Full Judgment Text
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REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 7474 OF 2019
M/S RADHA EXPORTS (INDIA) PVT. LIMITED. ...Appellant(s)
VERSUS
K.P. JAYARAM & ANR. ...Respondent(s)
J U D G M E N T
Indira Banerjee, J.
This appeal, under Section 62 of the Insolvency and
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Bankruptcy Code, 2016, is against a judgment and order dated 2
September, 2019 of the National Company Law Appellate Tribunal
(NCLAT), New Delhi, hereinafter referred to as “the Appellate
Tribunal”, allowing Company Appeal (AT) (INS) No.224 of 2019
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against an order dated 19 December, 2018 passed by a Division
Bench of the National Company Law Tribunal (NCLT) at Chennai,
Signature Not Verified
Digitally signed by
Jayant Kumar Arora
Date: 2020.08.28
14:19:30 IST
Reason:
rejecting the application filed by the Respondents under Section 7
of the Insolvency and Bankruptcy Code, 2016, inter alia, on the
ground that the alleged claim of the Respondents was barred by
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limitation, on the date on which the said application had been filed.
2. It is the case of the Appellant Company, that the
Respondents were closely acquainted with one Mr. M. Krishnan,
and Mrs. Radha Gouri, who were the promoters of the Appellant
Company.
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3. Between 1 November, 2002 and 12 September 2003, the
Respondents had advanced an aggregate sum of Rs.2.10 crores, in
tranches, to M/s Radha Exports, a proprietorship concern of Mrs.
Radha Gouri, for its business purposes.
4. In 2004-2005, the Respondents advanced a further sum of
Rs.10 lakhs to the said proprietorship concern, M/s Radha Exports.
The said M/s Radha Exports thus obtained total loan of Rs.2.20
crores from the Respondents, during the period between 2002 and
2004. The loan was unsecured and free of interest.
5. According to the Appellant Company, M/s Radha Exports
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repaid Rs.80,40,000/- to the Respondents between 1 October,
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2003 to 18 March 2004. As recorded in the judgment and order
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dated 19 December, 2018 of the NCLT, the Respondent Nos. 1
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and 2 jointly wrote a letter dated 11 January, 2011 to the Deputy
Commissioner of Income Tax, Company Circle V (3), Chennai,
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where they stated that, as on 31 March, 2004, the said
proprietorship concern M/s Radha Exports had a loan liability of
Rs.1,39,60,000/- (Rs.2,20,00,000/- less Rs.80,40,000/-) to the
Respondents. The Respondents have, in the aforesaid letter,
stated that they had given a further loan of Rs.10 lakhs to M/s
Radha Exports, between 2004 and 2005. The said letter is
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reproduced in full, in the judgment and order dated 19 December,
2018, of the NCLT.
6. The Appellant Company was incorporated under the
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Companies Act, 1956 on or about 19 July, 2004, to take over the
business of the proprietorship concern, M/s Radha Exports, along
with its assets and liabilities. The Appellant Company states that
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as on 19 July, 2004, the proprietorship concern, M/s Radha
Exports had a loan liability of Rs.1,11,85,350/-, which was taken
over by the Appellant Company.
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7. On 19 July, 2004, when the Appellant Company was
incorporated as a Private Limited Company, to take over and
continue the business of the proprietorship concern, M/s Radha
Exports, the Respondents requested the Appellant Company to
convert a sum of Rs.90,00,000/- from out of the said outstanding
loan as share application money for issuance of shares in the
Appellant Company, in the name of the Respondent No.2, and the
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same was confirmed by the Respondents, by their aforesaid letter
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dated 11 January, 2011 addressed to the Deputy Commissioner of
Income Tax, Company Circle V(3), Chennai. The said letter, a copy
of which is enclosed to the Paper Book, reads:
“..I have requested to transfer a sum of Rs. 90,00,000/-
(Rupees Ninety Lakhs) to my wife A/c. Mrs. Shoba
Jayaram for allotment of shares in Radha Exports (I) Pvt.
