Mantena Laboratories Limited Vs. Edelweiss Asset Reconstruction Company Limited - In other words, the novation of contract comprised of two elements. First is the discharge of one debt or debtor and the second is the substitution of a new debt or debtor.

NCLAT (13.12.2021) in Mantena Laboratories Limited Vs. Edelweiss Asset Reconstruction Company Limited [Company Appeal(AT)(CH)(Insolvency) No. 214 of 2021] held that 

• In other words, the novation of contract comprised of two elements. First is the discharge of one debt or debtor and the second is the substitution of a new debt or debtor.

• Terms and conditions of the contract can indisputably be altered or modified. They cannot, however, be done unilaterally unless there exists any provision either in contract itself or in law.

• Suffice to it, to the Tribunal to point out that in the present case, as per new contract, the ‘Corporate Debtor’, apart from the fact that it paid Rs. 1 crore, committed a default in regard to the upfront payment of sum of Rs. 9 Crores in response to the settlement of loan amount and in any event, in law, the new promise had given new cause of action enabling the Respondent/’Corporate Debtor’/Applicant to initiate CIRP under IBC resulting in filing of Application under Section 7 of IBC against the ‘Corporate Debtor’, which is well within period of limitation.

Excerpts of the Order;

# 3. The Learned Counsel for the Appellant submits that the ‘Adjudicating Authority’ had failed to appreciate that the Application filed under Section 7 of IBC by the Respondent/Financial Creditor is not maintainable in law when the Application was filed beyond three years from the date on which the Account was classified as ‘Non Performing Assets’ (in short ‘NPA’) and a ‘Demand’ was made under Section 13(2) of SARFAESI Act, 2002. 

 

# 4. The Learned Counsel for the Appellant brings it to the notice of this ‘Tribunal’ that the Account was classified as NPA on 30.06.2012 and that the Notice under Section 13(2) of SARFAESI Act, 2002 was issued on 04.04.2013 and the date for filing Application before the ‘Adjudicating Authority’ was on 03.10.2018.

 

# 5. The Learned Counsel for the Appellant contends that the ‘Adjudicating Authority’ had failed to appreciate in a proper and real perspective of the fact that the reflection of ‘Debt’ in the ‘Accounts’ relating to the period 2017-18 and the proposal of ‘One Time Settlement’ (in short ‘OTS’) in the year constitute ‘An Acknowledgment of Liability’ as per Section 18 of the Limitation Act, 1963, especially when the same was made after expiry of three years period from the date on which the ‘Demand’ was made. 

 

# 6. According to the Learned Counsel for the Appellant, even if the Director’s Report, which was signed on 01.09.2017 is taken into account, still the Application filed by the Respondent/Financial Creditor is beyond three years of limitation. Besides this, the OTS Application indicates that the same was signed on 28.02.2018 beyond four years and therefore, these documents cannot be relied upon to come to a conclusion that there was ‘Acknowledgment of Liability’ within three years w.e.f. 04.04.2013 and the Notice under Section 13(2) of SARFAESI Act, 2002 was issued and the Account was classified as ‘NPA’ on 30.06.2012. 

 

# 12. It is represented on behalf of the Appellant that an Application beyond three years from the date of declaration of ‘Non Performing Asset’ without ‘An acknowledgment of Liability, within three years from the date of declaration as ‘NPA’ is barred by limitation. 

 

# 13. The Learned Counsel for the Appellant comes out with a plea that in the present case, the Unit is running from the year 2014 and is in possession of the Secured Creditors and that the invocation of the IBC is nothing but an abuse of the process of law. 

