Resolving the Conundrum of Decree-holding Homebuyers under the IBC

[Anand Singh is a 3rd-year student of Hidayatullah National Law University (HNLU), Raipur]

Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) allows financial creditors to initiate a corporate insolvency resolution process (“CIRP”) against a corporate debtor. However, whether a decree or recovery certificate holder falls under the said provision has always remained an open question, and has been marred by conflicting judgments of the National Company Law Appellate Tribunal (“NCLAT”). Recently, the Supreme Court in Dena Bank (now Bank of Baroda) v. C. Shivakumar Reddy (4 August 2021) dealt with this issue. This post seeks to analyze this judgment and discuss the effect it will have on decree-holding homebuyers.

Factual Background 

In 2011, Dena Bank (the “Bank”) sanctioned a term loan in favour of one of the respondents Kavveri Telecom Infrastructure Limited (“KTIL”). In 2013, KTIL defaulted in the repayment of the loan amount, and the Bank declared its loan account as a non-performing asset (“NPA”). Subsequently, in 2014, the Bank issued a legal notice to KTIL for payment of the outstanding dues. In 2015, on non-repayment of dues, the Bank filed an application before the Debt Recovery Tribunal, Bangalore (“DRT”) for recovery of the said dues. In March 2017, while the proceedings were still pending, KTIL proposed a one-time settlement (“OTS letter”) of the loan amount, which was, however, rejected by the Bank. The debt was also acknowledged as liabilities by KTIL in the annual reports for the financial years 2016-17 and 2017-18. In March 2017, the DRT passed a final judgment against KTIL, and then in May 2017 issued a recovery certificate of approximately Rs. 52.12 crores in favour of the Bank.

Thereafter, on non-repayment of any amount by KTIL, in October 2018 the Bank filed a petition before the National Company Law Tribunal (“NCLT”) under section 7 of the IBC. Subsequently, the Bank filed two applications before the NCLT to place on record additional documents, including the DRT judgment, recovery certificate, OTS letter, and financial statements of KTIL for the financial years 2016-17 and 2017-18. These applications were accepted by the NCLT. KTIL contended that the petition is liable to be rejected as it was barred by limitation. In March 2019, the NCLT admitted the petition, rejecting the objections of KTIL as to limitation. Subsequently, an appeal was filed before the NCLAT by respondent no. 1, Mr. C. Shivakumar Reddy (director of KTIL). The NCLAT set aside the decision of the NCLT, and dismissed the application under section 7, holding the same to be barred by limitation. Aggrieved by the decision of the NCLAT, the Bank filed the present appeal before the Supreme Court.

Analysis of the Judgment

The Supreme Court set aside the judgment of the NCLAT and allowed the appeal. Several observations were made by the Court while dealing with the present appeal, as discussed below.

There is no bar in law to the amendment of pleadings or to file additional documents in a petition under section 7

The Supreme Court rejected Mr. Reddy’s argument that additional documents which were not originally filed with the petition, but were brought on record at a belated stage, were in violation of the provisions of the IBC, as they delayed the adjudication of the question of admissibility of the petition by not adhering to the timelines set forth under the IBC. The Court relied on Swiss Ribbons Private Limited v. Union of India to specify that the provisions of the IBC must not be construed in a pedantic manner, and emphasised the need for a purposive interpretation to achieve the objectives for which the IBC was enacted. CIRP under the IBC is favourable to the interests of the corporate debtor, unlike coercive recovery litigation.

Further, the Court clarified that an application to initiate CIRP by the financial creditor is required to be filed under statutory “Form 1”, in which particulars can be filled by the applicant only as specified in the form. Therefore, there is no scope for elaborate pleadings. The 14-day time limit under section 7(4) to ascertain the existence of default by the adjudicating authority (AA) is only directory in nature and not mandatory. According to the proviso to section 7(4), there is no penalty stipulated if no order is passed under section 7(5) within the time schedule; the AA only needs to record the reasons for the same. Moreover, before rejecting an application under section 7(5)(b), the AA is required by the proviso to this section to give a notice to the applicant to rectify the defects under application within seven days of receipt of such notice. If the applicant is unable to cure the defects within seven days, there is no penalty for it and, in appropriate cases, to meet the ends of justice, the AA may accept the cured application even after the seven-day period has expired.

