M/s. Next Education India Pvt. Ltd. Vs. M/s. K12 Techno Services Pvt. - Under the circumstances, the NCLT ought to have considered the invoices at least for the period preceding three years from the date of the application under Section 9, rather than considering the starting point of limitation as 12.03.2011.

SCI (27.03.2023) In M/s. Next Education India Pvt. Ltd. Vs. M/s. K12 Techno Services Pvt. Ltd. [Civil Appeal No. 1775 of 2021] held that;

• Under the circumstances, the NCLT ought to have considered the invoices at least for the period preceding three years from the date of the application under Section 9, rather than considering the starting point of limitation as 12.03.2011.

Excerpts of the order; 

Feeling aggrieved and dissatisfied with the impugned judgment and order dated 17-03-2021 passed by the National Company Law  Appellate Tribunal (NCLAT), New Delhi, Principal Bench in Company Appeal (AT) (Insolvency) No.98/2019, by which the NCLAT has dismissed the said appeal confirming the order passed by the National Company Law Tribunal(NCLT), Bengaluru Bench dismissing the application under Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC) filed by the appellant solely on the ground that the claim was barred by limitation, the original applicant has preferred the present appeal. 

At the outset, it is required to be noted that, in fact, the appellant herein, who claimed to be `Operational Creditor’ raised 187 different invoices for the Digital Classroom Solution Services provided for the period between 12.03.2011 and 30.06.2017. The amount under different invoices were unpaid, which gave rise to the appellant to initiate the proceedings under Section 9 of the IBC before the NCLT. The NCLT considering the starting point of  limitation as 12.03.2011 held that the claim is barred by limitation. However, the NCLT did not take into consideration the subsequent invoices at least preceding three years from the date of filing of Section 9 application, which ought to have been considered. Under the circumstances, the NCLT ought to have considered the invoices at least for the period preceding three years from the date of the application under Section 9, rather than considering the starting point of limitation as 12.03.2011. Under the circumstances, the order(s) passed by the NCLT and affirmed by the NCLAT are unsustainable.

Learned counsel appearing on behalf of the respondent has pointed out that, as such, the respondent is a going concern and commercially viable and has already paid Rs.4.5 crores to the appellant and, therefore, there is no question of declaring it as insolvent.

The aforesaid aspects are required to be considered by the NCLT. However, the view taken by the NCLT that the claim is barred by limitation is unsustainable.

In view of the above and for the reasons stated hereinabove, the present appeal succeeds. The impugned judgment and order(s) passed by the NCLT and that of the NCLAT dismissing/rejecting application under Section 9 of the IBC on the ground that the claim is barred by limitation are hereby quashed and set aside and now the matter is remitted to the NCLT to consider Section 9 application afresh in accordance with law and on its own merits.

All the contentions/defences which may be available to the respective parties including the case on behalf of the respondent that the respondent company is economically and commercially sound and a running company and, therefore, is not required to be declared as insolvent are kept open, which may be considered by the NCLT in accordance with law and on its own merits. The present appeal is accordingly allowed.

 No costs. However, it is made clear that the respondent shall not be permitted to raise the pre-existing dispute as the same has been negatived by the NCLAT.

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Vinod Singh Negi Vs Kiran Shah, Liquidator of ORG Informatics Ltd. - Claim rejected by Liquidator for delayed filing & being time-barred, Appplication U/s 61

NCLAT (19.01.2021) in Vinod Singh Negi Vs Kiran Shah, Liquidator of ORG Informatics Ltd.  [Company Appeal (AT) (Insolvency) No. 1101 of 2020] held that;

• It is clear that the writers of law were conscious that there could be situation where time-barred debts are claimed before the IRP/RP. In the present matter, it does not appear that before the IRP/RP claim was filed. At the stage of Liquidation, the Appellant suddenly woke up to make a claim of salary of 2012, without showing as to how it is within limitation. Considering the reasons recorded by the Adjudicating Authority which we have reproduced above, it does not appear that the Adjudicating Authority erred in rejecting the Application of the Appellant.