Ltd...”
8. Accordingly, a sum of Rs.90,00,000/- was adjusted by the
Appellant Company, as share application money, for issuance of
shares in a Appellant Company in the name of the Respondent
No.2. Thereafter, the balance loan liability of the company was
Rs.21,85,350/-.
9. According to the Appellant Company, during the period from
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27 July, 2004 to 23 March, 2006, the Appellant Company paid
Rs.43,25,000/- to the Respondents, which included the balance
loan of Rs.21,85,350/- payable by M/s Radha Exports. The loan
liability, which the Appellant Company had taken over from the
proprietorship concern was, according to the Appellant Company,
completely liquidated by March, 2006. Particulars of the payments
have been given in detail in paragraph (12) of the judgment and
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order of the NCLT dated 19 December, 2018 and are supported by
Bank Statements being Annexure A1 filed before the NCLT. The
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last payment appears to have been made on 23.03.2006.
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10. On or about 6 October, 2007, the Respondent No.2
resigned from the Board of the Appellant Company. At the time of
resignation, the Respondent No.2 requested the Appellant
Company to treat the share application money of Rs.90,00,000/- as
share application money of Mr. M Krishnan and to issue shares of
the value of Rs.90,00,000/- in the name of Mr. M. Krishnan. The
amount of share application money of Rs.90,00,000/- transfered to
Mr. M. Krishnan, was to be treated as a personal loan from the
Respondent No.2 to the said Mr. M. Krishnan.
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11. By another letter dated 11 January, 2011 addressed to the
Deputy Commissioner of Income Tax, Company Circle V(3),
Chennai, being Annexure A-4 to the reply filed by the Appellant
Company, the Respondent No.2 confirmed that she had requested
the Appellant Company to allot shares in the name of the said Mr.
M. Krishnan against her share application money, which the said M.
Krishnan had agreed to treat, as his personal loan from the
Respondent No.2 and pay her the amount at a later date.
12. The Appellant Company claims to have issued shares of the
value of Rs.90,00,000/- in the name of Mr. M. Krishnan in 2008.
According to the Appellant Company, there is thus, no further
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liability to be discharged by the Appellant Company to the
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Respondents. After 23 March, 2006, there had been no financial
transaction between the Appellant Company and the Respondents.
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13. However, by a legal notice dated 19 November, 2012, the
Respondents called upon the Appellant Company to repay to the
Respondents a sum of Rs.1,49,60,000/- alleged to be the
outstanding debt of the Appellant Company, repayable to the
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Respondents as on 19 July, 2004.
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14. By a letter dated 5 December, 2012, the Appellant
Company refuted the claim of the Respondents, whereupon the
Respondents filed petition being CP No.335 of 2013 in the High
Court of Madras under Sections 433 (e) & (f) and 434 of the
Companies Act 1956, for winding up of the Appellant Company.
The said petition was transferred to the Chennai Bench of NCLT
and re-numbered TCP/301/(IB)/2017.
15. The averments made in the winding up petition ex facie
show that the claim of the Respondents was hotly disputed. In that
the Respondents claimed that letters attributed to them, even
letters addressed by them to the Income Tax Authorities were
forged. Some of the averments are extracted hereinbelow:
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“6. …….The petitioners state that the respondent’s directors
who pretended to be the well-wishers of the petitioners,
knew all the facts and stopped paying the interest
intermittently till 2007. Adding insult to the injury, the
respondent’s company created a fraudulent sale deed and
the sale consideration is a circuitous fraudulent transaction
which will clearly prove the fraud, cheating, forgery and
various other criminal offences of the respondent. The
respondent have illegally grabbed the residential house of
the petitioners. The petitioners had already filed a Civil Suit
in C.S. No.66 of 2013 in the Original Side of the Hon’ble High
Court of Judicature at Madaras.
