Case Number: Civil Appeal No. 7474 of 2019

Judges Name: Hon’ble Judge Arun Mishra J, INDIRA BANERJEE J,

Order dated: 28th August, 2020

Facts of the Case:

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. The Respondents were closely acquainted with one Mr. M. Krishnan, and Mrs. Radha Gouri, who were the promoters of the Appellant Company(Radha Exports (India) Pvt. Limited). 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. 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. According to the Appellant Company, M/s Radha Exports repaid Rs.80,40,000/- to the Respondents between 1st October, 2003 to 18th March 2004. As recorded in the judgment and order dated 19th December, 2018 of the NCLT, the Respondent Nos. 1 and 2 jointly wrote a letter dated 11th January, 2011 to the Deputy Commissioner of Income Tax, Company Circle V (3), Chennai, where they stated that, as on 31st March, 2004, the said proprietorship concern M/s Radha Exports had a loan liability of Rs.1,39,60,000/- (Rs.2,20,00,000/- less Rs.80,40,000/-) to the Respondents. The Respondents have, in the aforesaid letter, stated that they had given a further loan of Rs.10 lakhs to M/s Radha Exports, between 2004 and 2005. The said letter is reproduced in full, in the judgment and order dated 19th December, 2018, of the NCLT.

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/sRadha 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. 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. 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/-. 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.

On or about 6th October, 2007, the Respondent No.2 resigned from the Board of the Appellant Company. At the time of resignation, 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 of the value of Rs.90,00,000/- in the name of Mr. M. Krishnan. The amount of share application money of Rs.90,00,000/- transfered to Mr. M. Krishnan, was to be treated as a personal loan from the Respondent No.2 to the said Mr. M. Krishnan. By another letter dated 11th January, 2011 addressed to the Deputy Commissioner of Income Tax, Company Circle V(3), Chennai, being Annexure A-4 to the reply filed by the Appellant Company, the Respondent No.2 confirmed that she had requested the Appellant Company to allot shares in the name of the said Mr. M. Krishnan against her share application money, which the said M. Krishnan had agreed to treat, as his personal loan from the Respondent No.2 and pay her the amount at a later date.

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. 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.

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. Allegations of forgery and fraud are not decided in proceedings under Sections 433 and 434 of the Companies Act 1956 for winding up of a company. Such disputes necessarily have to be adjudicated in a regular suit, on the basis of evidence, including forensic examination reports. 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.

On 7th December 2017, the Respondents issued a fresh demand notice to the Appellant Company. By a letter dated 14th December 2017, the Appellant Company refuted the claims in the demand notice dated 7th December 2017, inter alia claiming that all amounts due and payable by the Appellant Company or its predecessor-in- interest to the Respondents, had duly been paid within 2007 and 2008.

The Respondents, thereafter, filed a petition being CP/77/ (IB)/CB/2018 under Section 9 of the IBC, in the NCLT (Chennai Bench) claiming to be an operational creditor of the Appellant Company, within the meaning of Section 9 of the IBC and claiming from the Appellant Company Rs.2.10 Crores as principal and Rs.2,31,60,000/- towards interest at the rate of 24% per annum, from the year 2007.

By an order dated 12th April 2018, a Single Bench of NCLT dismissed CP/77/(IB)/CB/2018 filed by the Respondent No.1, claiming himself to be an
‘Operational Creditor’ under Section 9 of the IBC, as withdrawn, with liberty to file a fresh petition in accordance with law. 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.
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.

On or about 13th February 2019, the Respondents filed Company Appeal (AT) (INS) NO.224/19 before the Appellate Tribunal, challenging the order dated 19th December 2018 passed by the NCLT, dismissing the petition of the Respondents under Section 7 of the IBC. 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.

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. Issue: Whether any financial debt is in existence in between the parties as on the date of filing petition u/s 7 of the Code and as to whether, assuming the financial debt is in existence, the debt is barred by limitation or not.

Supreme Court held:

• The Supreme court referred the judgment of Innoventive Industries Ltd. v. ICICI Bank and Anr and observed 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.
• The Court referred another judgment of B.K. Educational Services Pvt. Ltd. v. Parag Gupta and Associates and observed 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.
• The Supreme court held that 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.
• 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.
• Therefore it held that the impugned judgment and order of the Appellate Tribunal is set aside and the order of the Adjudicating Authority dismissing the application, is restored.