Decree For Money Or Certificate Of Recovery In Favor Of Financial Creditor Gives Rise To Fresh Cause Of Action U/S. 7 Of IBC: Supreme Court

The Court held, "An application under Section 7 of the IBC would not be barred by limitation, on the ground that it had been filed beyond a period of three years from the date of declaration of the loan account of the Corporate Debtor as NPA, if there were an acknowledgment of the debt by the Corporate Debtor before expiry of the period of limitation of three years, in which case the period of limitation would get extended by a further period of three years."

An Appeal was filed against a Judgment passed by the National Company Appellate Law Tribunal (NCLAT), which held that the petition filed by the Appellant was barred by limitation under Section 7 of the IBC. Aggrieved, the Appellant moved the Supreme Court, where three main contentions were raised for the consideration of the Court:

(i) "Whether a Petition under Section 7 of the IBC would be barred by limitation, on the sole ground that it had been filed beyond a period of 3 years from the date of declaration of the loan account of the Corporate Debtor as NPA, even though the Corporate Debtor might subsequently have acknowledged its liability."

(ii) "Whether a final judgment and decree of the DRT in favour of the Financial Creditor, or the issuance of a Certificate of Recovery in favour of the Financial Creditor, would give rise to a fresh cause of action to the Financial Creditor to initiate proceedings under Section 7 of the IBC."

(iii) "Whether there is any bar in law to the amendment of pleadings, in a Petition under Section 7 of the IBC."

The Court noted that the IBC does not exclude the application of Sections 14 or 18 or any other provisions of the Limitation Act. "There is therefore no reason to suppose that Sections 14 or 18 of the Limitation Act do not apply to proceedings under Section 7 or Section 9 of the IBC," observed the Court.

Moreover, the Bench reiterated that entries in books of accounts and/or balance sheets of a Corporate Debtor would amount to an acknowledgment under Section 18 of the Limitation Act.

Therefore, the Court observed, "We see no reason why the principles should not apply to an application under Section 7 of the IBC which enables a financial creditor to file an application initiating the Corporate Insolvency Resolution Process against a Corporate Debtor before the Adjudicating Authority, when a default has occurred. As observed earlier in this judgment, on a conjoint reading of the provisions of the IBC quoted above, it is clear that a final judgment and/or decree of any Court or Tribunal or any Arbitral Award for payment of money, if not satisfied, would fall within the ambit of a financial debt, enabling the creditor to initiate proceedings under Section 7 of the IBC."

"A final judgment and order/decree is binding on the judgment debtor. Once a claim fructifies into a final judgment and order/decree, upon adjudication, and a certificate of Recovery is also issued authorizing the creditor to realize its decretal dues, a fresh right accrues to the creditor to recover the amount of the final judgment and/or order/decree and/or the amount specified in the Recovery Certificate", noted the Court.

The Court therefore opined that the Appellant was entitled to initiate proceedings under Section 7 of the IBC within three years from the date of issuance of the Recovery Certificate.

The Court noted that Section 18 of the Limitation Act cannot also be construed with pedantic rigidity in relation to proceedings under the IBC. The Court therefore saw no reason why an offer of One Time Settlement of a live claim, made within the period of limitation, should not also be construed as an acknowledgment to attract Section 18 of the Limitation Act.

Hence, the Court observed, "In our considered opinion an application under Section 7 of the IBC would not be barred by limitation, on the ground that it had been filed beyond a period of three years from the date of declaration of the loan account of the Corporate Debtor as NPA, if there were an acknowledgment of the debt by the Corporate Debtor before expiry of the period of limitation of three years, in which case the period of limitation would get extended by a further period of three years."

Furthermore, the Court noted, "Moreover, a judgment and/or decree for money in favour of the Financial Creditor, passed by the DRT, or any other Tribunal or Court, or the issuance of a Certificate of Recovery in favour of the Financial Creditor, would give rise to a fresh cause of action for the Financial Creditor, to initiate proceedings under Section 7 of the IBC for initiation of the Corporate Insolvency Resolution Process, within three years from the date of the judgment and/or decree or within three years from the date of issuance of the Certificate of Recovery, if the dues of the Corporate Debtor to the Financial Debtor, under the judgment and/or decree and/or in terms of the Certificate of Recovery, or any part thereof remained unpaid."

On the question of amendment of pleadings, the court held that there is no bar in law to the amendment of pleadings in an application under Section 7 of the IBC, or to the filing of additional documents, apart from those initially filed along with application under Section 7 of the IBC, except in cases where there is an inordinate delay, where the adjudicating authority can, at its discretion, decline the petition for amendment.

The Court, therefore, set aside the impugned judgment of NCLAT and allowed the appeal.