7. The Petitioners issued a statutory notice of demand on
19.11.2012 for claiming the amount from the respondent
company and its directors and they gave a reply on
05.12.2012 making unwanted, unnecessary and defamatory
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allegations against the 1 petitioner, who had helped the
directors of the respondent company for purchasing a flat in
which they presently reside and for the entire capital for
running the respondent company. In para 3 of the said
reply, the respondent asked for details of the payments
made by the petitioners to the respondent. But in para 12,
the respondent company had stated that the transactions
have been placed before the Income Tax Department, for
which the petitioners had signed the affidavits. The
allegations are contradictory to each other and it reveals
rank forgery committed by the respondents to 1 to 3.
8. The Petitioners had not signed any documents or blank
papers or any affidavits to the respondent or its directors.
The directors of the respondent company are capable of
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forging the signatures of the petitioners, which has been
proved on various occasions...”
xxx xxx xxx
10. The petitioners state that from the reply notice given
by the advocate, it is clearly understood that the respondent
and its directors had forged the signatures of the petitioners
to the Income Tax Department….
11. The petitioners states that the petitioners had
verified the records of the Registrar of Companies, Chennai
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and found that the 2 petitioner’s signature had been
forged in the resignation letter, which has been forged
immediately after the fraudulent sale deed. The respondent
company and directors had even forged the signatures in
the application for Director’s Identification Number and the
forgery is the peak of fraud and cheating committed by the
respondent company and its directors not only against the
petitioners, but also against the Government Departments.
15. The petitioner states that the directors of the
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respondent company had forged the signatures of the 2
petitioner. In all the documents submitted to the Registrar
of Companies from the inception of the respondent
company including the resignation and the DIN Application
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form and obtained DIN number to remove the 2 petitioner
from the directorship, which the directors of the respondent
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company made the 2 petitioner as a director to their
convenience.”
16. Allegations of forgery and fraud are not decided in
proceedings under Sections 433 and 434 of the Companies Act
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1956 for winding up of a company. Such disputes necessarily have
to be adjudicated in a regular suit, on the basis of evidence,
including forensic examination reports.
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17. By an order dated 4 August 2017 the NCLT dismissed the
said winding up petition, on the ground that the Respondents had
failed to comply with the provisions of Section 7(3)(b) of the
Insolvency and Bankruptcy code, 2016, hereinafter “IBC”, with the
liberty to file a fresh petition, if so advised.
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18. On 7 December 2017, the Respondents issued a fresh
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demand notice to the Appellant Company. By a letter dated 14
December 2017, the Appellant Company refuted the claims in the
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demand notice dated 7 December 2017, inter alia claiming that
all amounts due and payable by the Appellant Company or its
predecessor-in-interest to the Respondents, had duly been paid
within 2007 and 2008.
19. The Respondents, thereafter, filed a petition being CP/77/
(IB)/CB/2018 under Section 9 of the IBC, in the NCLT (Chennai
Bench) claiming to be an operational creditor of the Appellant
Company, within the meaning of Section 9 of the IBC and claiming
from the Appellant Company Rs.2.10 Crores as principal and
Rs.2,31,60,000/- towards interest at the rate of 24% per annum ,
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from the year 2007.
20. For the purpose of this appeal, it is not necessary for this
Court to examine the discrepancies between the claim in the
winding up petition and the claim in the petition under Section 9 of
the IBC.
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21. By an order dated 12 April 2018, a Single Bench of NCLT
dismissed CP/77/(IB)/CB/2018 filed by the Respondent No.1,
claiming himself to be an ‘Operational Creditor’ under Section 9 of
the IBC, as withdrawn, with liberty to file a fresh petition in
accordance with law.
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22. Thereafter, on 25 April 2018, the Respondents filed a fresh
petition being WC.P. No.770/IB/CB/C-II/2018 before the NCLT
(Chennai Bench) under Section 7 of the IBC, as “Financial
Creditor”, claiming principal amount of Rs.2.10 Crores together
with interest @ 24% per annum from 2007, amounting to Rs.
4,41,60,000/-. The Appellant Company filed its counter statement
in CP No.770/IB/2018 before the NCLT.
