2025 (6) TMI 772 - AT - IBC

Admission of application u/s 7 of IBC - declaration of the Corporate Debtors accounts as Non-Performing Assets (NPA) by the Financial Creditor - impugned order failed to take into account that the date of default shown by the Respondent-Financial Creditor in Part-IV of the Section 7 application was premised on the classification of the Corporate Debtor as NPA which classification itself was wrong as it was made in violation of the RBI guidelines - Section 7 petition was admitted ex-parte - violation of principles of natural justice - time limitation. Declaration of the Corporate Debtors accounts as Non-Performing Assets (NPA) by the Financial Creditor - HELD THAT - The Financial Creditor-Bank of Baroda in its communication dated 23.11.2017 to the Corporate Debtor had sent a detailed response to the directions raised by the Appellant in compliance of the directions of the Hon ble High Court of Madhya Pradesh. In their reply it was clearly pointed out by the Financial Creditor that the Corporate Debtor had not paid the quarterly instalments on the due dates due to which the term loan accounts had become irregular and that this status had been duly communicated to the Appellant on 03.06.2015 24.08.2015 and 02.03.2016. Inspite of these repeated communications the Corporate Debtor had not taken remedial action. On seeing the statement of Accounts placed on record by the Financial Creditor as per Banker Book Evidence Act buttressed by entries in the Balance sheets of the Corporate Debtor and the tabular chart forwarded by the Financial Creditor to the Appellant on 28.04.2016 it is persuaded to believe that default had arisen well before the declaration of the accounts of the Corporate Debtor as NPA. On putting all these facts and documents together the clear picture that evolves is that the Corporate Debtor stood as a defaulter qua the debt borrowed from the Financial Creditor-Respondent No.1 since 31.03.2016. Time Limitation - second bone of contention raised by the Appellant is that if the default had arisen on 31.03.2016 then the Section 7 application having been filed 8 years from the date of default the present application is clearly barred under Article 137 of the Limitation Act - HELD THAT - For any Section 7 application which is based on the date of default of the Corporate Debtor as of 31.03.2016 the period of limitation would run only until 30.03.2019. However the present Section 7 petition has been filed after a protracted delay of eight years in 2024 and thus become time-barred. It is the counter contention of the Financial Creditor that while indubitably Section 18 of the Limitation Act 1963 is fully applicable to IBC proceedings however entries in the balance-sheets of a Corporate Debtor would amount to be an acknowledgement under Section 18 of the Limitation Act which would extend the period of limitation. It was contended that the Adjudicating Authority has correctly noted in paras 19-21 of the impugned order that the 3 years period of limitation stood extended basis clear acknowledgment of debt liability as reflected in the balance sheets of the Corporate Debtor from FY 2015-16 until 2022-23. There are no quarrel with the proposition canvassed by the Appellant that if the default has occurred over 3 years prior to the date of filing of Section 7 application then the Section 7 application would be barred under Article 137 of the Limitation Act - the Adjudicating Authority has noted at para 19 therein that the Financial Creditor has presented credible evidence that the outstanding debt of the Corporate Debtor is recorded in their balance sheets from FY 2015-16 until 2022-23. The Adjudicating Authority has also noted that these entries were not contested by the Corporate Debtor during the oral arguments and hence held these entries to be acknowledgments of debt and basis these acknowledgement held the Section 7 petition to be within the period of limitation. Thus even though the balance sheets of FY 2015-16 onwards prior to FY 2022-23 do not specifically mention the name of the Financial Creditor it is an undisputed fact that the name of Financial Creditor is specifically mentioned in the Balance sheet of 2022-23 - the fact that the Appellant has not made any averment or placed any material on record to show that they had obtained any fresh loan from any other Financial Creditor during this period it would not be wrong to infer that the Long Term Borrowings reflected in the Balance sheet was in the context of present Respondent No.1-Financial Creditor and not for any other Financial Creditor. Neither did the present Financial Creditor give any fresh loan during this period other than the restructured loan amount from 26.06.2013 therefore it may not be wrong either to hold the view that the Long Term Borrowing reflected in the Balance sheet of the Corporate Debtor until 2022-23 relates to a continuing and subsisting liability qua the Financial Creditor from 2015-16 onwards. There is sound basis to hold that the Corporate Debtor in their balance sheet had acknowledged the debt consistently year on year from FY 2015-16 onwards. In such circumstances the Adjudicating Authority has correctly concluded that the Section 7 application fell well within limitation - the Adjudicating Authority has returned the correct finding that the debt having been acknowledged year over year from 2015-16 onwards until 2022-23 it was not barred by limitation. Conclusion - i) The validity of NPA classification is a matter of fact and evidence and a mere issuance of a No Due Certificate without detailed particulars cannot negate the existence of default. The classification of accounts as NPA by the Financial Creditor supported by statutory auditor s report and detailed communications upheld as valid. ii) The date of default as recorded in the Section 7 application is critical and can be relied upon if supported by credible evidence of continuing default. The contention that the date of default could be arbitrarily changed or disregarded is rejected. The appeals are devoid of merits and are dismissed.

