Insolvency and Bankruptcy Code, 2016 – s.7 – Companies Act, 1956 – Limitation Act, 1963 – Clauses (19) to (21) of Part II of the Schedule – The respondents filed a petition on 25.04.2018 u/s.7 of the IBC, as ‘Financial creditor’, claiming principal amount of Rs.2.10 crores together with interest – According to the appellant company, Rs.80,40,000/- was repaid to the respondents between 2003 to 2004 – Further, respondents requested to convert Rs.90,00,000/- from the outstanding loan as share application money for issuance of shares in the appellant company in name of respondent no. 2, which was later requested to be treated as the said share application of ‘MK’ and to treat the same as loan from respondent no. 2 – Also, during the period from 2004 to 2006, the appellant company paid Rs.43,25,000/- to the respondents and with that payment the loan liability was completely liquidated – The NCLT vide its judgment and order dated 19.12.2018 held that the respondents were not Financial creditors of the appellant company and the claim of the respondents was barred by limitation – Further, it was 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 – By the impugned judgment and order dated 02.09.2019 the Appellate Tribunal set aside the order dated 19.12.2018 of the NCLT – On appeal, held: 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 – In the instant case, the last loan was advanced in 2004-2005 – Apparently, the debt was barred by limitation even in the year 2012, when winding up proceedings of the appellant company were initiated in the Madras High Court by the respondents – The NCLT rightly refused to admit the application u/s. 7 of the IBC, holding the same barred by limitation – The Appellate Tribunal erred in law in reversing the judgment and order of the earlier Adjudicating Authority – Disputes as to whether the signatures of the respondents are forged or whether records were fabricated can be adjudicated upon evidence including forensic evidence in a regular suit and not in proceedings u/s. 7 of IBC – Even otherwise, the application u/s. 7 of the IBC was not maintainable – As 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 – The NCLT rightly held that there was not financial debt in existence – Thus, impugned judgment and order of the Appellate Tribunal is set aside and the order of the Adjudicating Authority dismissing application is restored.
Allowing the appeal, the Court
HELD: 1. 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. [Para 36][286-E]
2. 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. [Para 37][286-E-G]
3. The NCLT rightly refused to admit the application under Section 7 of the Insolvency Bankruptcy Code, 2016, 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 decision of the adjudicating authority and admitting the application. [Para 38][286G]
4. As recorded in the said order dated 19th December, 2018 passed by the NCLT Chennai, the Respondent Nos. 1 and 2 jointly addressed the letter dated 11th 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 to the Respondent was Rs.1,39,60,000/as on 31st March, 2004. The said letter has been extracted in full in Paragraph (9) of the judgment and order dated 19th December, 2018 of NCLT. [Para 39][287-A-C]
5. There are, as observed above cogent records including etters signed by the Respondent Nos. 1 and 2 which evince that on 6th 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 ‘MK’ and to issue shares for aforesaid value to ‘MK’. The amount was to be treated as a personal loan from the Respondent No.2 to ‘MK’. A personal Loan to a 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. [Para 40][287-CE]
6.1 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. [Para 42][287-G-H]
6.2 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. [Para 43][290-F]
Innoventive Industries Ltd. v. ICICI Bank and Anr. (2018) 1 SCC 407 : [2017] 8 SCR 33; B.K. Educational Services Pvt. Ltd. v. Parag Gupta and Associates (2019)
11 SCC 633 : [2018] 12 SCR 794 – relied on.
Vashdeo R. Bhojwani v. Abhyudaya Co-operative Bank Ltd. (2019) 9 SCC 158 : [2019] 12 SCR 75 – referred to.
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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