Rajendra Narottamdas Sheth vs Chandra Prakash Jain on 30 September, 2021


Try out our Premium Member services: Virtual Legal Assistant, Query Alert Service and an ad-free experience. Free for one month and pay only if you like it.

Supreme Court of India

Rajendra Narottamdas Sheth vs Chandra Prakash Jain on 30 September, 2021

Author: L. Nageswara Rao

Bench: [ B ], [ N Rao]

                                                        Reportable

         IN THE SUPREME COURT OF INDIA
          CIVIL APPELLATE JURISDICTION

              Civil Appeal No.4222 of 2020

Rajendra Narottamdas Sheth & Anr.
                                               .... Appellant(s)
                           Versus

Chandra Prakash Jain & Anr.
                                          …. Respondent(s)
                      JUDGMENT

L. NAGESWARA RAO, J.

1. Respondent No. 2 filed an application under Section 7

of the Insolvency and Bankruptcy Code, 2016 (hereinafter

referred to as the ‘Code’) which was admitted by the National

Company Law Tribunal, Ahmedabad bench (hereinafter

referred to as the ‘NCLT’ or ‘Adjudicating Authority’) on

01.06.2020. The Appellants, who are the suspended

directors of the board of R.K. Infratel Ltd. (hereinafter

referred to as the ‘Corporate Debtor’), filed an appeal which

was rejected by the National Company Law Appellate

Tribunal, Delhi (hereinafter referred to as the ‘ NCLAT’).

Therefore, this Appeal.

2. The Corporate Debtor is in the business of setting up

underground fiber network in the cities of Surat, Ahmedabad,

1 | Page
Vapi, Silvasa, Ankleswar and in South Gujarat, and providing

dedicated dark fiber, broadband, internet leased line, VPN,

point-to-point, wi-fi and wiMAX connections and CCTV

surveillance services to corporate entities, financial

institutions and other organisations. Respondent No. 2,

Union Bank of India (hereinafter referred to as the ‘ Bank’ or

‘Financial Creditor’), sanctioned a loan of Rs. 4.5 crore which

was cleared by the Corporate Debtor on 08.12.2012.

Another loan was granted by the Financial Creditor for Rs. 3.5

crore which was also repaid on 28.05.2018. Thereafter, loans

were granted by the Financial Creditor to the Corporate

Debtor but the Corporate Debtor was unable to settle the

dues of the Financial Creditor in time. On 30.09.2014, the

account of the Corporate Debtor was declared as non-

performing asset (NPA). The Financial Creditor issued notice

for recovery of all dues payable by the Corporate Debtor on

01.10.2014. Pursuant to the notice, the Financial Creditor

filed an application before the Ahmedabad bench of the Debt

Recovery Tribunal under Section 19 of the Recovery of Debts

Due to Banks and Financial Institutions Act, 1993 for recovery

of the dues, which is still pending consideration.

3. On 25.04.2019, the Financial Creditor filed an

application under Section 7 of the Code, which was admitted

2 | Page
on 01.06.2020. The Financial Creditor averred, in the

application filed under Section 7 of the Code, that the

Corporate Debtor owed an amount of Rs. 24.62 crore as on

31.03.2019. The Financial Creditor submitted documents in

support of its claim, including a debit balance confirmation

letter dated 07.04.2016 signed by the Corporate Debtor. On

the other hand, the Corporate Debtor contended that the

application was time-barred. It was further contended by the

Corporate Debtor that the application under Section 7 filed

by the Financial Creditor was legally untenable, as

proceedings before the Debt Recovery Tribunal, including a

counter claim by the Corporate Debtor, were still pending

consideration. After examining the material on record, the

Adjudicating Authority held, by an order dated 01.06.2020,

that the application under Section 7 was not barred by

limitation. The Adjudicating Authority referred to the debit

balance confirmation letter dated 07.04.2016 and regular

credit entries made after 07.04.2016 till May, 2018 to come

to the said conclusion. A letter by the Corporate Debtor

dated 17.11.2018 giving details of the amount repaid till

30.09.2018 and acknowledging the outstanding amount as

on 30.09.2018 was also referred to by the NCLT. In addition,

the reply of the Corporate Debtor was relied upon wherein

3 | Page
payment of an amount of Rs. 16.17 lakh during the financial

year 2019-20 was admitted. The Adjudicating Authority

rejected the contention of the Corporate Debtor that the

application filed by the power of attorney holder on behalf of

the Financial Creditor was not maintainable.

4. The Corporate Debtor reiterated its stand that the

application under Section 7 of the Code was barred by

limitation before the NCLAT. According to the Corporate

Debtor, the payments made by it to the Bank after its

account was declared as NPA could not extend the period of

limitation. It was further contended by the Corporate Debtor

that the “cut back offer” cannot be taken into account for

attracting Section 19 of the Limitation Act, 1963 (hereinafter

referred to as the ‘Limitation Act’). It was argued on behalf

of the Corporate Debtor that Section 18 of the Limitation Act

is also not applicable to the facts of this case. The further

argument of the Corporate Debtor was that the power of

attorney in favour of the individual who has signed the

application under Section 7 of the Code had been granted

prior to the Code coming into force without any specific

authorisation to initiate proceedings under the Code, and

therefore, the application was not maintainable.

4 | Page

5. The NCLAT examined the power of attorney given by

the Bank to Mr. Praveen Kumar Gupta and found no merit in

the argument of the Corporate Debtor that the application

under Section 7 of the Code was not maintainable as it was

filed by a power of attorney holder. In so far as limitation is

concerned, the NCLAT referred to all the documents as well

as the “cut back arrangement” relied on by the NCLT to hold

that the application under Section 7 of the Code was filed

within the prescribed time. It was further observed by the

NCLAT that the Corporate Debtor could not demonstrate any

error in the order of the Adjudicating Authority. Accordingly,

the NCLAT dismissed the appeal of the Corporate Debtor.