 

# 14. The Learned Counsel for the Appellant projects an argument that the ‘Adjudicating Authority’ had failed to appreciate that the documents were executed beyond three years and not within three years. As such, the same do not constitute an ‘Acknowledgment of Liability’

 

RESPONDENT’S CONTENTIONS:

# 15. The Learned Counsel for the Respondent contends that the instant Appeal revolves round only one issue i.e., Limitation Period and further that as per Section 18 of the Limitation act, ‘An Acknowledgment of Liability’ may be sufficient although it omits to specify the exact nature of the property or right or averse that time for payment, delivery, performance, enjoyment, has not arrived or is accompanied to refusal to pay, deliver, perform or permit to enjoy or is coupled with claim to set off or is addressed to a person other than a person who is entitled or right. 

 

# 16. The Learned Counsel for the Respondent submits averse to the decision of the Hon’ble Kerala High Court in ‘P.D.Pillai v. Mrs. Kaliyani Kutty Amma’ (1994 SCC Online Ker 139) wherein the full Bench of the High Court of Kerala observed and held: .. 

• “An Acknowledgment does not require to be specific and direct. The substance of the decisions appear to be that it is not necessary that there should be a specific and direct acknowledgment of the particular liability which is sought to be enforced, but if there is an admission of facts of which the liability in question is a necessary consequence, there would be an acknowledgment within the meaning of section 18 of the Limitation Act. What is necessary is admission of the existence of a debt, a liability for contribution in case a part of it is paid and such an admission would operate to enlarge the period of limitation” .. 

 

# 17. The Learned Counsel for the Respondent cites the decision of the Hon’ble Supreme Court in the matter of “Asset Reconstruction Company (India) Limited V. Bishal Jaiswal and Anr” (Civil Appeal No. 323 of 2021, SLP(C) No. 1168 of 2021, (2021) 6 SCC 366 and the decision in “Sandeep Kr. Bhagat Vs. Punjab National Bank” reported in [Company Appeal (AT)(Ins) 1003 of 2019 wherein it is categorically held:

• “Section 18 of the Limitation Act gets attracted the moment acknowledgment in writing signed by the party against whom such right to initiate resolution process under Section 7 IBC enures. Section 18 of the Limitation Act would come into play every time when the principal borrower and/or the guarantor, as the case made be, acknowledge their liability to pay the debt” It is further submitted held that “The default in had been admitted by the ‘Corporate Debtor’, and the signed balance sheet of the ‘Corporate Debtor’ for the year 2016-17 was not disputed by the ‘Corporate Debtor’. As a result, the NCLT held that the Section 7 application was not barred by limitation, and therefore, admitted the same”

 

# 20. It is represented on behalf of the Respondent that the ‘Corporate Debtor’ had requested the ‘IDBI Bank Ltd’, from whom the Respondent obtained ‘Assignment of Debt’ for restructuring of the outstanding dues as per letter dated 09.04.2013. In reality, it is the stand of the Respondent that the ‘Corporate Debtor’ had proposed ‘One Time Settlement’ and addressed a letter to the Respondent on 30.03.2016 which was replied by the Respondent on the same date. Besides these, the ‘Corporate Debtor’ also addressed a letter dated 19.02.2018 and in favour of the Respondent for ‘One Time settlement’ of the ‘Loan Accounts’ which was granted by the Respondent, of course subject to the terms and conditions made mention of, in the Sanction Letter dated 28.02.2018. Furthermore, the ‘Corporate Debtor’ depending upon said settlement, made an upfront payment as seen in the ‘One Time Settlement’ letter by agreeing all the terms and conditions of the sanctioned, signed the said sanctions. 

 

# 24. The Learned Counsel for the Respondent points out that as per Section 62 of the Indian Contract Act, 1872, if the parties to a contract agree to substitute a new contract for it or to rescind or alter it, the ‘original contract’ need not be performed. In effect, it is the plea of the Respondent/Financial Creditor that the rights and liabilities of the contract shall be governed by the terms of the new contract. 

