SCI (28.08.2020) in M/s Radha Exports (India) Pvt. Limited Vs. K.P. Jayaram & Anr.[Civil Appeal 7474 of 2019] held as under;.
It is well settled in law that alternative defences are permissible to contest a claim. It was thus open to the Appellant Company, to refute the claim of the Respondents by taking the plea of limitation and also to contend that no amount was in fact due and payable by the Appellant Company to the Respondents.
It was for the applicant invoking the Corporate Insolvency Resolution Process, to prima facie show the existence in his favour, of a legally recoverable debt. In other words, the respondent had to show that the debt is not barred by limitation, which they failed to do.
In the winding up petition, there is not a whisper of any agreed date by which the alleged loan was to be repaid to the Respondents. In the instant case, apparently the debt was barred by limitation even in the year 2012, when winding up proceedings were initiated in the Madras High Court.
The payment received for shares, duly issued to a third party at the request of the payee as evident from official records, cannot be a debt, not to speak of financial debt.
Excerpts of the order;
This appeal, under Section 62 of the Insolvency and Bankruptcy Code, 2016, is against a judgment and order dated 2nd September, 2019 of the National Company Law Appellate Tribunal (NCLAT), New Delhi, hereinafter referred to as “the Appellate Tribunal”, allowing Company Appeal (AT) (INS) No.224 of 2019 against an order dated 19th December, 2018 passed by a Division Bench of the National Company Law Tribunal (NCLT) at Chennai, rejecting the application filed by the Respondents under Section 7 of the Insolvency and Bankruptcy Code, 2016, inter alia, on the ground that the alleged claim of the Respondents was barred by limitation, on the date on which the said application had been filed.
# 2. It is the case of the Appellant Company, that the Respondents were closely acquainted with one Mr. M. Krishnan, and Mrs. Radha Gouri, who were the promoters of the Appellant Company.
# 3. Between 1st November, 2002 and 12th September 2003, the Respondents had advanced an aggregate sum of Rs.2.10 crores, in tranches, to M/s Radha Exports, a proprietorship concern of Mrs. Radha Gouri, for its business purposes.
# 4. In 2004-2005, the Respondents advanced a further sum of Rs.10 lakhs to the said proprietorship concern, M/s Radha Exports. The said M/s Radha Exports thus obtained total loan of Rs.2.20 crores from the Respondents, during the period between 2002 and 2004. The loan was unsecured and free of interest.
# 6. The Appellant Company was incorporated under the Companies Act, 1956 on or about 19th July, 2004, to take over the business of the proprietorship concern, M/s Radha Exports, along with its assets and liabilities. The Appellant Company states that as on 19th July, 2004, the proprietorship concern, M/s Radha Exports had a loan liability of Rs.1,11,85,350/-, which was taken over by the Appellant Company.
# 7. On 19th July, 2004, when the Appellant Company was incorporated as a Private Limited Company, to take over and continue the business of the proprietorship concern, M/s Radha Exports, the Respondents requested the Appellant Company to convert a sum of Rs.90,00,000/- from out of the said outstanding loan as share application money for issuance of shares in the Appellant Company, in the name of the Respondent No.2, and the same was confirmed by the Respondents, by their aforesaid letter dated 11th January, 2011 addressed to the Deputy Commissioner of Income Tax, Company Circle V(3), Chennai. The said letter, a copy of which is enclosed to the Paper Book, reads: “..I have requested to transfer a sum of Rs. 90,00,000/- (Rupees Ninety Lakhs) to my wife A/c. Mrs. Shoba Jayaram for allotment of shares in Radha Exports (I) Pvt. Ltd...”
# 8. Accordingly, a sum of Rs.90,00,000/- was adjusted by the Appellant Company, as share application money, for issuance of shares in a Appellant Company in the name of the Respondent No.2. Thereafter, the balance loan liability of the company was Rs.21,85,350/-.
# 9. According to the Appellant Company, during the period from 27th July, 2004 to 23rd March, 2006, the Appellant Company paid Rs.43,25,000/- to the Respondents, which included the balance loan of Rs.21,85,350/- payable by M/s Radha Exports. The loan liability, which the Appellant Company had taken over from the proprietorship concern was, according to the Appellant Company, completely liquidated by March, 2006. Particulars of the payments have been given in detail in paragraph (12) of the judgment and order of the NCLT dated 19th December, 2018 and are supported by Bank Statements being Annexure A1 filed before the NCLT. The last payment appears to have been made on 23.03.2006.
# 12. The Appellant Company claims to have issued shares of the value of Rs.90,00,000/- in the name of Mr. M. Krishnan in 2008. According to the Appellant Company, there is thus, no further liability to be discharged by the Appellant Company to the Respondents. After 23rd March, 2006, there had been no financial transaction between the Appellant Company and the Respondents.
# 13. However, by a legal notice dated 19th November, 2012, the Respondents called upon the Appellant Company to repay to the Respondents a sum of Rs.1,49,60,000/- alleged to be the outstanding debt of the Appellant Company, repayable to the Respondents as on 19th July, 2004.
# 14. By a letter dated 5th December, 2012, the Appellant Company refuted the claim of the Respondents, whereupon the Respondents filed petition being CP No.335 of 2013 in the High Court of Madras under Sections 433 (e) & (f) and 434 of the Companies Act 1956, for winding up of the Appellant Company. The said petition was transferred to the Chennai Bench of NCLT and re-numbered TCP/301/(IB)/2017.