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23. By a judgment and order dated 19 December 2018, the
NCLT meticulously recorded details of the payments made by the
Appellant Company and/or its predecessor in interest to the
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Respondents, considered the letters written by the Respondents to
the Income Tax Authorities and dismissed CP No. 770/IB/CB/2018,
being the petition filed by the Respondents under Section 7 of the
IBC, inter alia, holding that the Respondents were not Financial
Creditors of the Appellant Company, and in any case the claim of
the Respondents was hopelessly barred by limitation. The NCLT
held that the Respondents had failed to prove that there was any
debt due from the Appellant Company, to the Respondents,
observing that the Appellant Company had produced proof of
payments.
24. The relevant parts of the said judgment and order of the
Chennai Bench of NCLT are extracted herein below for
convenience.
“9. To prove that Rs.90,00,000 was treated as share
application money, the Corporate Debtor filed a letter
(Annexure-A2) these Applicants together addressed to the
Income Tax Department on 11.01.2011 confirming the
first applicant requesting the corporate debtor to transfer
a sum of Rs.90,00,000 to his wife (Second Applicant) for
allotment of shares in the Corporate Debtor. Not only
about this request, the corporate debtor counsel says, the
Applicants themselves stated that they advanced monies
to M/s. Radha Exports during the Financial Years 2001-
2002, 2002-2003 and 2003-2004 and amount outstanding
from the said the partnership firm on 31.03.2004 is
Rs.1,39,60,000. The letter dated 11.01.2011 addressed
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by the Applicants to the Deputy Commissioner of Income
Tax is as follows:...”
10. In addition to the above letter, the Corporate Debtor
has also placed another letter dated 11.01.2011 Second
Applicant addressed to the Deputy Commissioner of
Income Tax confirming that she requested the Corporate
Debtor to allot shares in the name of First Applicant
against her share application money Rs.90,00,000 on the
agreement that her husband would pay that money to her
later. The corporate debtor has annexed this letter as
Annexure-A4 to the reply affidavit filed by the Corporate
Debtor.
….
17. Now going through the observations we have noted,
now the points for consideration are, as to whether any
financial debt is in existence in between the parties as on
the date of filing petition u/s 7 of the Code and as to
whether, assuming the financial debt is in existence, the
debt is barred by limitation or not.
18. It is evident from the facts that first Applicant
advanced Rs.2,10,00,000/- Rs.2,20,00,000/- as the case
may be, to a partnership firm during the period in
between 2002 and 2003. It is also evident on record by
4.07.2004, the same partnership firm repaid
Rs.1,08,14,650. To show that it has been paid, the
Corporate debtor has placed proof by submitting copies of
the statement of the statement of accounts of various
banks reflecting payments made to these Applicants, on
the contrary, these Applicants have not placed any
material showing as to whether these payments were
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made or not.
25. In this case, if we go by the case of the Applicant,
it is a claim made basing on the money disbursed by way
of cheque payment in the year 2002 & 2003. This money
was also not disbursed to this Corporate Debtor, it was
given to a partnership firm.
26. This Applicant, has not even placed any material
disclosing how this debt is still alive after lapse of three
years from the date of disbursement. Whenever any
claim is made, when it is beyond three years period as
envisaged under Article 136 of the Limitation Act, the
person making claim is bound to disclose and explain as
to how the debt claim is not barred by limitation. No such
effort has been made by these Applicants to prove that
this is within limitation. Assuming that filing of this
Company Petition is continuation to the winding up
proceedings filed before the Hon’ble High Court i.e.
15.02.2013, then also, since these Applicants have
claimed money was disbursed in the year 2002 to 2003, if
the limitation period is computed from the date of
disbursement, filing of winding up proceedings would be
beyond the period of limitation from the date of
disbursement.
27. Given the historical facts available on record, even if
the Corporate Debtor statement is taken as true, the
limitation would start running from the year 2007. Since
the winding up petition was filed in the year 2013, even
from the year 2007, these Applicants could have filed
winding proceedings within three years from thereof, not
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in the year 2013, Conceding everything as stated by the
applicants, then also the debt claim would remain barred
by limitation.