 

# 25. The Learned Counsel for the Respondent points out that in the present case, after considering the ‘One Time Proposal’ of the Appellant (vide its letter dated 19.02.2018), the said proposal was acceded to by the Respondent in and by which the ‘Corporate Debtor’ was required to pay Rs. 10 Crores as against its liability of Rs. 17.12 Crores as on 01.02.2015 thereby a new contract came into existence on 19.02.2018. To put it precisely, the clear cut stand of the Respondent is that the ‘Corporate Debtor’ is bound by the terms of the contract. 

 

# 26. The Learned Counsel for the Respondent submits that under new contract, the ‘Corporate Debtor’ had paid a sum of Rs. 1 Crore till date and had defaulted an upfront a sum of Rs. 9 Crores in respect of the settlement of the loan amount and bound by the new terms that give the Respondent a new ‘Cause of Action’ for initiating Corporate Insolvency Resolution Process as per IBC. As such, the Application projected by the Financial Creditor/Applicant before the Adjudicating Authority was well within the period of limitation.

 

# 27. The Learned Counsel for the Respondent cites the decision of the Hon’ble Supreme Court in the matters (1) “H.R. Basavaraj v. Canara Bank” [(2010) 12 SCC 458], (2) “Sasan Power Ltd. v. North American Coal Corporation (India) Pvt. Ltd.” [(2016) 10 SCC 813] and “Delhi Development Authority & Anr. V. Joint Action Committee Allottee of SFS Flats” [(2008) 2 SCC 672] wherein it is held: 

• “Section 62 gives statutory form to the common law principle of novation. The basic principle behind the concept of novation is the substitution of a contract by a new one only through the consent of both the parties to the same. Such consent may be expressed as in written agreements or implied through their actions or conduct. In other words, the novation of contract compromised of two elements. First is the discharge of one debt or debtor and the second is the substitution of a new debt or debtor. The novation is not complete unless its results in substitution, rescission or extinguishment of the previous contract by the new contract. The terms and conditions therefore were, therefore required to be complied with by both the parties. Terms and conditions of the contract can indisputably be altered or modified. They cannot, however, be done unilaterally unless there exists any provision either in contract itself or in law”.

 

# 28. One cannot brush aside an important fact that the Respondent/Financial Creditor/Applicant in O.A. No. 40/2015 on the file of DRT, Hyderabad on 24.10.2018 had obtained a decree against the Appellant for recovery of Rs. 24,21,74,776.21 which confers a fresh ‘cause of action’ to the Respondent/Financial Creditor/Applicant to initiate CIRP against the ‘Corporate Debtor’, in which there is no impediment in law. Furthermore, the decree/order of a Tribunal will, without any hesitation, falls within the purview of Financial Debt define Section 5(8) of IBC meaning a debt along with interest, if any, which is disbursed against the contract for the time value of money and includes following: 

• 5(8) “financial debt means a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes— . . . .

 

# 30. ACKNOWLEDGMENT OF LIABILITY:

It is relevantly pointed out that ‘An Acknowledgment of Liability’ points out that an individual who acknowledges has some kind of interest, which is undoubtedly bound by his statement. No wonder ‘An Acknowledgment of Liability ought to involve an admission of a subsisting jural relationship between the parties and further that an intention to continue such a relationship till it comes to end in legal manner. Moreover, kind of jural relationship that should exist is that the individual making an acknowledgment should be under an existing liability to the other person as per the decision of ‘Nallathambi Nadar v. Ammal Nadachi” reported in AIR 1964 Mad. 169 at pages 171, 172 (Full Bench). 

 

# 31. The object of Section 18(2) of the Limitation Act, 1963 is to ascertain the real date written and signed acknowledgment for the purpose of saving limitation and to exclude fraudulent testimony. Apart from that, unconditional acknowledgment is an implied promise to pay the debt, that is the logical inference, if nothing is uttered to the contrary, as opined by this Tribunal. Besides this, for the purpose of satisfying the requirement of ingredients of Section 18 of the Limitation Act, 1963, if the balance was confirmed, would suffice as per the decision of “Allahabad Bank, Rewa v. Pramod Kumar Singh” reported in AIR 2006 M.P. 10 at p. 12. 

