted that this provision was not considered by the NCLAT. The Appellant Financial Creditor contended that the terms of settlement executed on 20th December 2018 constituted such a promise, potentially making the debt enforceable.

4. Role of NCLT and NCLAT:
The NCLT had admitted the application for CIRP, finding that the acknowledgment of debt by the Corporate Debtor in December 2018 constituted a continuous cause of action. The NCLAT, however, reversed this decision, holding that the application was time-barred. The Supreme Court found that the NCLAT erred in not considering the potential applicability of Section 25(3) of the Indian Contract Act and in not giving the Appellant Financial Creditor an opportunity to explain the delay in filing the application.

5. Significance of CIRP under IBC:
The Supreme Court emphasized that the IBC is designed to ensure the revival and continuation of the Corporate Debtor's business, rather than merely being a debt recovery mechanism. The process aims to protect the Corporate Debtor from coercive litigation, allowing it to improve its financial health and repay its creditors. The Court noted that the IBC has an overriding effect over other laws and that the CIRP is not adversarial to the interests of the Corporate Debtor but rather beneficial for all stakeholders, including creditors and employees.

Conclusion:
The Supreme Court allowed the appeal, setting aside the NCLAT's decision to close the CIRP proceedings. The matter was remitted to the Adjudicating Authority (NCLT) for fresh consideration, with directions to allow the parties to file additional affidavits and documents. The Court underscored the importance of giving the Financial Creditor an opportunity to rectify any defects in its application and to consider the applicability of Section 25(3) of the Indian Contract Act. The judgment reaffirmed the principles of the IBC and the necessity of a fair and comprehensive adjudication process.