Limitation and novation under IBC: prior recovery steps and a conditional settlement supported CIRP admission.

Limitation for a section 7 IBC application was treated as running with reference to prior recovery proceedings under SARFAESI and later settlement correspondence, so the petition was not barred merely because the default dated to 2013. A one-time settlement that preserved the creditor's right to recover the original dues on default was held not to be novation, and it did not discharge the corporate debtor from liability. Sanction letters, loan documents, account statements, a banker's certificate, credit report and the debtor's admission of delayed repayment established financial debt and default, so CIRP was admitted and moratorium and an interim resolution professional were ordered.

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Issues: (i) Whether the application under section 7 of the Insolvency and Bankruptcy Code, 2016 was barred by limitation; (ii) Whether the one time settlement agreement novated the original loan contract and discharged the corporate debtor from liability; (iii) Whether the existence of financial debt and default justified admission of the insolvency application.

Issue (i): Whether the application under section 7 of the Insolvency and Bankruptcy Code, 2016 was barred by limitation.

Analysis: The record showed that recovery proceedings had been initiated within time under the SARFAESI regime and that amounts were recovered pursuant to orders passed in those proceedings. The corporate debtor's own documents showed later payments and correspondence concerning settlement, which supported the creditor's case that the debt continued to be pursued and acknowledged. The prior proceedings were treated as relevant for computing limitation, and the application could not be defeated by the mere fact that the default date was in 2013.

Conclusion: The application was held to be within limitation, against the corporate debtor.

Issue (ii): Whether the one time settlement agreement novated the original loan contract and discharged the corporate debtor from liability.

Analysis: The terms of the settlement letter expressly preserved the creditor's right to recover the entire contractual dues upon failure to comply with the settlement conditions. The settlement was treated as an opportunity to resolve the liability and not as an absolute substitution of the original contract. Since the agreement contemplated revival of the original dues on default, the essential element of novation was absent.

Conclusion: The one time settlement did not amount to novation and did not discharge the corporate debtor from the original liability, against the corporate debtor.

Issue (iii): Whether the existence of financial debt and default justified admission of the insolvency application.

Analysis: The sanction letters, loan documents, account statements, banker's certificate, credit report, and the corporate debtor's admission of delayed repayment established financial debt and default. The amount due exceeded the statutory threshold, and the application was complete in form. In these circumstances, the requirements for commencement of corporate insolvency resolution process were satisfied.

Conclusion: The application was admitted and the corporate insolvency resolution process was directed to commence, in favour of the petitioner.

Final Conclusion: The insolvency petition succeeded on merits, limitation was not a bar, the settlement did not extinguish the debt, and CIRP was ordered to proceed together with moratorium and appointment of an interim resolution professional.

Ratio Decidendi: A settlement agreement that preserves the creditor's right to recover the original dues on default does not amount to novation, and time spent in bona fide prosecution of recovery proceedings can be excluded for limitation purposes where the debt and default are otherwise established.

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