 

# 32. Be it noted, that a ‘Balance Sheet’ is ‘An Acknowledgment of Liability’ as per decision of “Rampur Engineering Company Ltd v. Syed Raja Ali Khan Bahadur”, 1966 ALJ 385 at Page 388. 

 

# 33. In fact, if before the expiry of the prescribed period for a suit in respect of any property or right, there is written acknowledgment of liability in respect of such property or right in writing against whom such right or property is claimed, then, in that event, a fresh limitation is to be calculated from the time when the acknowledgment was signed as per the decision of “Vijay Tractors Corporation v. M/s Haryana Agro Industries Corporation” reported in AIR 2006 P & H 86 at spl. Page 89. 

 

APPRAISAL:

# 37. In short, the amount claimed to be in default in Part-IV of the Application in Serial No. 2 is Rs. 26,43,25,009.11 as on 31.08.2018 with further interest therein from 01.09.2018 at contractual rates. Further, the NPA date was mentioned as 30.06.2012. 

 

# 38. That apart, in the Application filed by the Respondent/Financial Creditor, the details of Financial Contracts were mentioned beginning from the Sanction Letter dated 17.02.2010 issued by the IDBI Bank to the ‘Corporate Debtor’ till the Assignment Letter dated 26.03.2015 executed between the IDBI Bank and the Respondent/Financial Creditor/Applicant. 

 

# 39. It is the stand of the Appellant that the Application was filed in the month of October, 2018 and that when the loan was recalled through Notice dated 20.11.2012 and Section 13(2) Notice in SARFAESI, 2012 was dated 04.04.2013, the same was no averred in the Affidavit as regards ‘An Acknowledgement of Liability’. 

 

# 40. The prime contention advanced by the Appellant is that the Account was classified as ‘NPA’ on 30.06.2012 giving a cause of action for the Respondent/Applicant and that the period of limitation begins to run from the said date and further three years’ period is calculated from 04.04.2013 and the same is barred by law of limitation. 

 

# 41. Besides the above, it is the stand of the Appellant that even after the Director’s Report was signed on 01.09.2017 and the same be taken into account, still it is beyond three years of limitation period. In pith and substance, the stand of the Appellant is that the documents which were executed beyond three years do not constitute ‘An Acknowledgment of Liability’.

 

# 42. It is by now well settled that the pendency of the proceeding under SARFAESI Act, 2002 is not a bar in initiating ‘CIRP’ under I&B Code, 2016. 

 

# 43. Although the Appellant in the instant case has taken plea that Section 7 Application filed by the Respondent/Financial Creditor/Applicant is barred by limitation and further that the ‘NPA’ was classified as on 30.06.2012, it cannot be lost sight of the fact the ‘Corporate Debtor’ in its Financial Statement for the period from 2013-17 had acknowledged of debt in question. Moreover, the ‘Corporate Debtor’ made a request to the IDBI Bank, from whom the 

Respondent/Financial Creditor/Applicant secured the ‘Assignment of Debt’ for restructuring of the balance due amount as per letter dated 09.04.2013. 

 

# 44. It is to be borne in mind that the Respondent/Financial Creditor/ Applicant had given a ‘Reply’ on 30.03.2016 for the proposed ‘One Time Settlement’ made by ‘Corporate Debtor’. Continuing further, it is to be remembered that the Respondent/Financial Creditor had addressed Reply letter to the ‘Corporate Debtor’ dated 19.02.2018 for ‘One Time Settlement’ of the loan amount which was accepted by the Respondent based on Terms and Conditions specified in the Sanction Letter dated 28.02.2018. Apart from this, based on the said settlement, ‘Corporate Debtor’ had paid an upfront amount as seen from the ‘One Time Settlement’ letter by agreeing to abide by the Terms and Conditions of the ‘Sanction Letter’ and signed it. 