• 
  

Excerpts of the order;

# 3. The Appellant filed I.As No. 505 of 2020 and 306 of 2020 before the Adjudicating Authority (National Company Law Tribunal, Ahmedabad Bench). These I.As were filed in CP (IB) No. 120/NCLT/AHM/2017 and the I.As came to be rejected on the basis that the claim which was sought to be filed late before the Liquidator itself was time-barred claim.

 

# 5. The Learned Counsel for the Appellant refers to copy of the Application which was filed before the Adjudicating Authority. Copy of the same is filed with Diary No. 24669. The Application was filed under Section 42 of Insolvency and Bankruptcy Code, 2016 (IBC in short). The same was required to be filed as the Liquidator had sent communication Annexure F (Page 76) which was an e-mail dated 15th February, 2020 informing the Appellant who had filed claim for arrears of salary, etc. with interest, that the claim filed with the Liquidator was beyond time and the same could be filed with the Liquidator if the AdjudicatingAuthority condones the delay. The Learned Counsel argues that the Application which was filed before the Adjudicating Authority was merely for condoning the delay in filing of the claim and it was not with regard to the merits of the claim. It is argued that the Adjudicating Authority could not have gone into the merits of the claim to hold that the claim itself was time-barred.

 

# 6. We have gone through the record. Annexure E (Page 72) is Form E which is stated to have been filed on 07.01.2020 with the Liquidator as proof of claim by the Workman or Employee. The contents show that the Appellant claimed Rs. 34,94,287/- with interest and it was also stated that he was employee of the Corporate Debtor between 16.04.2007 to 31.07.2012. The Appellant relied on documents as mentioned in Column 10 like 

• (i) Copy of Pan Card

• (ii) Appointment Letters (ORG Telecom and ORG Informatics).

• (iii) Relieving Letter by ORG Informatics.

• (iv) Bank Statement.

• (v) Calculation of Claim Amount.

• (vi) Duly Notarized Affidavit.

 

# 7. The prayer made in the Application (Copy of which is at Annexure I Diary No. 24669) is as under:

• “In light of the above averments, it is hereby prayed that this Hon’ble Tribunal may graciously be pleased to pass necessary order(s):

• (1) Directing the Liquidator of ORG Informatics Limited (Under Liqn.) to accept and admit the claim of the applicant.

• (2) Condone the delay in filing of this petition and claim before the Liquidator due to aforesaid practical difficulty which was unintentional.”

 

# 8. Thus the prayer made was that the Liquidator should not only accept the delayed claim but also admit the same. Learned Counsel for Appellant is now submitting that the Application should have been read as a whole and that in fact, what was sought, was only condonation of delay to file the claim and not with regard to considering the merits of the claim.

 

# 9. We are not impressed by the argument that when the Adjudicating Authority was called upon to consider the condoning delay to file the claim it was debarred from looking into the question whether or not the claim itself was maintainable. The Adjudicating Authority in the Impugned Order mentioned as under:

• # “20. It is very difficult, on the one hand, the applicant is saying that he has completed more than 5 years of service, whereas he has shown the date of continuation in service as per para 4 of the application as 16th April, 2007 till 31st July, 2012. Even if it is assumed that there is a certain typographical error, but then even to support the claim, the applicant has not filed any documents such as salary slip, copy of bank statement in which the salary is credited, working of gratuity, and leave encashment, and the basis of calculation of interest and relieving order or resignation paper. In absence of supporting documents the claim so made by the applicant is not free from the shadow of doubt. 

• 21. Further as per the application, the amount is due from 2012 but since 2012 till date applicant never demanded the amount from the Corporate Debtor. Not a single paper is attached, so as, to show that the applicant has demanded the amount. Under such circumstances, the claim itself became time-barred. However, in support of the claim, the applicant filed only a self-prepared statement/calculation sheet (Page No. 26).