Summary

The core legal questions considered by the Appellate Tribunal in these appeals arise under Section 7 of the Insolvency and Bankruptcy Code, 2016 ("IBC") and pertain to the admission of Corporate Insolvency Resolution Process ("CIRP") applications filed by a Financial Creditor against two Corporate Debtors. The issues revolve around:

• Whether the declaration of the Corporate Debtors' accounts as Non-Performing Assets (NPA) by the Financial Creditor was valid and in accordance with the Reserve Bank of India (RBI) guidelines;
• Whether the date of default as recorded in the Section 7 applications was correct and could be relied upon for initiating CIRP;
• Whether the Section 7 applications were barred by limitation under the Limitation Act, 1963, considering the date of default;
• Whether the Corporate Debtors acknowledged the debt in a manner that extended the limitation period under Section 18 of the Limitation Act;
• Whether the Adjudicating Authority committed any error in admitting the Section 7 petitions ex parte without granting the Corporate Debtors an opportunity to file replies or be heard, thereby violating principles of natural justice.

The Tribunal dealt with these issues primarily through the factual matrix of the first appeal and then applied the findings to the second appeal, as the legal questions were substantially similar.

Issue 1: Validity of NPA Declaration and Date of Default

The Appellants contended that the accounts of the Corporate Debtors were wrongly classified as NPA by the Financial Creditor in violation of RBI guidelines, specifically the requirement that an account can be declared NPA only if interest or principal instalments remain overdue for more than 90 days. The Appellants relied heavily on a No Due Certificate (NDC) dated 16.01.2016, which certified that the accounts were regular and had no overdue amounts. They argued that since the NPA declaration was made on 31.03.2016, only 75 days after the NDC, the classification was arbitrary and illegal. Further, they pointed to orders of the Debt Recovery Tribunal (DRT) and the High Court of Madhya Pradesh which had set aside or stayed the NPA classification, asserting that the Financial Creditor suppressed these material facts from the Adjudicating Authority, thus not approaching with clean hands.

In response, the Financial Creditor argued that the Corporate Debtors had failed to maintain financial discipline post restructuring and renewal of loans, leading to genuine default and classification as NPA on 31.03.2016. The Financial Creditor produced a detailed communication dated 28.04.2016, which itemized overdue amounts and interest, and requested minimum repayments to upgrade the accounts. This letter was issued by the Chief Manager and referred to the Central Statutory Auditors' downgrading of the accounts to NPA. The Financial Creditor also placed on record statements of accounts under the Banker's Book Evidence Act and balance sheets evidencing continuing debt and default.

The Tribunal scrutinized the NDC and found it to be cryptic, lacking details such as account numbers or loan particulars, and issued at the request of the Corporate Debtor without clear purpose. Conversely, the 28.04.2016 communication was detailed, reflected statutory auditor involvement, and indicated ongoing default. The Tribunal noted the Corporate Debtor's failure to repay overdue amounts despite opportunities and communications, and the initiation of multiple litigations challenging the NPA classification rather than settling dues.

Regarding judicial findings, although the DRT and High Court had addressed the NPA classification, the Financial Creditor had complied with directions and provided detailed explanations. The Tribunal found no merit in the contention that the NPA classification was illegal, concluding that default had arisen prior to 31.03.2016 and persisted thereafter. The Tribunal held that the date of default as 31.03.2016 was correctly recorded and justified.

Issue 2: Limitation Period for Filing Section 7 Application

The Appellants argued that the Section 7 petitions filed in 2024, based on a default date of 31.03.2016 (or 31.03.2017 in the second appeal), were barred by limitation under Article 137 of the Limitation Act, which prescribes a three-year limitation period. They contended that the petitions were filed after eight years, thus time-barred.

The Financial Creditor countered that the limitation period was extended due to acknowledgment of debt by the Corporate Debtors as reflected in their balance sheets for the financial years from 2015-16 to 2022-23. The Tribunal referred to Section 18 of the Limitation Act, which provides that a written acknowledgment of liability signed by the debtor before the expiry of the limitation period restarts the limitation clock from the date of acknowledgment.

