2025 (10) TMI 973 - AT - IBC

Section 7 petition maintainable; overdraft is continuing debt; part-payments, confirmations, instruments and mortgage extend limitation under Section 25(3)

Sarang Kumar Wadhawan (Shareholder of Privilege Power and Infrastructure Private Limited) Versus Unity Small Finance Bank Ltd. (Erstwhile Punjab and Maharashtra Co-Operative Bank Limited). and Mr. Anurag Kumar Sinha Interim Resolution Professional of the Corporate Debtor (Privilege Power and Infrastructure Private Limited)

NCLAT dismissed the appeal and upheld the Adjudicating Authority's finding that the Section 7 petition was maintainable. The Tribunal held the overdraft ... Maintainability of petition - initiation of CIRP - balated section 7 petition - date of disbursement being 12.03.2007 and the date of NPA being 31.08.2012 - petition must be filed within 3 years from the date of default or not - fraudulent transactions or not. Whether the OD facility of 2007 is different than 2017-2018? - HELD THAT:- FC-Respondent contends that the sanction documents were executed in lieu of the amounts already disbursed to the Corporate Debtor till 31 March 2013 which were to the tune of INR 80,99,73,539.27, and in light of the fact that the Corporate Debtor had failed to clear the entire outstanding dues and/or make payment towards the interest and the overdraft facility in respect of the Overdraft Account - the Corporate Debtor had acknowledged the subsisting relationship between the Corporate Debtor and PMC Bank of that being a debtor and creditor, and continued to maintain an overdraft account with PMC Bank under which it had continued to avail facility from PMC Bank, it cannot be agreed with the arguments of the Appellant that the OD facility of 2007 is different than 2017-2018 OD facility. Extension of limitation period by Section 18 of the Limitation Act, 1963 - HELD THAT:- As per Section 18, Limitation Act, 1963, if the debtor makes an acknowledgment of their liability towards the creditor, during the period of limitation, it gives rise to a fresh limitation to the creditor from the date of such acknowledgment. The Financial Creditor relied on sanction letters, balance confirmations, and other documents related to the purported overdraft facility of 2017–2018, to advance the contention that these materials constitute acknowledgments of debt under Section 18 of the Limitation Act, 1963 and thereby initiate a fresh period of limitation. Appellant claims that an acknowledgment under Section 18 must be made before the expiry of the original limitation period. But the aforesaid documents were executed only after the expiration of the prescribed three-year limitation period commencing from the date of the account being declared NPA (31.08.2012), and as such, cannot be regarded as valid acknowledgments for the purpose of extending limitation under Section 18 of the Limitation Act, 1963. On applying the provisions of Section 18 alone in this particular case, a final conclusion is arrived that three years of limitation was over and therefore, the respondent was barred under the Limitation Act to proceed against the Appellant. But conspectus of this case does not allow us to conclude relying solely on Section 18 of the Limitation Act, 1963, which is being dealt in hereinafter. Respondent had given the date of default to be 31.08.2012 i.e., the date of classification of CD as a Non-performing Asset (NPA), which has not been disputed by the Appellant. After such declaration, the CD has given various part- payments and acknowledged the debt, thus, extending the period of limitation from time to time - The CD has given various part- payments and acknowledged the debt, thus, extending the period of limitation from time to time. Even though small payments and from various vendors, the arguments canvassed by the financial creditor gain lot of credibility, particularly in the overall context which is noted herein after. Can the financial creditor invoke Section 17 of the Limitation Act? - HELD THAT:- The period of limitation of 3 years, in respect of the Company Petition could not run against the Financial Creditor on or prior to 27 December 2019. Given that the Company Petition was filed in 2020, it is clear that the Company Petition was not barred by limitation and was filed at the earliest instance. Appellant being an active participant in the concealment of fraud and default of the Corporate Debtor, cannot be permitted to take advantage of its’ own wrong and has approached this Hon’ble Tribunal with unclean hands. The Appellant along with the Corporate Debtor, has acted collusively to conceal default, and as such, only after obtaining the knowledge of the default and its right to sue, the Financial Creditor could have initiated the proceedings under Section 7 of the IBC. Therefore, any contention that the suit is barred by limitation is merely a ploy by the Appellant to take advantage of its own fraud on the Financial Creditor and ought not to be permitted. In the present case, RBI completed an inspection of the credit exposure of PMC Bank to HDIL Group on 02.11.2019, and found that PMC Bank officials committed fraud in collusion with Appellant/CD. It was found that sanction letters were not executed by CD, borrowings were not reported in the financial statements by CD, and default was concealed by CD - it is inclined to agree with the arguments of the Financial Creditor that in view of Section 17 of the Limitation Act 1963, period of limitation ought not to run till the discovery of date of default when the Administrator appointed an auditor to conduct re- audit and recasting of PMC Bank’s books of accounts which concluded on 27.12.2019. And thereafter, the Petition was filed within the one year of finding of fraud and therefore, not barred under Section 17 of the Limitation Act, 1963 and is permissible to be filed. Can Section 25(3) of Contract Act be invoked to link or revive the original 2007 disbursement? - HELD THAT:- Adjudicating Authority has held that Balance confirmation is a