2022 (11) TMI 160 - AT - Insolvency and Bankruptcy

Admission of Section 7 Application Upheld in Insolvency Case: Limitation Period Not Barred

The tribunal upheld the admission of the Section 7 application under the Insolvency and Bankruptcy Code, initiating the Corporate Insolvency Resolution ... Financial debt - Initiation of CIRP under section 7 of the Insolvency and Bankruptcy Code, 2016 - Admission/acknowledgement of debt for extension of limitation - Date of default - Limitation defenceFinancial debt - Initiation of CIRP under section 7 of the Insolvency and Bankruptcy Code, 2016 - Existence of a financial debt and correctness of admitting the section 7 application to initiate CIRP against the corporate debtor. - HELD THAT: - The Tribunal examined documentary material including the promissory note, disbursal by cheque, ledger showing payment of interest, TDS records and correspondence between the parties. The ledger entries and TDS particulars demonstrated payment of interest in 2014-2015, corroborating that the amount advanced was a loan used in the corporate debtor's business. The corporate debtor's own communications (including correspondence and replies) admitted receipt of the loan and issuance of cheques towards repayment. The Adjudicating Authority considered these documents and events and concluded that the transaction constituted a financial debt. The Tribunal found no misapplication of the test for determining a financial debt and that the Adjudicating Authority rightly performed the requisite scrutiny before admitting the section 7 petition. [Paras 12, 13, 18, 19]The existence of a financial debt was established and the section 7 application was correctly admitted.Admission/acknowledgement of debt for extension of limitation - Date of default - Limitation defence - Whether the corporate debtor's letter dated 7.6.2016 and the dishonour of cheques on 16.12.2016 constituted acknowledgement/default such that the date of default was 16.12.2016 and the section 7 petition filed on 25.10.2019 was within limitation. - HELD THAT: - The corporate debtor's letter dated 7.6.2016 expressly acknowledged that Rs. 50 lakhs had been received by cheque and recorded that a repayment cheque had been given, with assurance that depositing the cheque would result in honour and that dishonour would permit legal action. The three cheques presented in October 2016 (for principal and interest) were dishonoured with bank advices dated 16.12.2016 stating 'Account Closed.' The corporate debtor, in a later reply, accepted issuance of the cheques but asserted a later intended deposit date; the Tribunal rejected that explanation and accepted that the cheques were presented as per their dates. Given the admission in the 7.6.2016 letter coupled with the dishonour advices, the Adjudicating Authority correctly treated 16.12.2016 as the date of default. Consequently the petition filed on 25.10.2019 fell within the three year limitation period measured from the date of default. [Paras 13, 14, 15, 16]The letter dated 7.6.2016 and the dishonour of cheques on 16.12.2016 together constituted acknowledgement/default; 16.12.2016 was the date of default and the section 7 petition was within limitation.Final Conclusion: The Appellate Tribunal found that the Adjudicating Authority correctly held that a financial debt existed and rightly treated 16.12.2016 as the date of default based on the corporate debtor's admission and the dishonour of cheques; the appeal was dismissed and the admission of the section 7 petition upheld. Issues Involved:1. Admission of Section 7 application under IBC.2. Determination of default and limitation period.3. Acknowledgment of debt and its impact on limitation.4. Nature of the transaction and its qualification as financial debt.5. Examination of relevant judgments cited by the appellant.Issue-wise Detailed Analysis:1. Admission of Section 7 Application under IBC:The appellant challenged the admission of the Section 7 application filed by Respondent No. 1, which initiated the Corporate Insolvency Resolution Process (CIRP) against the corporate debtor, Varsha Corporation Limited. The appellant argued that the application was barred by limitation as it was filed beyond the three-year period stipulated for a promissory note payable on demand.2. Determination of Default and Limitation Period:The appellant contended that no demand for repayment was made during the life of the promissory note (up to 23.2.2015), and thus, no default could be determined during this period. The appellant further argued that the Section 7 application filed on 25.10.2019, was clearly barred by limitation, as it was filed more than seven years after the promissory note's issuance. The appellant also cited letters dated 7.6.2017 and 16.1.2017, claiming they were beyond the limitation period and could not be used to acknowledge the debt under Section 18 of the Limitation Act, 1963.3. Acknowledgment of Debt and Its Impact on Limitation:The respondent argued that the corporate debtor was paying interest on the loan, and thus, there was no reason to demand repayment until 2016. The respondent referred to a letter dated 7.6.2016, where the corporate debtor admitted receiving the loan and issued cheques towards repayment. The respondent claimed the date of default was 16.12.2016, when the cheques were dishonored, making the Section 7 application within the three-year limitation period.4. Nature of the Transaction and Its Qualification as Financial Debt:The tribunal examined whether the loan advanced by Respondent No. 2 constituted a financial debt. The ledger statement and TDS details corroborated the payment of interest by the corporate debtor, supporting the respondent's claim that the loan was a financial debt. The tribunal found the respondent's argument convincing that the demand for repayment did not arise until June 2016, and the date of default was correctly considered as 16.12.2016.5. Examination of Relevant Judgments Cited by the Appellant:The appellant cited several judgments to support their contention. The tribunal noted that in the case of Anita Jindal vs. M/s. Jindal Buildtech Pvt. Ltd., the Section 7 application was dismissed as it related to recovery of past dues. However, in the present case, it was a clear case of loan disbursement for running the enterprise, and the loan repayment was in default. The tribunal also examined the judgments in Prayag Polytech Pvt. Ltd. vs. Gem Batteries Pvt. Ltd. and Pawan Kumar vs. Utsav Securities Pvt. Ltd., concluding that the existence of a financial debt was established without ambiguity in the present case.Conclusion:The tribunal concluded that the Adjudicating Authority did not commit any error in admitting the Section 7 application. The appeal was dismissed as devoid of merit, with no order as to costs.