• 22. The said statement is neither verified by its employer nor any proof has been given, so as, to show that at any point in time from 16.04.2007 till 31.07.2014 the applicant has claimed his due amount form its employer. Had there been such huge claim, the applicant would have never sit idle without making any correspondence with his employer claiming the pending arrear dues or as the case may be. In view of that, it creates Iota of doubt on the very claim made by the Applicant.

• 23. With regard to the prayer for condonation of delay by the applicant and filing this application for his claim before the liquidator, which was rejected on the ground that the application was filed beyond the stipulated period, would have been condoned as the Hon’ble Supreme Court in its catena of the case have taken very liberal approach, but in the instant application the applicant cannot able to produce any documentary proof in support of his claim, therefore the claim is bad in absence of evidentiary proof as also observed hereinabove.

• 24. Moreover, this claim is of 2012, since then the applicant was sitting idle without making any correspondence for claim and / or filed any proceeding to show his bona fide against employer. Hence, the applicant is not entitled to the claim as made in the application. Under such circumstances when there is a shadow of doubt upon the claim of the applicant, itself the liquidator cannot accept the claim of the applicant even if delay is condoned.

• 25. In view of the above observations, the instant application is rejected.”

 

# 10. The Hon’ble Supreme Court of India in the matter of ‘B. K. Educational Services Pvt. Ltd. Versus Parag Gupta and Associates.’ (MANU/SC/1160/2018) in para 6 of the Judgment had referred to reasons as to why Section 238A with regard to Limitation was inserted in the provisions of IBC. For this purpose, Hon’ble Supreme Court referred to the Report of the Insolvency Law Committee of March, 2018 in which Paragraphs 28.2 and 28.3 read as under:

• 28.2 Further, non-application of the law on limitation creates the following problems; first, it re-opens the right of financial and operational creditors holding time-barred debts under the Limitation Act to file for CIRP, the trigger for which is default on a debt above INR one lakh. The purpose of the law of limitation is “to prevent disturbance or deprivation of what may have been acquired in equity and justice by long enjoyment or what may have been lost by a party’s own inaction, negligence or latches”4. Though the Code is not a debt recovery law, the trigger being ‘default in payment of debt’ renders the exclusion of the law of limitation counter-intuitive. Second, it reopens the right of claimants (pursuant to issuance of a public notice) to file time-barred claims with the IRP/RP, which may potentially be a part of the resolution plan. Such a resolution plan restructuring time-barred debts and claims may not be in compliance with the existing laws for the time being in force as per Section 30 (4) of the Code.

• 28.3 Given that the intent was not to package the Code as a fresh opportunity for creditors and claimants who did not exercise their remedy under existing laws within the prescribed limitation period, the Committee thought it fit to insert a specific Section applying the Limitation Act to the Code. The relevant entry under the Limitation Act may be on a case to case basis. It was further noted that the Limitation Act may not apply to applications of corporate applicants, as these are initiated by the applicant for its own debts for the purpose of CIRP and are not in the form of a creditor’s remedy.”

 

# 11. It is clear that the writers of law were conscious that there could be situation where time-barred debts are claimed before the IRP/RP. In the present matter, it does not appear that before the IRP/RP claim was filed. At the stage of Liquidation, the Appellant suddenly woke up to make a claim of salary of 2012, without showing as to how it is within limitation. Considering the reasons recorded by the Adjudicating Authority which we have reproduced above, it does not appear that the Adjudicating Authority erred in rejecting the Application of the Appellant.

 

For the above reasons, we do not find that there is any substance in the present Appeal.

 

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Blogger’s comments; Following are certain provisions of the Code.& The Limitation Act.

 

Insolvency & Bankruptcy,2016

# Section 238. Provisions of this Code to override other laws. -

The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.

# Section 238A. Limitation. –

The provisions of the Limitation Act, 1963 (36 of 1963) shall, as far as may be, apply to the proceedings or appeals before the Adjudicating Authority, the National Company Law Appellate Tribunal, the Debt Recovery Tribunal or the Debt Recovery Appellate Tribunal, as the case may be.