promise to pay and unconditional acknowledgment is given by mortgage deeds, promissory note and acknowledgment letters. AA held that these documents would give rise to an independent cause of action under Section 25(3) of the Contract Act. The Application under Section 7 was filed within limitation having been filed within 3 years of “Promise to pay” under Section 25(3) of the Indian Contract Act, 1872. It is also found that the petition is filed within time contemplating the extension of limitation under Section 18 and 19 of the Limitation Act, 1963. It is also found that the Petition is within the 1 (one) year of finding of fraud and therefore, permissible under Section 17 of the Limitation Act, 1963. There are no infirmity in the findings of the Adjudicating Authority - appeal dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether the overdraft facility availed in 2007 is a distinct transaction from the sanction/acknowledgement documents executed in 2017-2018, and if so, whether the 2020 Section 7 petition is barred by limitation based on the 2012 date of default. 2. Whether acknowledgements, part-payments, balance confirmations and executed security documents operate to revive or reset the limitation period under Section 18 and Section 19 of the Limitation Act, 1963. 3. Whether a written 'promise to pay' or other documents executed after expiry of limitation operate as a fresh cause of action under Section 25(3) of the Indian Contract Act, 1872 and thereby restart the limitation period for a Section 7 application. 4. Whether Section 17 (effect of fraud or mistake) of the Limitation Act, 1963 applies to delay in instituting proceedings where the relevant facts or documents were fraudulently concealed by bank management and/or the corporate debtor, thereby postponing the running of limitation until discovery of fraud. 5. Whether transactions tainted by collusion or fraud fall outside the definition of 'financial debt' under Section 5(8) of the Insolvency and Bankruptcy Code, 2016, and thus cannot support a Section 7 petition. 6. Whether the Adjudicating Authority (NCLT) erred in finding existence of debt and default and in admitting the Section 7 petition within limitation. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Distinctness of 2007 OD facility vs. 2017-2018 documents; date of default and limitation Legal framework: Limitation under Article 137/Article 21 (applicable provisions of the Limitation Act) runs from date of default; Section 7 IBC requires existence of financial debt and default. Precedent treatment: The Court relied on established principle that limitation for Section 7 begins from the date of default but also considered subsequent authorities permitting revival by acknowledgement or promise and cases treating assignment/confirmation as fresh cause of action. Interpretation and reasoning: The Court examined account statements, board resolutions, mortgage deeds, sanction letters and balance confirmations. It found continuous transactional nexus - initial overdraft withdrawals from 2007, continuing utilization through 2013, and subsequent execution of sanction letters, mortgage deeds, demand promissory notes and balance confirmations in 2017-2019 which evidenced an ongoing debtor-creditor relationship. The Court concluded the 2017-2018 documentation did not represent an entirely distinct fictitious transaction but rather post-facto confirmations and security for outstanding disbursements earlier made. Ratio vs. Obiter: Ratio - where later-executed formal documents explicitly acknowledge and secure extant overdraft liabilities, they are competent to be treated in relation to the antecedent facility for the purposes of limitation. Obiter - comments on internal bank irregularities not altering continuous debt relationship. Conclusions: The OD facility of 2007 was not held to be wholly distinct from the 2017-2018 instruments; the latter corroborate an extant debt obligation and therefore bear on the limitation analysis. Issue 2 - Reviving limitation under Section 18 & Section 19 (acknowledgement and part-payment) Legal framework: Section 18 (acknowledgement in writing) and Section 19 (effect of payment on account) of the Limitation Act, 1963; Article provisions computing fresh limitation from when acknowledgement/payment made. Precedent treatment: The Court applied settled principles that signed written acknowledgements and part payments revive limitation and must be construed liberally. Interpretation and reasoning: The Court found multiple balance confirmations signed by the corporate debtor (2011, 2018, 2019) and small part-payments credited into the overdraft account (2013-2016) which, taken together, demonstrated acknowledgment/part-payment within statutory tests. The Court accepted that balance confirmations and part payments in the overdraft/current account context constituted valid acknowledgements or payments for the purposes of Sections 18 and 19. Ratio vs. Obiter: Ratio - signed balance confirmations and part-payments in the overdraft/current account revived limitation, thereby making a 2020 petition timely. Obiter - discussion of whether all small vendor credits individually suffice is contextual and depends on account character and surrounding facts. Conclusions: Sections 18 and 19 operate to extend/revive limitation on the facts: acknowledgements and part-payments occurred and fresh limitation periods were computed from those dates, supporting the petition's timeliness. Issue 3 - Operation of Section 25(3) Indian Contract Act (promise to pay time-barred debt) Legal framework: Section 25(3) permits a written promise to pay a debt barred by limitation to constitute a valid contract and create a fresh cause of action; Kotak Mahindra-type requirements (debt referable to enforceable liability, distinct written promise, signature). Precedent treatment: The Court followed authority that Section 25(3) does not require promise to be made before expiry of limitation and the three tests in Kotak Mahindra for a valid promise to