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Case Abstract 一

The Hon'ble Supreme Court recently held in Dena Bank v. C. Shivakumar Reddy that non-payment of an amount awarded under a decree, judgement, or arbitral award would fall under the definition of "financial debt" and would give rise to a new cause of action to precede insolvency proceedings under the Insolvency and Bankruptcy Code, 2016. 

The Hon’ble Supreme court further said that amending pleadings in an application filed under Section 7 of the IBC is not prohibited. The Supreme Court stated that the applicant might file additional papers in addition to those filed under Section 7 at any time until the final ruling is issued.

The Apex Court further said that amending pleadings in an application filed under Section 7 of the IBC is not prohibited. The Supreme Court stated that the applicant might file additional papers in addition to those filed under Section 7 at any time until the final ruling is issued. The purpose of this essay is to look at how the Supreme Court interpreted important legal requirements to reach its decision.

Facts in brief 一

Dena Bank (Appellant) sanctioned a term Loan in favour of the second respondent (Corporate Debtor) on December 23, 2011, which was to be repaid in 24 quarterly payments two years following disbursement. In September 2013, the Corporate Debtor missed a payment under the Loan and defaulted. In December 2013, the Corporate Debtor's account was designated a Non-Performing Asset (NPA). The Appellant served the Corporate Debtor with legal notice in December 2014, demanding payment of INR 52.12 crores.The repayment was not made by the Corporate Debtor. The Appellant filed a claim with the Bangalore Debt Recovery Tribunal (DRT) on January 1, 2015, seeking the recovery of INR 52.12 crores in unpaid debts. The Corporate Debtor asked the Appellant to restructure the debt in a letter dated 5 January 2015. On the same day, the Corporate Debtor suggested a one-time settlement of the Loan, which the Appellant refused.

In March 2017, the DRT issued an order for the collection of outstanding debts against the Corporate Debtor. As a result, the DRT granted a recovery certificate in favour of the Appellant on May 25, 2017. The Corporate Debtor then suggested a one-time settlement to jointly pay the loan amount on June 19, 2017. In the annual reports for the financial years 2016-2017 and 2017-2018, the Corporate Debtor's unpaid dues were also shown as liabilities.

The Appellant filed a petition under Section 7 of the IBC in October 2018. Following that, in January 2019, the Appellant requested to add additional documents to the record, including the DRT's final judgement and order of March 27, 2017, and the recovery certificate dated May 25, 2017. This request by the Appellant was granted. In February 2019, the Corporate Debtor filed a preliminary objection to the Appellant's petition, claiming that it was prohibited by limitation. In March 2019, the Appellant requested to record new documents, including one-time settlement proposals and the Corporate Debtor's financial records from 2016 to 2018, which was granted.

The National Company Law Tribunal (NCLT) allowed the petition under Section 7 of the IBC in a judgement dated March 21, 2019. The NCLT heard the Corporate Debtor's challenge on the basis of limitation but dismissed it. The NCLT's ruling was appealed by the first respondent to the National Company Law Appellate Tribunal (NCLAT). The NCLAT upheld the appeal and rejected the Appellant's petition under Section 7 of the IBC, concluding that the application was time-barred.

The issue was finally brought to the Honorable Supreme Court, where the following questions turned out:

1. Whether a petition under Section 7 of the IBC would be prohibited by limitation just because it was submitted three years after the loan account was declared non-performing, even if the Corporate Debtor afterwards admitted its liability?

2. Whether the financial creditor would have a new cause of action to begin proceedings under Section 7 of the IBC if the DRT issued a final judgement or decree in his or her favour or if a recovery certificate was issued in his or her favour?

3. Is there any legal restriction on amending pleadings in a petition filed under Section 7 of the IBC or adding new documents?

Analysis of the Court 一 

The Apex Court in this case alluded to the IBC's aim from the start. The IBC was seen to be an useful piece of legislation intended at encouraging investments and resolving corporate insolvency, among other things. The judgement in Swiss Ribbons Private Limited v. Union of India was used to emphasise that, unlike forced recovery action, the IBC's Corporate Insolvency Resolution Process (CIRP) is not hostile to the interests of the Corporate Debtor. As a result, the Apex Court concluded that the IBC's provisions must be read freely and purposefully to promote the statute's aim, rather than being given a limited, pedantic construction that contradicts the statute's entire purpose.

