The Supreme Court in its recent ruling addressed a crucial question regarding the statute of limitations for initiating insolvency proceedings under the Insolvency and Bankruptcy Code (IBC).
The question at the heart of the case was whether the date of the initial default or the declaration of a loan account as non-performing should be considered the starting point for the limitation period.
Apex Court Bench held that the initiation of insolvency proceedings should be guided by a three-year limitation period starting from the date of the initial default, and that a recovery certificate issued under the Debt Recovery Act could be treated as a decree for the purpose of pursuing insolvency proceedings under the IBC.
Facts and Judicial History of the Case:
Initiation of Recovery Proceedings: Several banks, including Union Bank of India, IDBI, Oriental Bank of Commerce, Bank of Baroda, Karnataka Bank, Syndicate Bank, and Punjab National Bank, extended financial facilities to Totem Infrastructures Limited (corporate debtor) in the form of loans and bank guarantees. When the corporate debtor defaulted on these facilities, recovery proceedings were initiated against them by the lending banks.
Debt Recovery Tribunal (DRT) Proceedings: The exposed lending banks filed applications before the Debt Recovery Tribunals (DRT), Hyderabad, and Bengaluru, seeking recovery of the outstanding dues. Multiple recovery certificates were issued by the respective DRTs, confirming the amount owed by the corporate debtor.
Application under the Insolvency and Bankruptcy Code: The State Bank of India (SBI) filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) before the National Company Law Tribunal (NCLT), Hyderabad. This application was based on the recovery certificates issued by the DRTs. The NCLT admitted the application and declared a moratorium.
Appeal to the National Company Law Appellate Tribunal (NCLAT): The appellant appealed against the NCLT's decision to the NCLAT on the grounds of limitation period and the application's reliance on an RBI circular dated 12.02.2018.
RBI Circular Controversy: The appellant argued that the application under the IBC was based on the RBI circular, which had been declared ultra vires by the Supreme Court in the case of Dharani Sugars and Chemicals Ltd. vs. Union of India and Others[1].
Acknowledgment of Debt: The NCLT considered a letter issued by the corporate debtor on 29.01.2020 as an acknowledgment of debt, which affected the computation of the limitation period.
NCLAT's Decision: The NCLAT upheld the NCLT's decision, including the acknowledgment of debt, and dismissed the appeal. The NCLAT also addressed the controversy surrounding the RBI circular.
Observations of the Court:
The primary issue before the Supreme Court was about the statute of limitations regarding the initiation of insolvency proceedings under the Insolvency and Bankruptcy Code (IBC).
The Court distinguished between acknowledgment under Section 18 of the Limitation Act, 1963, and a promise under Section 25 of the Contract Act, 1872. While both could reset the limitation, Section 18 acknowledgments had to be made within the limitation period and didn't require a promise to pay, while Section 25(3) of the Contract Act demanded a clear, unconditional promise to pay a time-barred debt, which could be inferred from the document.
The Court considered an argument about the starting point of the limitation period based on the date of declaring the debtor's loan account as non-performing. The Court referenced relevant cases but maintained that the limitation period for Section 7 IBC applications was guided by Article 137 of the Limitation Act.
Regarding the doctrine of election, preventing pursuing the same right in different fora for the same cause of action, the Court clarified it didn't apply since the recovery proceedings started before the IBC's existence. A recovery certificate gave rise to a fresh cause of action for initiating Corporate Insolvency Resolution Process (CIRP), as established in Kotak Mahindra Bank Limited vs A. Balakrishnan and Anr[2].
The Court discussed recovery certificates issued under the Debt Recovery Act, treated as decrees, with a twelve-year enforcement period per Article 136 of the Limitation Act. It emphasized that recovery certificates could be used to initiate CIRP under the IBC. The Court directed the segregation of the claim based on the 2015 recovery certificate and clarified the limitation period for initiating CIRP based on recovery certificates. The Court's decision was based on legal principles, precedents, and statutory provisions.
The Decision of the Court:
The Supreme Court dismissed the appeal while issuing directions related to the segregation of the claim based on the 2015 recovery certificate from the composite claim. It also clarified the application of the limitation period for initiating CIRP proceedings under the IBC based on recovery certificates.
Case Title: Tottempudi Salalith vs. State Bank of India & Ors.
Coram: Hon’ble Justice Aniruddha Bose and Vikram Nath
Case no.: Civil Appeal No.2348 of 2021
Citation:
Advocate for the Appellant: K. Parameshwar, Aarti Gupta, Kanti, Chinmay Kalgaonkar, Dhananjaya Naidu, and Swaroop George
Advocate for the Defendant: Avrojyoti Chatterjee, Rajiv S Roy, Jayasree Saha, and Siddharth Dhingra
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