revive a time-barred debt. Interpretation and reasoning: The Court catalogued multiple documents (demand promissory note, mortgage deeds, sanction letters, balance confirmations signed in 2017-2019) that bore express signatures and unambiguous promises/acknowledgements to pay. It found these fulfilled Section 25(3) requisites: reference to an enforceable debt, distinct written promises, and signatures by authorised signatories. Ratio vs. Obiter: Ratio - written instruments executed after the original limitation period, which constitute an express promise to pay a past debt, operate as a fresh cause of action under Section 25(3), restarting the limitation period. Obiter - comparative remarks on assignment-based cases cited by parties. Conclusions: Section 25(3) applies; the 2017-2019 documents constituted written promises to pay a time-barred debt and thereby restarted the limitation clock such that the 2020 petition was within three years of those promises. Issue 4 - Application of Section 17 (fraud or mistake) of the Limitation Act Legal framework: Section 17 suspends operation of limitation where knowledge of the right is concealed by fraud or where documents necessary to establish the claim were fraudulently concealed, until discovery with reasonable diligence. Precedent treatment: The Court treated Section 17 consistent with equitable principles that a party should not be barred by limitation where fraud concealed the cause of action, and considered contemporaneous regulatory and criminal findings. Interpretation and reasoning: The Court examined RBI intervention, supersession of the bank board, re-audit/recasting of books, and a chargesheet prepared by enforcement authorities in December 2019 which identified concealment and fraud by erstwhile bank management. On those facts the Court held discovery of the true NPA status and relevant documents occurred on or after 27 December 2019, and limitation accordingly did not run against the creditor until discovery. The Court rejected the contention that the creditor's claimed discovery in 2019 was a manufactured afterthought, given regulator-led re-audit and criminal investigation findings. Ratio vs. Obiter: Ratio - where material shows that management-level concealment prevented discovery of the default and documents, Section 17 delays the commencement of limitation until reasonable discovery of fraud; such discovery date can be fixed on re-audit/regulatory findings. Obiter - cautionary note that Section 17 applies only where concealment/fraud is established on evidence. Conclusions: Section 17 applies on the facts: fraudulent concealment by bank management and co-ordination with debtor prevented earlier discovery and the creditor filed within one year of discovery; hence limitation did not bar the petition. Issue 5 - Whether fraudulent/collusive transactions fall outside 'financial debt' under Section 5(8) IBC Legal framework: Section 5(8) defines 'financial debt' as debt disbursed against consideration for time value of money; jurisprudence holds sham/collusive/fraudulent transactions may not qualify as financial debt. Precedent treatment: The Court acknowledged authority that collusive/fraudulent transactions can be excluded from IBC remedy if substance displaces form. Interpretation and reasoning: While the appellant argued the transactions were tainted by fraud such that they could not constitute financial debt, the Court considered the overall documentary matrix (disbursals, core account entries, board resolutions, mortgages, promissory notes and balance confirmations) and regulatory findings that, despite wrongdoing by bank officials, monies were advanced and remained unpaid. The Court concluded that the creditor established existence of debt and default sufficient for Section 7 admission; allegations of fraud affected culpability of bank management but did not negate subsisting debt obligations evidenced by documents and account entries. Ratio vs. Obiter: Ratio - allegations of fraud do not per se negate existence of financial debt where documentary and account evidence establish disbursal, acknowledgement and default; such allegations are matters for separate criminal or civil remedy and do not necessarily bar IBC proceedings. Obiter - where a transaction is wholly a sham with no real disbursal or commercial effect, it may not constitute financial debt. Conclusions: On the record, the transactions supported a claim of financial debt despite misconduct by bank officers; hence the petition under Section 7 could be maintained. Issue 6 - Validity of NCLT finding on debt, default and limitation Legal framework: Adjudicating Authority must be satisfied there is debt and default and that petition is within limitation; factual matrix and documentary evidence govern assessment. Precedent treatment: The Court reviewed the NCLT's reliance on balance confirmations, mortgage deeds, promissory notes, part-payments and regulatory/re-audit findings to reach its conclusion. Interpretation and reasoning: After reviewing account statements, executed documents (2017-2019), part-payments, regulatory re-audit and chargesheet evidence, the Court found no infirmity in the Adjudicating Authority's conclusion that debt and default existed and that limitation had been extended/revived by Section 18/19, Section 25(3), and postponed under Section 17. Ratio vs. Obiter: Ratio - where documentary acknowledgements, promissory notes and security deeds exist and regulator/criminal findings establish concealment preventing earlier discovery, the Adjudicating Authority properly admits a Section 7 petition filed within the revived or postponed limitation periods. Obiter - procedural observations as to scope of further civil/criminal liabilities. Conclusions: The Court affirmed the Adjudicating Authority's findings: existence of debt and default proven; petition within limitation under Sections 18/19 and 25(3); Section 17 applied given concealment; admission under Section 7 was appropriate. The appeal was dismissed and no costs ordered.