2025 (3) TMI 911 - AT - IBC

ARC's Section 7 petition upheld despite time-bar challenge as debt acknowledgment extended limitation period

Mrs. Madhubala Chauhan Suspended director of Karni Developers & Construction Company Pvt. Ltd. Versus Phoenix Arc Pvt. Ltd., Sh. Manoj Sehgal

NCLAT Principal Bench dismissed the appeal challenging admission of Section 7 petition by Asset Reconstruction Company against Corporate Debtor. Tribunal ... Section 7 petition is time-barred or not - Term loan having separate dates of default - Respondent, being an Asset Reconstruction Company (ARC), was entitled to grant a fresh loan to the Corporate Debtor or not - excessive interest rate charged by the Respondent or not. Whether the present Section 7 petition is time-barred or not and whether TL-1 and TL-2 could have separate dates of default? - HELD THAT:- It is the case of the Appellant that Respondent No. 1 was trying to use the CIRP process as a recovery tool and had supressed material facts and particulars before the Adjudicating Authority and fraudulently filed the Section 7 application. It has also been asserted that the Respondent No. 1 by supressing material facts has misused the insolvency proceedings and hence the Section 7 application attracts Section 65 of the IBC. On seeing the prayers contained in the present appeal, it is not found that Section 65 has been sought to be invoked. Furthermore, the degree of proof and evidence required to prove any transaction to be fraudulent in nature should be beyond reasonable doubt and of an unimpeachable nature which is not found established in the present case. There are no substance in this contention of the Appellant and the same is rejected. The account of the Corporate Debtor for this Term Loan was declared as NPA on 31.03.2016. Calculating three months prior to the date of NPA, the date of default works out to be not later than 31.12.2015. The Section 7 application was filed on 09.01.2021 which is clearly beyond three years from the date of default. What therefore needs to be seen is whether the Respondent No. 1 has effectively substantiated the argument canvassed by them that the debt and default having been acknowledged by the Corporate Debtor within the three years limitation period made room for extension of the period of limitation. There is sufficient evidence to prove the existence of debt and default. The balance sheet of the Corporate Debtor for FY 2019-20 and the Independent Auditor’s Report attached thereto clearly indicate both the Term Loans along with unpaid interest amount. We therefore find no error in the impugned order that in view of the acknowledgement of liability on the part of the Corporate Debtor, the period of limitation stood extended. Hence, though the Section 7 application was filed on 09.01.2021, it fell within the limitation period in view of the judgment of the Hon’ble Supreme Court in Suo-Motu Writ Petition (C) No. 3 of 2020 [2021 (3) TMI 497 - SC ORDER] wherein it was held that in all case where limitation would have expired during the period between 15.03.2020 till 28.02.2022, notwithstanding the actual balance period of limitation remaining, the limitation period of 90 days was to be counted from 01.03.2022. Hence the application under Section 7 was clearly filed within limitation. Imposition of 30% interest p.a. and penal interest 36% p.a. - HELD THAT:- The Corporate Debtor having signed the TL-2 dated 07.02.2014, the terms of the same have become binding. Having signed the TL-2 and adhered thereto without challenging the same, the Corporate Debtor cannot now raise the issue of legality or validity of the Term Loan Agreement. Moreover, when the TL-2 was executed voluntarily and was never challenged at any stage and the Corporate Debtor had even voluntarily made interest payment at the agreed rate of interest, there are not much force in the contention of the Appellant of the applicability of the Tulip Hotels ratio. It is not found that the issue of rate of interest was pressed before the Adjudicating Authority. It is well settled that while dealing with a Section 7 application neither the Adjudicating Authority nor the Appellate Authority is expected to interfere with the terms of contract entered into between the concerned parties. All that is required to be seen is whether the debt and default is proven without adjudicating on whether the rate of interest was unreasonable or inflated. That being the case, raising this fresh plea at the appellate stage of excessive interest rate cannot be looked into. The Adjudicating Authority had substantial material on record placed before it for determination of date of default. We have no reasons to disagree with the Adjudicating Authority in recording its satisfaction basis the materials on record placed by Respondent No. 1 in Part-V. The Adjudicating Authority has also adverted attention to the decision of this Tribunal in the case of Manmohan Singh Jain Vs SBI [2021 (11) TMI 794 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL , CHENNAI] wherein it had been held that omission to mention date of default is not fatal to a Section 9 application as long as sufficient documentary evidence is adduced to establish the date of default. In the present case, since the CoC has already been constituted, in the event the settlement proposal as proposed