2022 (8) TMI 329 - SC - Insolvency and Bankruptcy

SC Overturns NCLAT Decision, Cites Section 25(3) Indian Contract Act on Time-Barred Debt; CIRP Application Reconsidered

Kotak Mahindra Bank Limited Versus Kew Precision Parts Private Limited & Ors.

Kotak Mahindra Bank Limited Versus Kew Precision Parts Private Limited & Ors. - (2022) 9 SCC 364 Issues Involved:1. Whether the application under Section 7 of the Insolvency and Bankruptcy Code (IBC) was barred by limitation.2. Whether the acknowledgment of debt by the Corporate Debtor extended the period of limitation.3. Applicability of Section 25(3) of the Indian Contract Act to the case.4. The role of the National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) in adjudicating the matter.5. The significance of the Corporate Insolvency Resolution Process (CIRP) under the IBC.Detailed Analysis:1. Limitation Period for Application under Section 7 of IBC:The primary issue was whether the application filed by the Appellant Financial Creditor for initiating CIRP against the Corporate Debtor was within the limitation period. The NCLAT held that the application was barred by limitation as it was filed beyond the three-year period prescribed under Article 137 of the Limitation Act, 1963, which governs applications for which no specific period is provided.2. Acknowledgment of Debt:The Appellant Financial Creditor argued that the Corporate Debtor had acknowledged its debt through various offers of one-time settlement made in December 2018. The NCLAT, however, found that there was no acknowledgment of debt within the three-year limitation period from the date of default, which occurred in June 2015. The acknowledgment must be made within the limitation period to extend it, and the acknowledgment of debt made in December 2018 was beyond the three-year period from the default date.3. Applicability of Section 25(3) of the Indian Contract Act:The Supreme Court highlighted Section 25(3) of the Indian Contract Act, which allows for the enforcement of a time-barred debt if there is a written and signed promise to pay the debt. The Court noted that this provision was not considered by the NCLAT. The Appellant Financial Creditor contended that the terms of settlement executed on 20th December 2018 constituted such a promise, potentially making the debt enforceable.4. Role of NCLT and NCLAT:The NCLT had admitted the application for CIRP, finding that the acknowledgment of debt by the Corporate Debtor in December 2018 constituted a continuous cause of action. The NCLAT, however, reversed this decision, holding that the application was time-barred. The Supreme Court found that the NCLAT erred in not considering the potential applicability of Section 25(3) of the Indian Contract Act and in not giving the Appellant Financial Creditor an opportunity to explain the delay in filing the application.5. Significance of CIRP under IBC:The Supreme Court emphasized that the IBC is designed to ensure the revival and continuation of the Corporate Debtor's business, rather than merely being a debt recovery mechanism. The process aims to protect the Corporate Debtor from coercive litigation, allowing it to improve its financial health and repay its creditors. The Court noted that the IBC has an overriding effect over other laws and that the CIRP is not adversarial to the interests of the Corporate Debtor but rather beneficial for all stakeholders, including creditors and employees.Conclusion:The Supreme Court allowed the appeal, setting aside the NCLAT's decision to close the CIRP proceedings. The matter was remitted to the Adjudicating Authority (NCLT) for fresh consideration, with directions to allow the parties to file additional affidavits and documents. The Court underscored the importance of giving the Financial Creditor an opportunity to rectify any defects in its application and to consider the applicability of Section 25(3) of the Indian Contract Act. The judgment reaffirmed the principles of the IBC and the necessity of a fair and comprehensive adjudication process.