A financial creditor was obliged to file an application under Section 7 of the IBC, using statutory "Form 1," which permitted the applicant to fill out only the essential information. As a result, unlike in a lawsuit, there was no need for extensive pleadings. As a result, the Supreme Court stated that a Section 7 petition could not be considered in the same way that a plaintiff in a lawsuit might. The requirements of Sections 7(2) to 7(5) were then referred to, which provide that the adjudicating authority must determine the presence of the default based on information utility records or proof provided by the financial creditor.

It was emphasised that the 14-day time specified in Section 7(4) for determining the presence of default was only advisory and not obligatory. Taking this into account, the Hon'ble Supreme Court held that a careful reading of the provisions of the IBC, specifically Sections 7(2) to 7(5), as well as the Insolvency and Bankruptcy (Application to Adjudicating Authority Rules), 2016, revealed that there was no prohibition on filing documents at any time until a final order admitting or dismissing the application was issued. Nonetheless, when there has been an excessive delay, the adjudicating body may refuse the request to file more pleadings or papers and continue to make a final ruling at its discretion.

The Supreme Court, therefore, stated that Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries Private Limited was not a precedent for the concept that pleadings cannot be amended at the end of the NCLT proceedings. Furthermore, it was noted that the changes were made within 2-3 months after the commencement of the proceedings before the admission of the Section 7 petition in the current case.

The Hon'ble Supreme Court held that under Section 18 of the Limitation Act, 1963 (Limitation Act), an admission of a continuing obligation expressed in writing has the effect of starting a new term of limitation from the day the acknowledgement was signed. This recognition does not have to be followed by an express or implied agreement to pay. However, the acknowledgement must be given prior to the expiration of the applicable limitation period.

The Supreme Court cited Sesh Nath Singh v. Baidyabati Sheoraphuli Cooperative Bank Ltd. to emphasise that the IBC does not exclude the use of the Limitation Act. As a result, there was no reason to believe that Section 18 of the Limitation Act would not apply to IBC Sections 7 and 9. Furthermore, the Apex Court stated that it was well established that entries in a Corporate Debtor's books of accounts and/or balance sheets constituted an acknowledgement under Section 18 of the Limitation Act.

As a result, the Supreme Court decided that the NCLAT's decision was not legally sound. The Supreme Court relied on the statement of accounts, balance sheets, and one-time settlement offer to determine that the petition under Section 7 was filed within the three-year limitation period. Furthermore, it was observed that the Corporate Debtor had failed to pay the dues in accordance with the recovery certificate granted by DRT in the instant case, giving the Appellant a new cause of action. As a result, the Apex Court decided that if a final judgement, decree, or arbitral award for money is not fulfilled, it falls within the scope of a financial obligation, allowing a financial creditor with a new cause of action to start proceedings under Section 7 of the IBC.

The Hon'ble Supreme Court found that the NCLT's decision to grant the Appellant's request for further documents and supporting pleadings, as well as to examine such papers and pleadings, did not need involvement in the appeal. As a result, the appeal was granted, and the NCLAT's ruling was reversed.

 Review 

The current decision correctly points out a frequent misunderstanding that bankruptcy processes are adversarial in character and serve as a substitute for coercive recovery lawsuits. Rather, the goal of insolvency procedures is to help the corporate debtor get back on its feet and recover from its financial difficulties. Given that the IBC is a positive piece of legislation, a highly technical approach to addressing corporate insolvencies should be avoided. The adjudicating body must work in the interest of bringing the corporate debtor back to life.

Financial creditors who have received a favourable result in recovery action or arbitral procedures but have yet to collect their dues would be relieved by the ruling. Such financial creditors can now seek relief under the IBC to settle the corporate debtor's bankruptcy.

When a decree, judgement, or arbitral award is challenged in court, this judgement will not come to the rescue of operating creditors. In K. Kishan v. Vijay Nirman Company Private Limited, the Hon'ble Supreme Court stated that the existence of any objections or appeals would amount to the existence of a pre-existing dispute, prohibiting the operational creditor from starting actions under the IBC.