 

What is conspicuous by its absence in this Section (238A) are the expressions “under this Act” or “subject to the provisions of this Act”. Thus Section 238A restricts the application of The Limitation Act to the proceedings or appeals before the Adjudicating Authority, the National Company Law Appellate Tribunal, the Debt Recovery Tribunal or the Debt Recovery Appellate Tribunal only.

 

As far as the claims of creditors being filed with Liquidator during the liquidation process are concerned, following is an interesting  provision of the “The Limitation Act, 1963.

 

# Section 3. Bar of limitation.

(1) Subject to the provisions contained in sections 4 to 24 (inclusive), every suit instituted, appeal preferred, and application made after the prescribed period shall be dismissed, although limitation has not been set up as a defence.

(2) For the purposes of this Act,- 

• (a) a suit is instituted,-

• (i) in an ordinary case, when the plaint is presented to the proper officer;

• (ii) in the case of a pauper, when his application for leave to sue as a pauper is made; and 

• (iii) in the case of a claim against a company which is being wound up by the court, when the claimant first sends in his claim to the official liquidator;

 

The Section 3(2)(a)(iii)] of the “The Limitation Act. 1963, provides that the claim of a creditor submitted to the Liquidator in the liquidation process of a company, will fall under the definition of the institution of a suit, hence will attract the provisions of “The Limitation Act”. However  Section 238A of the Code read with non obstante clause Section 238, prevents the applicability of the provisions of “The Limitation Act, 1963” on the claims of creditors being submitted to Liquidator during liquidation process under “IBC, 2016”

 

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The Great Indian Linen And Textile Infrastructure Company Pvt. Ltd. Vs Raghavendran, Liquidator - Claim rejected by Liquidator being time-barred, Appplication U/s 42

NCLT Chennai (11.12.2018) in The Great Indian Linen And Textile Infrastructure Company Pvt. Ltd. Vs Raghavendran, Liquidator  [MA/181/IB/2018 IN CA/61/IB/2018 in CP/510/ (IB)/CB/2017 ] held that;

• a reference can be made to the recent ruling of the Hon'ble Apex Court given in M/s. B.K. Educational Services Pvt. Ltd. Vs. M/s. Parag Guptha & Associates in Civil Appeal No.23988/2017, wherein the Hon'ble Apex Court has held that 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. 

• The ratio laid down by the Hon'ble Apex Court in the above cited case is equally applicable to the claims filed before the IRP/Liquidator. If a claim has been filed before IRP/Liquidator after the expiry of a period of three years, the same is time barred. The IRP and the Liquidator cannot entertain time barred claims. 

Excerpts of the order;

# 1. Under adjudication is MA/181/2018 in CA/61/2018 filed in CP/510/IB/2017 by the Applicant/Operational  Creditor against the Liquidator. The prayer made by the Applicant/Operational Creditor in the Application is as follows: 

• a. Hon'ble Tribunal NCLT, Chennai Bench may be pleased to overturn the order dated 17th May 2018 passed by the Liquidator. 

• b. Hon'ble Tribunal NCLT, Chennai Bench may direct the Liquidator to admit the claim filed by The Great Indian Linen And Textile Infrastructure Company Put. Ltd., Operational Creditor under Form-C dated 06.04.2018 

• C. Such other order(s) or further order be made affording complete relief to the Operational Creditor as the authority may deem fit and proper in the circumstances given herein and in the interest of justice. 

 

# 2. The Counsel for the Applicant/Operational Creditor has submitted that the Applicant has filed the claim for an amount of Rs.1,44,60,000/- with interest @ 18% p.a. totaling Rs.2,73,78,977/- before the Resolution Professional which was rejected, and thereafter, again the claim was filed before the Liquidator on 06.04.2018. The claim has been filed in Form 'C', copy of which is placed at page 126 of the typed set filed with the Application wherein the principal amount i.e. Rs. 1,44,60,000/- with interest @ 18% p.a., totaling Rs.3,47,57,642/- as claimed is reflected. The claim has been supported with documents as mentioned in Column 4 of the said Form. However, it has been noted that an interim reply dated 08.01.2011 was filed by the Corporate Debtor disputing the claim. 

