Section 7 application dismissed as time-barred after eight-year delay following project failure and partial refund

The NCLAT Principal Bench dismissed a Section 7 application filed by financial creditors against a corporate debtor, ruling it was time-barred. The tribunal held that cause of action arose on 16.12.2010 when the project failed to commence within the stipulated timeframe, making the application filed years later hopelessly barred by limitation. The court found that the corporate debtor had already refunded Rs.1.7 crores through intermediaries, with the financial creditor's eight-year silence indicating satisfaction of the Rs.3 crore refund obligation. The tribunal rejected imposing penalties under Section 65 IBC, noting insufficient grounds for malicious intent, and allowed the corporate debtor's appeal while dismissing the Section 7 application as abuse of process.

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Issues Involved:

1. Whether the Section 7 Application filed by the Financial Creditor was barred by limitation.
2. Whether the Corporate Debtor discharged its liability of the balance amount of Rs. 1.7 Crores.
3. Whether there are sufficient grounds to invoke Section 65 of the IBC for imposing any penalty on the Financial Creditor.

Issue-wise Detailed Analysis:

Issue 1: Limitation of Section 7 Application

The Corporate Debtor contended that the Section 7 Application was barred by limitation. The Memorandum of Understanding (MoU), Articles of Understanding (AoU), and Articles of Agreement (AoA) dated 16.05.2010 outlined the redevelopment project. The MoU stipulated that the Developer was to get the plan sanctioned within six months with a grace period of one month. The AoA allowed the Investors to terminate the agreement if the Developer failed to comply within this timeframe, with the obligation to return Rs. 3 Crores with 18% interest. The project did not commence, and the building plan was never approved. The Corporate Debtor argued that the cause of action arose after the expiration of the seven-month period from the execution of the MoU, i.e., on 16.12.2010. The Financial Creditor claimed that the limitation period began on 30.07.2019, when they terminated the agreement. However, the tribunal found that the cause of action under Clause 8 of the AoA, which allowed the Investors to claim back their investment if the project did not commence, was independent of the termination option. The cause of action arose when the project did not commence, and the limitation period began on 16.12.2010, expiring on 15.12.2013. The Section 7 Application filed in 2022 was deemed hopelessly barred by time.

Issue 2: Discharge of Liability by the Corporate Debtor

The Corporate Debtor asserted that they had refunded Rs. 1.3 Crores directly to the Financial Creditor and an additional Rs. 1.7 Crores to the Thakkars for onward payment to the Financial Creditor. The tribunal noted that the AoU and AoA involved the Thakkars as Vendors, who were responsible for obtaining the investment. Payments made to the Thakkars and their company, Vision Infraventures Pvt. Ltd., were supported by bank statements. The tribunal found that the Corporate Debtor had refunded the amount of Rs. 1.7 Crores through the Thakkars for payment to the Investors. The long silence of the Financial Creditor, who did not demand any amount for over eight years, indicated that the refund was satisfied. The tribunal held that the Corporate Debtor had discharged its liability.

Issue 3: Invocation of Section 65 of the IBC

The tribunal issued a notice to the Financial Creditor to show cause why they should not be proceeded against under Section 65 of the IBC, which deals with fraudulent or malicious initiation of proceedings. The Corporate Debtor alleged collusion between the Financial Creditor and the Thakkars but did not specifically plead malicious intent in the Section 7 Application. The tribunal, citing the Supreme Court's ruling, found that the ingredients of Section 65 were not fulfilled, as there was no specific plea of malicious intent. Consequently, the notice under Section 65 was discharged.

Conclusion:

The tribunal concluded that the Section 7 Application filed by the Financial Creditor was hopelessly barred by time and constituted an abuse of the court process. The appeal was allowed, and the order admitting the Section 7 Application was set aside. The parties were directed to bear their own costs.

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