Insolvency and Bankruptcy Code, 2016 — Section 7 — Essential Ingredients
(Paras 28–31, 40)
An application under Section 7(1) of the Insolvency and Bankruptcy Code, 2016 must establish that (i) the applicant is a financial creditor, (ii) there exists a financial debt, (iii) a default has occurred in respect of such debt, and (iv) the default exceeds the statutory threshold under Section 4. Once these foundational requirements are demonstrated, admission follows, subject to limitation.
Form I — Procedural Compliance — Substantial Compliance Sufficient
(Paras 35–45)
The prescribed Form I under the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 is intended to ensure disclosure of essential particulars regarding debt and default. However, the provisions must receive a purposive and liberal interpretation. If the application, read as a whole along with accompanying documents and permitted amendments, substantially discloses the material particulars including debt and default, it cannot be rejected for technical or insignificant omissions.
Limitation — Article 137, Limitation Act, 1963 — Acknowledgment under Section 18
(Paras 29–31, 46–52)
Proceedings under Section 7 of IBC are governed by Article 137 of the Limitation Act, 1963. The right to apply accrues on the date of default. However, acknowledgment of liability in writing, signed by the debtor or its authorised agent, before expiry of limitation, extends limitation under Section 18 of the Limitation Act.
Acknowledgment in duly signed balance-sheets and in restructuring or working capital consortium agreements constitutes valid acknowledgment for purposes of Section 18, even if accompanied by caveats or reference to pending litigation.
Debt Restructuring — Fresh Working Capital Consortium Agreements — Effect on Limitation
(Paras 45, 49–51)
Execution of restructuring agreements or working capital consortium agreements, wherein the corporate debtor acknowledges existing liabilities and avails further facilities, revives and extends the enforceability of the debt. Such agreements provide a fresh cause for computing limitation, independent of earlier NPA classification for provisioning purposes.
Counterclaim — Pending Criminal Proceedings — No Bar to Section 7 Proceedings
(Paras 53–55)
Pendency of recovery proceedings, counterclaims, or criminal proceedings between the parties does not bar initiation of corporate insolvency resolution process under Section 7. Mere assertion of a counterclaim or allegations of criminality against bank officials do not extinguish financial debt nor preclude admission of CIRP if default is established.
ANALYSIS OF FACTS AND LAW
The appeal arose from proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016 initiated by State Bank of India, acting on behalf of a consortium of banks, against M/s. Metal Closure Pvt. Ltd. (Corporate Debtor).
The principal defence raised by the suspended Managing Director was limitation. According to him, the account had been declared NPA on 31.01.2010; hence, the Section 7 application filed on 25.04.2018 was barred under Article 137.
The litigation trajectory was as follows:
The NCLT admitted the application.
NCLAT initially upheld admission on a 12-year limitation theory under Article 62.
This Court remanded the matter in light of limitation jurisprudence.
On remand, NCLAT held the application time-barred.
This Court again remanded, permitting amendment of pleadings to incorporate acknowledgments.
Upon amendment, NCLAT held the application within limitation.
Before the Supreme Court, three principal issues arose:
First, whether the application suffered from lack of material particulars under Form I.
The Court held that Form I serves to disclose essential ingredients. The amended application contained details of restructuring, execution of Working Capital Consortium Agreements (2010–2014), NPA declarations (2014), and acknowledgment in balance-sheets signed on 30.09.2015. Substantial compliance was sufficient; technical objections were rejected.
Second, whether the application was within limitation.
The Court reaffirmed that Article 137 governs Section 7 proceedings, as held in B. K. Educational Services (P) Ltd. v. Parag Gupta & Associates.
It further relied upon Asset Reconstruction Company (India) Ltd. v. Bishal Jaiswal to hold that acknowledgment in a balance-sheet, if signed by a director, constitutes valid acknowledgment under Section 18 of the Limitation Act.
The balance-sheets for FY 2013–14 and 2014–15 were signed on 30.09.2015. Thus, limitation stood extended until 29.09.2018. Since the Section 7 application was filed on 25.04.2018, it was within time.
The Court rejected the contention that the 2010 NPA date controlled limitation. It clarified that shifting of NPA date to 2010 was only for provisioning under RBI norms. In substance, restructuring agreements up to March 2014 acknowledged liability and provided a fresh starting point.
Third, whether proceedings were mala fide in light of counterclaims and criminal cases.
The Court held that pendency of DRT proceedings, SARFAESI action, counterclaims, or criminal investigations does not bar IBC proceedings. IBC is an independent statutory mechanism for insolvency resolution. Unless the debt itself is extinguished, CIRP cannot be stalled on collateral grounds.
The Court also clarified that the discretion discussed in Vidarbha Industries Power Ltd. v. Axis Bank Ltd. is confined to its peculiar facts and does not dilute the settled principle that once default is established, admission follows.
RATIO DECIDENDI
For purposes of Section 7 of the Insolvency and Bankruptcy Code, 2016, limitation is governed by Article 137 of the Limitation Act, 1963. Acknowledgment of debt in writing, including in balance-sheets signed by authorised directors or in restructuring/consortium agreements, extends limitation under Section 18 of the Limitation Act. Technical defects in Form I do not warrant rejection if material particulars establishing debt and default are disclosed. Pendency of counterclaims, recovery proceedings, or criminal cases does not bar admission of CIRP once default above threshold is established.
RESULT
The appeal was dismissed.
The order of NCLAT upholding admission of the Section 7 application was affirmed.
Interim orders stood discharged.
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