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25. On or about 13 February 2019, the Respondents filed
Company Appeal (AT) (INS) NO.224/19 before the Appellate
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Tribunal, challenging the order dated 19 December 2018 passed
by the NCLT, dismissing the petition of the Respondents under
Section 7 of the IBC.
26. The Appellant Company filed a Counter Statement before
the Appellate Tribunal, and the Respondents filed a Rejoinder
thereto. Pursuant to the directions of the Appellate Tribunal,
additional pleadings were also filed.
27. On 13.08.2019 the Appellant Company caused ‘Notice to
Produce Documents’ to be issued to the Respondents calling upon
Respondents to produce certified true copies of the Statement of
Accounts of the Respondents maintained with HSBC Bank, Punjab
National Bank and Indian Overseas Bank, from which the
Respondents claimed to have advanced money to the Appellant
Company and also certified true copies of the Statement of
Accounts of the Banks, in which the cheques issued by M/s Radha
Exports (proprietary concern) were deposited and encashed. It is
alleged that the Respondents replied to the Notice to Produce
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Documents, but did not furnish the documents and/or the details
called for by the Appellant Company.
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28. On or about 20 August 2019, the Appellant Company filed
an Additional Reply Statement, enclosing true copies of the
Statement of Accounts of M/s Radha Exports (Proprietary concern),
the Appellant Company and Mr. M. Krishnan reflecting the
payments made to the Respondents. Under the direction of the
Appellate Tribunal, the Appellant Company also filed a Correlation
Statement of payment entries, reflected in the Bank Statements
and the statements given in the Additional Counter Statement.
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29. By the impugned judgment and order dated 2 September
2019 the Appellate Tribunal allowed the appeal of the Respondents
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and set aside the order dated 19 December 2018 of the NCLT,
dismissing the application under Section 7 of the IBC.
30. It appears that the Appellate Authority was not inclined to
accept the submission of the Appellant Company, that the entire
amount had been paid, for two purported reasons. The first reason
was that the Correlation Statement showed payments of certain
amounts amounting to Rs.53,05,000/- in favour of Customs,
Chennai and payments amounting to Rs.1,75,000/- in favour of one
Mr. Kulasekaran. The Respondents, as Financial Creditors had
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disputed that these payments were towards the dues of the
Financial Creditors. The second reason was that, if the total
amount had been paid, there was no reason for the Appellant
Company to take the plea that the amount was not payable, the
same being barred by limitation.
31. It is well settled in law that alternative defences are
permissible to contest a claim. It was thus open to the Appellant
Company, to refute the claim of the Respondents by taking the
plea of limitation and also to contend that no amount was in fact
due and payable by the Appellant Company to the Respondents.
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32. In Innoventive Industries Ltd. v. ICICI Bank and Anr. ,
the Supreme Court observed and held:-
“ 27 . The scheme of the Code is to ensure that when a
default takes place, in the sense that a debt becomes due
and is not paid, the insolvency resolution process begins.
Default is defined in Section 3(12) in very wide terms as
meaning non-payment of a debt once it becomes due and
payable, which includes non-payment of even part thereof
or an instalment amount. For the meaning of “debt”, we
have to go to Section 3(11), which in turn tells us that a
debt means a liability of obligation in respect of a “claim”
and for the meaning of “claim”, we have to go back to
Section 3(6) which defines “claim” to mean a right to
1 . (2018) 1 SCC 407
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payment even if it is disputed. The Code gets triggered the
moment default is of rupees one lakh or more (Section 4).
The corporate insolvency resolution process may be
triggered by the corporate debtor itself or a financial
creditor or operational creditor. A distinction is made by the
Code between debts owed to financial creditors and
operational creditors. A financial creditor has been defined
under Section 5(7) as a person to whom a financial debt is
owed and a financial debt is defined in Section 5(8) to mean
a debt which is disbursed against consideration for the time
value of money. As opposed to this, an operational creditor
means a person to whom an operational debt is owed and
an operational debt under Section 5 (21) means a claim in
respect of provision of goods or services.