 

# 45. It cannot be gainsaid that the Respondent/Financial Creditor, after considering the proposal of the Appellant for ‘One Time Settlement’ through its letter dated 19.02.2018 granted said settlement in and by which the ‘Corporate Debtor’ was required to pay Rs. 2 Crores as against its liability of Rs. 17.12 Crores as on 01.12.2015. As such it is crystal clear that the new contract had come into play on 19.02.2018 and further that the Application was filed by the Respondent/Applicant (under Section 7 of IBC) on 25.10.2018 which is within the period of limitation. 

 

# 46. There is not two opinion of the pivotal fact that under the new contract, the ‘Corporate Debtor’ had paid a sum of Rs. 1 Crore till date and committed default in respect upfront sum of Rs. 9 Crores in regard to the settlement of loan amount and without any iota of doubt, the ‘Corporate Debtor’ is bound by the new premises it had made which provided leverage to the Respondent/Financial Creditor to initiate CIRP under IBC (based on fresh cause of action). 

 

# 47. As far as the present case is concerned, even though a plea is taken on behalf of the Appellant that the Section 7 Application filed by Respondent/ Financial Creditor/Applicant is time barred because of the fact that during October, 2018, the same being filed which is beyond three years from 20.11.2012 (recall notice) and 04.04.2013 being the date when Demand Notice was issued to the Appellant by the ‘Corporate Debtor’ [Section 13(2) SARFAESI Act, 2002] and further that OTS application was signed on 28.02.2018 was beyond four years and they cannot be relied upon to conclude that there was ‘Acknowledgment of Liability’ and that the date of default mentioned on 30.09.2013 and 31.12.2013 was the date of declaration of the Account of the ‘Corporate Debtor’ as ‘NPA’ and these were not mentioned in the Application and brought forth only by way of an amendment Application etc. the same are not accepted by this Tribunal because of the latent and patent fact that the ‘‘Corporate Debtor’’ had acknowledged the debt due to be paid by it to the Respondent/Financial Creditor/Applicant through its Annual Reports and Balance Sheet Periodical till 2017. Furthermore, the ‘Corporate Debtor’s Report for the year ending 31.03.2017 unerringly points out to an ‘Acknowledgment of Liability’ which will give a ‘new leaf of life’ to commence the Limitation Period. 

 

# 48. In the present case, Balance Sheet for the Financial Year 2017-18 mentioned that the secured borrowings were inclusive of IDBI’s Cash Credit sum of Rs. 76,99,61,821/- and Indian Bank Cash Credit sum of Rs. 41,68,13,000/- as noted by the ‘Adjudicating Authority’ at paragraph- 10 of the ‘Impugned Order’. 

 

# 49. In short, the ‘OTS’ proposal of the ‘Corporate Debtor’’ dated 28.02.2018 was accepted by the authorised signatory of the ‘Corporate Debtor’ to the Terms and Conditions and it is brought to the fore that through a letter dated 07.06.2018 of the Respondent/Financial Creditor/Applicant addressed to the ‘Corporate Debtor’, the ‘OTS Letter’ was revoked because of the non-payment of settlement sum by the ‘‘Corporate Debtor’’ in spite of there being loss of time. Suffice to it, to the Tribunal to point out that in the present case, as per new contract, the ‘Corporate Debtor’, apart from the fact that it paid Rs. 1 crore, committed a default in regard to the upfront payment of sum of Rs. 9 Crores in response to the settlement of loan amount and in any event, in law, the new promise had given new cause of action enabling the Respondent/’Corporate Debtor’/Applicant to initiate CIRP under IBC resulting in filing of Application under Section 7 of IBC against the ‘Corporate Debtor’, which is well within period of limitation. Viewed in that perspective, the counter plea in regard to the aspect of limitation fails.

 

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Blogger’s Comments; Tribunal has observed that limitation is available on the basis of novation of contract (settlement agreement). Does this mean that FC's claim in the CIRP process will have to be taken based on settlement agreement, not on the basis of DRT decree.

 

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