by the Appellant is accepted by the Respondent No. 1, it shall be open for the Respondent No. 1 to file a Section 12- A application read with Regulation 30A of IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 within two weeks from date of pronouncement of this order. In the event the settlement proposal is not accepted by Respondent No. 1 and the Section 12-A application is not filed within two weeks from date of pronouncement of this order, the RP shall proceed with the CIRP of the Corporate Debtor in accordance with law. Conclusion - i) The Section 7 application is not time-barred due to the acknowledgment of debt by the Corporate Debtor, which extended the limitation period under Section 18 of the Limitation Act, 1963. ii) TL-2 is a separate loan with its own default date, distinct from TL-1, and the application is filed within the limitation period. iii) The ARC is entitled to grant a fresh loan to the Corporate Debtor for restructuring purposes, as per RBI guidelines. iv) The interest rate agreed upon in the Term Loan Agreement is binding, and the Court would not interfere with the contractual terms. v) The absence of a specific date of default in the application did not render it defective, as sufficient evidence of default was provided. Appeal dismissed. ISSUES PRESENTED and CONSIDEREDThe core issues considered in this judgment include:Whether the Section 7 application filed by the Respondent was time-barred under the Limitation Act, 1963.Whether the Term Loan 1 (TL-1) and Term Loan 2 (TL-2) could have separate dates of default.Whether the Respondent, being an Asset Reconstruction Company (ARC), was entitled to grant a fresh loan to the Corporate Debtor.Whether the interest rate charged by the Respondent was excessive and against public policy.Whether the absence of a specific date of default in the Section 7 application rendered it defective.ISSUE-WISE DETAILED ANALYSIS1. Limitation Period for Section 7 ApplicationThe legal framework under the Limitation Act, 1963, particularly Section 18, was considered to determine whether the application was time-barred. The Court examined the acknowledgment of debt by the Corporate Debtor in its letters and balance sheets, which extended the limitation period. The Court found that the application filed on 09.01.2021 was within the limitation period due to acknowledgments made by the Corporate Debtor and the Supreme Court's guidelines regarding the COVID-19 pandemic.2. Separate Dates of Default for TL-1 and TL-2The Court analyzed whether TL-1 and TL-2 could have distinct default dates. It was established that TL-2 was a new and separate loan, not merely a restructuring of TL-1. The Court found sufficient evidence, including the Term Loan Agreement and related documents, to conclude that TL-2 was a separate transaction with its own default date of 31.03.2016.3. Entitlement of ARC to Grant Fresh LoanThe Court reviewed the RBI guidelines, which allow Securitisation Companies/Reconstruction Companies (SC/RCs) to restructure loans as a measure to realize their dues. It was determined that the ARC was within its rights to provide additional funding for restructuring purposes, and the Corporate Debtor had requested such a loan. The issue was not raised before the Adjudicating Authority, suggesting it was an afterthought.4. Reasonableness of Interest RateThe Court considered the argument regarding the excessive interest rate under the Usurious Loans Act, 1918. It found that the Corporate Debtor had voluntarily agreed to the terms, including the interest rate, and had even made payments at the agreed rate. The Court noted that the terms of the contract were binding, and the issue of interest rates was not pressed before the Adjudicating Authority.5. Absence of Specific Date of DefaultThe Court addressed the technical objection regarding the absence of a specific date of default in the Section 7 application. It concluded that the application was supported by substantial documentary evidence, including the Term Loan Agreement, Recall Notice, and acknowledgment of debt, which adequately demonstrated the occurrence of default.SIGNIFICANT HOLDINGSThe Court's significant holdings include:The Section 7 application was not time-barred due to the acknowledgment of debt by the Corporate Debtor, which extended the limitation period under Section 18 of the Limitation Act, 1963.TL-2 was a separate loan with its own default date, distinct from TL-1, and the application was filed within the limitation period.The ARC was entitled to grant a fresh loan to the Corporate Debtor for restructuring purposes, as per RBI guidelines.The interest rate agreed upon in the Term Loan Agreement was binding, and the Court would not interfere with the contractual terms.The absence of a specific date of default in the application did not render it defective, as sufficient evidence of default was provided.The Court dismissed the appeal, allowing the Corporate Insolvency Resolution Process (CIRP) to proceed, while providing the Appellant an opportunity to submit a settlement proposal to the Respondent. If the proposal is accepted, the Respondent may file a Section 12-A application for withdrawal of CIRP. If not, the Resolution Professional will continue with the CIRP. The Court also directed the NCLAT Registry to refund the amount deposited by the Appellant.