28 . When it comes to a financial creditor triggering the
process, Section 7 becomes relevant. Under the explanation
to Section 7(1), a default is in respect of a financial debt
owed to any financial creditor of the corporate debtor – it
need not be a debt owed to the applicant financial creditor.
Under Section 7(2), an application is to be made under sub-
section (1) in such form and manner as is prescribed, which
takes us to the Insolvency and Bankruptcy (Application to
Adjudicating Authority) Rules, 2016. Under Rule 4, the
application is made by a financial creditor in Form 1
accompanied by documents and records required therein.
Form 1 is a detailed form in 5 parts, which requires
particulars of the applicant in Part I, particulars of the
corporate debtor in Part II, particulars of the proposed
interim resolution professional in part III, particulars of the
financial debt in part IV and documents, records and
evidence of default in part V. Under Rule 4(3), the applicant
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is to dispatch a copy of the application filed with the
adjudicating authority by registered post or speed post to
the registered office of the corporate debtor. The speed,
within which the adjudicating authority is to ascertain the
existence of a default from the records of the information
utility or on the basis of evidence furnished by the financial
creditor, is important. This it must do within 14 days of the
receipt of the application. It is at the stage of Section 7(5),
where the adjudicating authority is to be satisfied that a
default has occurred, that the corporate debtor is entitled to
point out that a default has not occurred in the sense that
the “debt”, which may also include a disputed claim, is not
due. A debt may not be due if it is not payable in law or in
fact. The moment the adjudicating authority is satisfied that
a default has occurred, the application must be admitted
unless it is incomplete, in which case it may give notice to
the applicant to rectify the defect within 7 days of receipt of
a notice from the adjudicating authority. Under sub-section
(7), the adjudicating authority shall then communicate the
order passed to the financial creditor and corporate debtor
within 7 days of admission or rejection of such application,
as the case may be.”
33. The proposition of law which emerges from Innoventive
Industries Ltd. (supra) is that the Insolvency Resolution Process
begins when a default takes place. In other words, once a debt or
even part thereof becomes due and payable, the resolution
process begins. Section 3(11) defines ‘debt’ as a liability or
obligation in respect of a claim and the claim means a right to
payment even if it is disputed. The Code gets triggered the
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moment default is of Rs.1,00,000/- or more. Once the Adjudicating
Authority is satisfied that a default has occurred, the application
must be admitted, unless it is otherwise incomplete and not in
accordance with the rules. The judgment is however, not an
authority for the proposition that a petition under Section 7 of the
IBC has to be admitted, even if the claim is ex facie barred by
limitation.
34. On the other hand, in B.K. Educational Services Pvt.
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Ltd. v. Parag Gupta and Associates , this Court held:-
“42. It is thus clear that since the Limitation Act is
applicable to applications filed under Sections 7 and 9 of
the Code from the inception of the Code, Article 137 of
the Limitation Act gets attracted. “The right to sue”,
therefore, accrues when a default occurs. If the default
has occurred over three years prior to the date of filing of
the application, the application would be barred under
Article 137 of the Limitation Act, save and except in those
cases where, in the facts of the case, Section 5 of the
Limitation Act may be applied to condone the delay in
filing such application.”
35. The judgment in B.K. Educational Services Pvt. Ltd.
(supra) was referred to and relied upon by the Court in Vashdeo
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R. Bhojwani v. Abhyudaya Co-operative Bank Ltd. .
2 . (2019) 11 SCC 633
3. (2019) 9 SCC 158
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36. It was for the applicant invoking the Corporate Insolvency
Resolution Process, to prima facie show the existence in his favour,
of a legally recoverable debt. In other words, the respondent had
to show that the debt is not barred by limitation, which they failed
to do.