 

# 3. The Counsel for the Applicant/Financial Creditor has submitted that the amount has become due and payable on 28.05.2010 on the expiry of the Bank Guarantee given. 

 

# 4. The brief facts stated by the Counsel for the Applicant/Financial Creditor are that an amount of Rs.1,44,60,000/- was given as mobilization advance to the Corporate Debtor on 10.06.2009 for manufacturing of equipments which the Corporate Debtor failed to do and the advance given was not returned, copy of the contract is placed at pages 25 to 75 of the typed set filed with the Application, in which the details of terms and conditions are mentioned. 

 

# 5. It has further been submitted by the Counsel for the Applicant/Financial Creditor that a Petition was filed before Hon'ble High Court of Madras under Section 433(e) of the Companies Act, 1956 for winding up of the Corporate Debtor which was subsequently transferred to this Adjudicating Authority after enforcement of I&B Code, 2016, and this Authority on 19.06.2017 ordered for initiation of Corporate Insolvency Resolution Process (CIRP) and ultimately passed an Order for liquidation of the Corporate Debtor on 19.03.2018. 

 

# 6. It has been submitted by the Applicant/Financial Creditor that in the chain of the circumstances, the claim is not time barred. It is further submitted that the Liquidator vide a communication dated 17.05.2018 has rejected the claim of the Applicant/Financial Creditor as time barred against which this Appeal has been filed on 05.06.2018. 

 

# 7. The Liquidator has filed a Reply wherein at page 5 and under Para 6(iii), he has stated as follows: 

• "in para 17(2)(b)(iii) & (iv), Chapter V of IBBI (Liquidation Process) Regulations, 2016, the Operational Creditors are expected to prove the existence of Debt on the basis of a Contract with the Corporate Debtor and/or an Invoice demanding Payment and/or an order of Court/Tribunal that has adjudicated upon the payment of Debt if any and/or Financial Accounts. The Appellant relies on an Auditor's Certificate which states that a sum of Rs. 1,44,60,000/- is part of the Capital Advance Amounts Due and Receivable by the Claimant from the Corporate Debtor. In the present case, the Certificate has been procured post submission of the Claim Form before the Liquidator and cannot be treated as conclusive evidence for Non-payment of Dues by the Corporate Debtor". 

 

# 8. It has further been averred in the reply that as per the Audited Accounts of the Corporate Debtor for the last 3 Financial Years, the Financial Statement reflect 'Nil' dues to the Applicant herein. The Liquidator has also placed on record that the Corporate Debtor had filed the Counter Claim in winding up Petition wherein it has been stated that different phases in the Work Contract have been completed and that the Applicant owed a sum of Rs.2,59,764/ (differential amounts) to the Corporate Debtor which is neither disputed by the Claimant nor demanded refund/payment of the monies due to them and the same has been concealed for filing claim before Liquidator, and therefore, the Applicant is guilty for suppressing the material facts in respect of the dispute between the parties. 

 

# 9. The Counsel for the Liquidator has referred to the communication dated 17.03.2017 wherein at page 3 under Para 2, it has clearly been brought out that the works in question were executed. 

 

# 10. The Counsel for the Liquidator has also referred to the Counter Affidavit filed by the Corporate Debtor before Hon'ble High Court of Madras wherein the liability has been denied, copy of which is placed at 23 of the typed set filed with the Rejoinder. Besides this, the Counsel for the Liquidator has submitted that the present Application has been filed after the expiry of 14 days as provided under Section 42 of the I&B Code, 2016 and the debt claimed is also time barred. 