Thus, based on the provisions of the IBC, specifically from sections 7(2) to (5) with the Insolvency and Bankruptcy (Application to Adjudicating Authority Rules), 2016, the Court determined that there is no bar in law to the amendment of pleadings or the filing of documents in an application under section 7, at any time until a final order either admitting or dismissing the application has been passed. However, in case of inordinate delay, the AA may use its discretion to decline such a request. 

A petition under section 7 of the IBC cannot be barred by limitation if the corporate debtor has subsequently acknowledged its liability

Mr. Reddy’s argument that the petition under section 7 of the IBC was barred by limitation was rejected by the Court. According to section 137 of the Schedule to the Limitation Act, 1963, the period of limitation to file an application under section 7 of the IBC is three years commencing from the date on which the right to apply accrues. The Court, while referring to section 18 of the Limitation Act, observed that it is a well-settled position of law that the IBC does not exclude the application of the provisions of the Limitation Act. Therefore, there is no reason to presume that section 18 of the Limitation Act will not apply to the proceedings under section 7 or 9 of the IBC. 

Section 18 of the Limitation Act provides that an acknowledgement of present subsisting liability, made in writing, has the effect of commencing a fresh period of limitation from the date on which the acknowledgement is signed by the party against whom such right is claimed. It makes no difference whether or not such acknowledgement is accompanied by a promise to pay expressly or even impliedly; however, it must be made before the relevant period of limitation has expired. The Court referred to its judgment in Asset Reconstruction Company (India) Limited v. Bishal  Jaiswal to observe that an acknowledgement of liability in balance sheets would amount to an acknowledgement under section 18 of the Limitation Act and will, therefore, extend the period of limitation. Thus, on the basis of the OTS letter and financial statements of the KTIL, the Court held the finding of the NCLAT that there was no acknowledgement of the debt within three years to be unsustainable under the law.

A judgment or decree of the DRT or the issuance of a recovery certificate in favour of the financial creditor will give rise to a fresh cause of action to initiate CIRP under section 7

The Court, while dealing with the issue of limitation, noted that KTIL also has unpaid dues in respect of the recovery certificate issued by the DRT. This led to the question whether a recovery certificate would give rise to a fresh cause of action for the financial creditor to initiate proceedings under section 7 of the IBC. The Court relied on Jignesh Shah v. Union of India to observe that an application under section 7 or 9 may be time-barred even if additional recovery proceedings in respect of the same debt were brought within the period of limitation. However, in case the applicant had approached the AA after receiving a final order or decree, or a recovery certificate, in respect of the recovery proceedings, and the decree remained unsatisfied, it would give rise to a fresh period of limitation to initiate CIRP.

The Court conjointly read the provisions of the IBC to rule that a final judgment or decree of any court or tribunal or any arbitral award for payment of money, if not satisfied, would come under the purview of financial debt, allowing the judgment creditor to initiate proceedings under section 7.

Comments  

The Court rightly pointed out that the IBC is not adversarial to the interests of the corporate debtor, unlike recovery litigation that further pushes the financially suffering companies towards liquidation. Therefore, the provisions of the IBC should not be construed in a very technical sense, defeating the very purpose for which it was enacted. The Court also settled down the position that a judgment, decree or recovery certificate would give rise to a fresh cause of action for initiation of proceedings under the IBC.

Earlier the NCLAT in Sushil Ansal v Ashok Tripathi had taken a different view that a decree-holder does not fall within the purview of financial creditor and, therefore, cannot initiate proceedings under section 7 of the IBC. The Supreme Court’s judgment comes as a relief for the homebuyers, who have already obtained a decree from the DRT, and such decree remains unsatisfied. The judgment upholds the view taken by the NCLAT in Urgo Capital Limited vs. Bangalore Dehydration and Drying Equipment Co., that a decree-holder is included under the ambit of the creditor in the IBC, and such decree enables it to file an application under section 7. Thus, the Supreme Court judgment clarifies the position that a decree-holding homebuyer indeed falls under the definition of financial creditor and can seek relief under section 7.

– Anand Singh