37. Under clauses (19) to (21) of Part II of the Schedule of the
Limitation Act 1963, the period of limitation for initiation of a suit
for recovery of money lent, is three years from the date on which
the loan is paid. The last loan amount is said to have been
advanced in 2004-2005. In the winding up petition, there is not a
whisper of any agreed date by which the alleged loan was to be
repaid to the Respondents. In the instant case, apparently the debt
was barred by limitation even in the year 2012, when winding up
proceedings were initiated in the Madras High Court.
38. The NCLT rightly refused to admit the application under
Section 7 of the IBC, holding the same to be barred by limitation.
The Appellate Tribunal has erred in law in reversing the judgment
and order of the earlier Adjudicating Authority. The Adjudicating
Authority rightly rejected the application as barred by limitation.
The Appellate Authority patently erred in law in reversing the
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decision of the adjudicating authority and admitting the
application.
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39. As recorded in the said order dated 19 December, 2018
passed by the NCLT Chennai, the Respondent Nos. 1 and 2 jointly
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addressed the letter dated 11 January, 2011 to the Income Tax
Department confirming that the Respondent No.1 had requested
the Appellant Company to transfer a sum of Rs.90 lakhs to his wife,
the Respondent No.2 for allotment of shares in the Appellant
Company and further acknowledged that the amount outstanding
from the erstwhile firm M/s. Radha Exports to the Respondent was
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Rs.1,39,60,000/- as on 31 March, 2004. The said letter has been
extracted in full in Paragraph (9) of the judgment and order dated
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19 December, 2018 of NCLT.
40. There are, as observed above cogent records including
letters signed by the Respondent Nos. 1 and 2 which evince that
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on 6 October, 2007, Respondent No.2 resigned from the Board of
the Appellant Company and at that time the Respondent No.2
requested the Appellant Company to treat the share application
money of Rs.90,00,000/- as share application money of Mr. M.
Krishnan and to issue shares for aforesaid value to Mr. M. Krishnan.
The amount was to be treated as a personal loan from the
Respondent No.2 to Mr. M. Krishnan. A personal Loan to a
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Promoter or a Director of a company cannot trigger the Corporate
Resolution Process under the IBC. Disputes as to whether the
signatures of the Respondents are forged or whether records have
been fabricated can be adjudicated upon evidence including
forensic evidence in a regular suit and not in proceedings under
Section 7 of the IBC.
41. It is, however, made clear that the observations made
above, with regard to limitation are based on the pleadings and
annexures in the winding up proceedings under Sections 433/434
of the Companies Act, 1956 filed in Madras High Court, which were
transferred to the NCLT and also the pleadings in CP/77/
(IB)/CB/2018 and WCP No. 770/IB/CB/C-II/2018 filed before the
Chennai Bench of NCLT. Any suit filed by the Respondents against
Mr. Krishnan or against the company will be decided on its own
merits without being swayed by the observations made in this
judgment.
42. Even otherwise, the application under Section 7 of the IBC
was not maintainable. As rightly held by the NCLT there was no
financial debt in existence. In this context, it would be pertinent to
refer to the following provisions of the IBC:-
“3. Definitions.- In this Code, unless the context otherwise
requires,—
…….
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(8) "corporate debtor" means a corporate person who owes a
debt to any person;
…….
(10) "creditor" means any person to whom a debt is owed
and includes a financial creditor, an operational creditor, a
secured creditor, an unsecured creditor and a decree-holder;
(11) "debt" means a liability or obligation in respect of a
claim which is due from any person and includes a financial
debt and operational debt;
(12) "default" means non-payment of debt when whole or
any part or instalment of the amount of debt has become
due and payable and is not paid by the debtor or the
corporate debtor, as the case may be.
xxx xxx xxx
5. Definitions.- In this Part, unless the context otherwise
requires,-
……...