# 17. By an order dated 4th August 2017 the NCLT dismissed the said winding up petition, on the ground that the Respondents had failed to comply with the provisions of Section 7(3)(b) of the Insolvency and Bankruptcy code, 2016, hereinafter “IBC”, with the liberty to file a fresh petition, if so advised.
# 22. Thereafter, on 25th April 2018, the Respondents filed a fresh petition being WC.P. No.770/IB/CB/C-II/2018 before the NCLT (Chennai Bench) under Section 7 of the IBC, as “Financial Creditor”, claiming principal amount of Rs.2.10 Crores together with interest @ 24% per annum from 2007, amounting to Rs. 4,41,60,000/-. The Appellant Company filed its counter statement in CP No.770/IB/2018 before the NCLT.
# 23. By a judgment and order dated 19th December 2018, the NCLT meticulously recorded details of the payments made by the Appellant Company and/or its predecessor in interest to the Respondents, considered the letters written by the Respondents to the Income Tax Authorities and dismissed CP No. 770/IB/CB/2018, being the petition filed by the Respondents under Section 7 of the IBC, inter alia, holding that the Respondents were not Financial Creditors of the Appellant Company, and in any case the claim of the Respondents was hopelessly barred by limitation. The NCLT held that the Respondents had failed to prove that there was any debt due from the Appellant Company, to the Respondents, observing that the Appellant Company had produced proof of payments.
# 29. By the impugned judgment and order dated 2nd September 2019 the Appellate Tribunal allowed the appeal of the Respondents and set aside the order dated 19th December 2018 of the NCLT, dismissing the application under Section 7 of the IBC.
# 31. It is well settled in law that alternative defences are permissible to contest a claim. It was thus open to the Appellant Company, to refute the claim of the Respondents by taking the plea of limitation and also to contend that no amount was in fact due and payable by the Appellant Company to the Respondents.
# 33. The proposition of law which emerges from Innoventive Industries Ltd. (supra) is that the Insolvency Resolution Process begins when a default takes place. In other words, once a debt or even part thereof becomes due and payable, the resolution process begins. Section 3(11) defines ‘debt’ as a liability or obligation in respect of a claim and the claim means a right to payment even if it is disputed. The Code gets triggered the moment default is of Rs.1,00,000/- or more. Once the Adjudicating Authority is satisfied that a default has occurred, the application must be admitted, unless it is otherwise incomplete and not in accordance with the rules. The judgment is however, not an authority for the proposition that a petition under Section 7 of the IBC has to be admitted, even if the claim is ex facie barred by limitation.
# 34. On the other hand, in B.K. Educational Services Pvt. Ltd. v. Parag Gupta and Associates2, this Court held:-
“42. It is thus clear that since the Limitation Act is applicable to applications filed under Sections 7 and 9 of the Code from the inception of the Code, Article 137 of the Limitation Act gets attracted. “The right to sue”, therefore, accrues when a default occurs. If the default has occurred over three years prior to the date of filing of the application, the application would be barred under Article 137 of the Limitation Act, save and except in those cases where, in the facts of the case, Section 5 of the Limitation Act may be applied to condone the delay in filing such application.”
# 36. It was for the applicant invoking the Corporate Insolvency Resolution Process, to prima facie show the existence in his favour, of a legally recoverable debt. In other words, the respondent had to show that the debt is not barred by limitation, which they failed to do.
# 37. Under clauses (19) to (21) of Part II of the Schedule of the Limitation Act 1963, the period of limitation for initiation of a suit for recovery of money lent, is three years from the date on which the loan is paid. The last loan amount is said to have been advanced in 2004-2005. In the winding up petition, there is not a whisper of any agreed date by which the alleged loan was to be repaid to the Respondents. In the instant case, apparently the debt was barred by limitation even in the year 2012, when winding up proceedings were initiated in the Madras High Court.
# 38. The NCLT rightly refused to admit the application under Section 7 of the IBC, holding the same to be barred by limitation. The Appellate Tribunal has erred in law in reversing the judgment and order of the earlier Adjudicating Authority. The Adjudicating Authority rightly rejected the application as barred by limitation. The Appellate Authority patently erred in law in reversing the decision of the adjudicating authority and admitting the application.
# 40. There are, as observed above cogent records including letters signed by the Respondent Nos. 1 and 2 which evince that on 6th October, 2007, Respondent No.2 resigned from the Board of the Appellant Company and at that time the Respondent No.2 requested the Appellant Company to treat the share application money of Rs.90,00,000/- as share application money of Mr. M. Krishnan and to issue shares for aforesaid value to Mr. M. Krishnan. The amount was to be treated as a personal loan from the respondent No.2 to Mr. M. Krishnan. A personal Loan to a Promoter or a Director of a company cannot trigger the Corporate Resolution Process under the IBC. Disputes as to whether the signatures of the Respondents are forged or whether records have been fabricated can be adjudicated upon evidence including forensic evidence in a regular suit and not in proceedings under Section 7 of the IBC.
# 42. Even otherwise, the application under Section 7 of the IBC was not maintainable. As rightly held by the NCLT there was no financial debt in existence.
# 43. ……… The payment received for shares, duly issued to a third party at the request of the payee as evident from official records, cannot be a debt, not to speak of financial debt. Shares of a company are transferable subject to restrictions, if any, in its Articles of Association and attract dividend when the company makes profits.
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