Section 7 insolvency default and balance-sheet acknowledgements extended limitation; natural justice challenge failed.
In a section 7 insolvency proceeding, the tribunal's focus is on whether a due and payable debt and default exist; the challenge to the date of default failed because the record showed repeated defaults, overdue communications, and continuing non-payment before the non-performing asset classification. Limitation was not a bar because balance-sheet entries and auditor references acknowledging outstanding liability constituted written acknowledgements under section 18 of the Limitation Act, extending time from year to year. No breach of natural justice was found, as repeated opportunities had been given and the request to reopen proceedings was rejected by a speaking order. The admission orders initiating CIRP were upheld.
Issues: (i) Whether the admitted default and the date of default were vitiated because the account was classified as non-performing asset contrary to the borrower's challenge; (ii) whether the section 7 application was barred by limitation or whether the balance-sheet entries extended limitation by acknowledgement of liability; (iii) whether rejection of the request to file a reply and seek rehearing violated natural justice.
Issue (i): Whether the admitted default and the date of default were vitiated because the account was classified as non-performing asset contrary to the borrower's challenge.
Analysis: The material on record showed that the certificate relied upon by the appellants was cryptic and issued at their request, whereas the creditor's subsequent communication contained account-wise overdue details, the amount outstanding, and the classification of the accounts as non-performing assets. The record also showed repeated defaults, prior communications regarding irregularity, and continued non-payment. On this basis, the account was found to have been in default before the stated non-performing asset date, and the date of default was not displaced by the challenge to the classification.
Conclusion: The challenge to the date of default failed, and the finding of continuing default was upheld against the appellants.
Issue (ii): Whether the section 7 application was barred by limitation or whether the balance-sheet entries extended limitation by acknowledgement of liability.
Analysis: The applicable principle was that a written acknowledgement of subsisting liability made before expiry of the limitation period gives rise to a fresh period of limitation. The balance sheets for successive financial years carried forward the borrowings and, in the later balance sheet and auditor's report, specifically referred to the outstanding amounts due to the financial creditor. Those entries were treated as acknowledgements of liability, sufficient to extend limitation from year to year.
Conclusion: The section 7 application was held to be within limitation and the limitation objection was rejected.
Issue (iii): Whether rejection of the request to file a reply and seek rehearing violated natural justice.
Analysis: The record showed repeated opportunities before the adjudicating authority, repeated non-appearance, and failure to file a reply within time. The request for reopening was considered and rejected by a speaking order in view of the strict timelines under the insolvency framework and the appellants' own conduct.
Conclusion: No violation of natural justice was found, and the refusal to reopen the matter was sustained.
Final Conclusion: The admission orders bringing both corporate debtors into corporate insolvency resolution process were upheld, and both appeals were found meritless.
Ratio Decidendi: In a section 7 proceeding, the adjudicating authority is required to be satisfied only about the existence of a due and payable debt and default, and written acknowledgements in balance sheets made before expiry of limitation extend the limitation period under section 18 of the Limitation Act, 1963.
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