 

# 11. The Counsel for the Applicant/Financial Creditor has controverted the submissions made by the Counsel for the Liquidator stating that the NCLT vide its Common Order dated 19.06.2017, under Para 3 has clearly brought out that there is sufficient material to show that the Corporate Debtor has defaulted in making payment of the outstanding debt due to the Operational Creditor. However, he could not explain/rebut other contentions made by the Counsel for the Liquidator, particularly that the present Application is time barred and the debt claimed is also time barred. 

 

# 12. Heard the Counsel for the Applicant/Financial Creditor, Counsel for the Liquidator and perused the Application along with record placed on file and particularly the decision that has been taken by the Liquidator on 17.05.2018 wherein it has clearly been stated that the operational debt dated 10.06.2009 is time barred. It has further been submitted by the Liquidator that there is no proof for non-payment attached to the claim and there is no specific clause for payment of interest on the amount due and a dispute has already been raised by the Corporate Debtor before Hon'ble High Court of Madras. 

 

# 13. Keeping in view the facts and circumstances stated above, a reference can be made to the recent ruling of the Hon'ble Apex Court given in M/s. B.K. Educational Services Pvt. Ltd. Vs. M/s. Parag Guptha & Associates in Civil Appeal No.23988/2017, wherein the Hon'ble Apex Court has held that 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. 

 

# 14. The ratio laid down by the Hon'ble Apex Court in the above cited case is equally applicable to the claims filed before the IRP/Liquidator. If a claim has been filed before IRP/Liquidator after the expiry of a period of three years, the same is time barred. The IRP and the Liquidator cannot entertain time barred claims. 

 

# 15. In view of the facts and circumstances and the legal position stated, the claim of the Applicant is held to be time barred. Thus, the Liquidator has rightly rejected the claim of the Applicant vide his communication dated 17.05.2018. Accordingly, MA/181/2018 stands dismissed. 

 

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Blogger’s comments; Following are certain provisions of the Code.& The Limitation Act.

 

Insolvency & Bankruptcy,2016

# Section 238. Provisions of this Code to override other laws. -

The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.

# Section 238A. Limitation. –

The provisions of the Limitation Act, 1963 (36 of 1963) shall, as far as may be, apply to the proceedings or appeals before the Adjudicating Authority, the National Company Law Appellate Tribunal, the Debt Recovery Tribunal or the Debt Recovery Appellate Tribunal, as the case may be.

 

What is conspicuous by its absence in this Section (238A) are the expressions “under this Act” or “subject to the provisions of this Act”. Thus Section 238A restricts the application of The Limitation Act to the proceedings or appeals before the Adjudicating Authority, the National Company Law Appellate Tribunal, the Debt Recovery Tribunal or the Debt Recovery Appellate Tribunal only.

 

As far as the claims of creditors being filed with Liquidator during the liquidation process are concerned, following is an interesting  provision of the “The Limitation Act, 1963.

 

# Section 3. Bar of limitation.

(1) Subject to the provisions contained in sections 4 to 24 (inclusive), every suit instituted, appeal preferred, and application made after the prescribed period shall be dismissed, although limitation has not been set up as a defence.

(2) For the purposes of this Act,- 

• (a) a suit is instituted,-

• (i) in an ordinary case, when the plaint is presented to the proper officer;

• (ii) in the case of a pauper, when his application for leave to sue as a pauper is made; and 

• (iii) in the case of a claim against a company which is being wound up by the court, when the claimant first sends in his claim to the official liquidator;

 

The Section 3(2)(a)(iii)] of the “The Limitation Act. 1963, provides that the claim of a creditor submitted to the Liquidator in the liquidation process of a company, will fall under the definition of the institution of a suit, hence will attract the provisions of “The Limitation Act”. However  Section 238A of the Code read with non obstante clause Section 238, prevents the applicability of the provisions of “The Limitation Act, 1963” on the claims of creditors being submitted to Liquidator during liquidation process under “IBC, 2016”

 

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M/s Radha Exports (India) Pvt. Limited Vs. K.P. Jayaram & Anr. - It was for the Applicant to show that the debt is not barred by Limitation.

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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