The Tribunal examined the balance sheets and auditor's reports. While earlier balance sheets did not mention the Financial Creditor by name, the 2022-23 balance sheet specifically disclosed borrowings from the Financial Creditor and noted defaults in repayment. The Tribunal found that the outstanding amounts shown in earlier balance sheets corresponded to the same debt carried forward, and there was no evidence of fresh loans from other creditors. The auditor's report explicitly acknowledged defaults and contingent liabilities related to the Financial Creditor's loans.

Relying on Supreme Court precedents, including the principle that entries in balance sheets constitute acknowledgment of debt for limitation purposes, the Tribunal held that the Corporate Debtors' acknowledgment extended the limitation period. Therefore, the Section 7 applications were held to be within limitation.

Issue 3: Admission of Section 7 Petition Without Opportunity to Reply

The Appellants contended that the Adjudicating Authority admitted the Section 7 applications ex parte without giving them an opportunity to file replies or be heard, violating the principles of natural justice. They cited reasons such as medical emergencies and defective service of notice for their absence. Applications for rehearing (IAs 98 and 99 of 2025) were rejected by the Adjudicating Authority.

The Tribunal noted that the Adjudicating Authority had considered the Appellants' pleas and rejected the applications after detailed reasoning, emphasizing the strict timelines under the IBC framework. The Adjudicating Authority observed that the petitions were listed multiple times, and the Appellants had absented themselves repeatedly and failed to file replies in a timely manner. The Tribunal concurred with the Adjudicating Authority's view that the Appellants could not take advantage of their own negligence or delay and that procedural fairness had been maintained.

Application to Second Appeal

The second appeal involved a similar factual and legal matrix concerning another Corporate Debtor with a default date of 31.03.2017. The Financial Creditor produced similar evidence of debt and default, including statements of accounts and balance sheets. The grounds of challenge mirrored those in the first appeal. The Tribunal applied the same reasoning and upheld the admission of the Section 7 petition in the second appeal as well.

Significant Holdings and Legal Principles Established

1. The Tribunal held that the validity of NPA classification is a matter of fact and evidence, and a mere issuance of a No Due Certificate without detailed particulars cannot negate the existence of default. The classification of accounts as NPA by the Financial Creditor, supported by statutory auditor's report and detailed communications, was upheld as valid.

2. The date of default as recorded in the Section 7 application is critical and can be relied upon if supported by credible evidence of continuing default. The Tribunal rejected the contention that the date of default could be arbitrarily changed or disregarded.

3. The limitation period for filing Section 7 applications under the IBC is governed by the Limitation Act, 1963. The three-year limitation period can be extended if there is a written acknowledgment of debt by the Corporate Debtor before the expiry of the limitation period, as per Section 18 of the Limitation Act.

4. Entries in the balance sheets of the Corporate Debtor, coupled with auditor's disclosures acknowledging default and outstanding dues, constitute sufficient acknowledgment of debt to restart the limitation period.

5. The Adjudicating Authority is entitled to admit Section 7 petitions ex parte if the Corporate Debtor fails to appear or file replies despite multiple opportunities, and such admission does not violate principles of natural justice if procedural fairness and opportunity to be heard have been accorded.

6. The Tribunal reiterated the principle from the Supreme Court in Innoventive Industries Ltd. v. ICICI Bank that the Adjudicating Authority's role in Section 7 applications is limited to ascertaining the existence of debt and default above the threshold limit, and the application should be admitted if these conditions are met, even if the debt is disputed.

Verbatim Extracts of Crucial Legal Reasoning

"As per Section 18 of the Limitation Act, an acknowledgement of present subsisting liability, made in writing in respect of any right claimed by the opposite party and signed by the party against whom the right is claimed, has the effect of commencing a fresh period of limitation from the date on which the acknowledgement is signed. Such acknowledgement need not be accompanied by a promise to pay expressly or even by implication. However, the acknowledgment must be before the relevant period of limitation has expired."

"The entries in balance sheets constitute an acknowledgement of debt for the purposes of Section 18 of the Limitation Act."

"The Adjudicating Authority is to be only satisfied that there is a debt which is above the threshold limit which has become due and payable and if a default thereto has occurred, a Section 7 application ought to be admitted even if the debt is disputed."

"When the Appellant was himself prima-facie casual and negligent, the Appellant cannot be seen to take advantage of their own wrong."

In conclusion, the Tribunal affirmed the impugned orders admitting the Corporate Debtors into CIRP, dismissed the appeals as devoid of merit, and closed all interlocutory applications.