(7) "financial creditor" means any person to whom a financial
debt is owed and includes a person to whom such debt has
been legally assigned or transferred to;
(8) "financial debt" means a debt alongwith interest, if any,
which is disbursed against the consideration for the time
value of money and includes—
(a) money borrowed against the payment of interest;
(b) any amount raised by acceptance under any acceptance
credit facility or its de-materialised equivalent;
(c) any amount raised pursuant to any note purchase facility
or the issue of bonds, notes, debentures, loan stock or any
similar instrument;
(d) the amount of any liability in respect of any lease or hire
purchase contract which is deemed as a finance or capital
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lease under the Indian Accounting Standards or such other
accounting standards as may be prescribed;
(e) receivables sold or discounted other than any receivables
sold on nonrecourse basis;
(f) any amount raised under any other transaction, including
any forward sale or purchase agreement, having the
commercial effect of a borrowing;
(g) any derivative transaction entered into in connection
with protection against or benefit from fluctuation in any rate
or price and for calculating the value of any derivative
transaction, only the market value of such transaction shall
be taken into account;
(h) any counter-indemnity obligation in respect of a
guarantee, indemnity, bond, documentary letter of credit or
any other instrument issued by a bank or financial
institution;
(i) the amount of any liability in respect of any of the
guarantee or indemnity for any of the items referred to in
sub-clauses (a) to (h) of this clause;
xxx xxx xxx
7. Initiation of corporate insolvency resolution process
by financial creditor.- (1) A financial creditor either by
itself or jointly with other financial creditors, or any other
person on behalf of the financial creditor, as may be notified
by the Central Govt. may file an application for initiating
corporate insolvency resolution process against a corporate
debtor before the Adjudicating Authority when a default has
occurred.
xxx xxx xxx
8. Insolvency resolution by operational creditor.- (1) An
operational creditor may, on the occurrence of a default,
deliver a demand notice of unpaid operational debtor copy of
an invoice demanding payment of the amount involved in
the default to the corporate debtor in such form and manner
as may be prescribed.
(2) The corporate debtor shall, within a period of ten days of
25
the receipt of the demand notice or copy of the invoice
mentioned in sub-section (1) bring to the notice of the
operational creditor—
(a) existence of a dispute, if any, on record of the
pendency of the suit or arbitration proceedings filed
before the receipt of such notice or invoice in relation
to such dispute;
(b) the payment of unpaid operational debt—
(i) by sending an attested copy of the record of
electronic transfer of the unpaid amount from the
bank account of the corporate debtor; or
(ii) by sending an attested copy of record that the
operational creditor has encashed a cheque
issued by the corporate debtor.
Explanation.—For the purposes of this section, a "demand
notice" means a notice served by an operational creditor to
the corporate debtor demanding payment of the operational
debt in respect of which the default has occurred.”
43. The definition of ‘financial debt’ in Section 5(8) makes it
clear that ‘financial debt’ means a debt along with interest, if any,
disbursed against the consideration for time value of money
and would include money raised or borrowed against the payment
of interest; amount raised by acceptance under any acceptance
credit facility or its de-materialised equivalent; amount raised
pursuant to any note purchase facility or the issue of
bonds, notes, debentures, loan stock or any similar
instrument; the amount of any liability in respect of any lease or
hire purchase contract which is deemed as a finance or capital
lease under the Indian Accounting Standards or such other
26
accounting standards as may be prescribed; receivables sold or
discounted other than any receivables sold on non-recourse basis
or any amount raised under any other transaction, including any
forward sale or purchase agreement, having the commercial effect
of a borrowing. Explanation to Section 5(8) which relates to real
estate projects is of no relevance in the facts and circumstances of
this case. The payment received for shares, duly issued to a third
party at the request of the payee as evident from official records,
cannot be a debt, not to speak of financial debt. Shares of a
company are transferable subject to restrictions, if any, in its
Articles of Association and attract dividend when the company
makes profits.
44. The appeal is, for the reasons discussed above, allowed.
The impugned judgment and order of the Appellate Tribunal is set
aside and the order of the Adjudicating Authority dismissing the
application, is restored.
....................................J.
[ARUN MISHRA]
….…..............................J.
[INDIRA BANERJEE]
NEW DELHI
AUGUST 28, 2020
27