6. Essentially, there are two issues that arise for

consideration in this Appeal. The first pertains to the

maintainability of the application under Section 7 of the Code

filed by a power of attorney holder. The second relates to the

question of limitation.

Maintainability of the application under Section 7
when filed by a power of attorney holder

7. Mr. Rana Mukherjee, learned Senior Counsel appearing

for the Appellants, submitted that the application filed on

behalf of the Financial Creditor under Section 7 of the Code

was on the basis of a power of attorney. He relied upon a

5 | Page
judgment of the NCLAT in Palogix Infrastructure Private

Limited v. ICICI Bank Limited1 in which it was held that an

‘authorised person’, distinct from a ‘power of attorney

holder’, can file an application under Section 7 and that a

‘power of attorney holder’ is not competent to file an

application on behalf of a financial creditor. According to Mr.

Mukherjee, the defect in filing of the application by an

unauthorised person is not curable. Assuming it is curable,

the Financial Creditor failed to rectify the defect within the

time stipulated under Section 7 (5) of the Code, in spite of an

order passed by the Adjudicating Authority on 22.01.2020

granting time to the Financial Creditor. He submitted that

the person who filed the application under Section 7 of the

Code is not the authorised representative of the Financial

Creditor and therefore, the application was liable to be

dismissed.

8. On the other hand, the Financial Creditor contended

that the power of attorney was executed in favour of Mr.

Praveen Kumar Gupta, which was perused by both the

Adjudicating Authority and the NCLAT to conclude that the

application was filed by the authorised person. Mr. Alok

Kumar, the learned Counsel appearing for the Financial

Creditor, also relied upon the judgment in Palogix
1 2017 SCC Online NCLAT 266

6 | Page
Infrastructure (supra) and argued that a person authorised

by way of a power of attorney can file an application under

Section 7 of the Code.

9. Initiation of the corporate insolvency resolution process

by a financial creditor is dealt with under Section 7 of the

Code. Section 7 (2) provides that the financial creditor shall

make an application in such form and manner and

accompanied with such fee as may be prescribed. As per

Rule 4 of the Insolvency and Bankruptcy (Application to

Adjudicating Authority) Rules, 2016 (hereinafter, ‘ the 2016

Rules’), the financial creditor is required to make an

application for initiating the corporate insolvency resolution

process against the corporate debtor under Section 7 of the

Code in Form 1, accompanied with documents and records

required therein. Form 1 is in a tabular form and the financial

creditor has to give particulars of the details sought. Further,

the Form is required to be signed by the “person authorised

to act on behalf of the financial creditor”.

10. The authorisation, in terms of the power of attorney,

given by the Financial Creditor to Mr. Praveen Kumar Gupta

who has filed the application under Section 7 of the Code has

been placed on record. Pursuant to the resolution passed by

the board of directors of the Bank on 06.12.2008, the power

7 | Page
of attorney was executed by the general managers in 2011.

By way of the said power of attorney, Mr. Praveen Kumar

Gupta was appointed by the Bank to act as its constituted

attorney with respect to “all the business and affairs of the

Bank and to conduct and manage and to assist in the

conduct and management of all such businesses and affairs

of the Bank, both within and outside India and to do all acts,

deeds and things necessary or proper for carrying on the

business and affairs of the Bank”. Further, Mr. Praveen Kumar

Gupta has also been authorised to “commence, prosecute,

endorse, defend, answer and/or oppose any suit or other

legal proceedings including any civil or criminal proceedings

in any Court or Tribunals and any demand touching any

matters in which the Bank may or may hereafter be

interested or concerned and also, … compromise, refer to

arbitration, abandon, submit to judgement or become non-

suited, in any such suits or proceedings, to appoint advocate,

solicitors and pleaders as occasion shall require and to make

sign, execute, present and file all applications, plaints,

petitions, written statements, vakalatnamas or any other

papers expedient or necessary … to be made, signed,

executed, presented or filed”.

8 | Page

11. The NCLAT in its judgment in Palogix Infrastructure

(supra) held that a ‘power of attorney holder’ is not

competent to file an application under Section 7 on behalf of

the financial creditor. However, the NCLAT made certain

further observations, as reproduced below:

“41. In so far as the present case is concerned, the
‘Financial Creditor’-Bank has pleaded that by Board’s
Resolutions dated 30th May, 2002 and 30th October,
2009, the Bank authorised its officers to do needful in
the legal proceedings by and against the Bank. If
general authorisation is made by any ‘Financial
Creditor’ or ‘Operational Creditor’ or ‘Corporate
Applicant’ in favour of its officers to do needful in legal
proceedings by and against the ‘Financial Creditor’ /
’Operational Creditor’ / ‘Corporate Applicant’ in favour
of its officer, mere use of word ‘Power of Attorney’ while
delegating such power will not take away the authority
of such officer and for all purposes it is to be treated as
an ‘authorization’ by the ‘Financial Creditor’ /
‘Operational Creditor’ / ‘Corporate Applicant’ in favour
of its officer, which can be delegated even by
designation. In such case, officer delegated with power
can claim to be the ‘Authorized Representative’ for the
purpose of filing any application under section 7 or
Section 9 or Section 10 of ‘I &B Code’.”

The NCLAT was of the opinion that general authorisation

given to an officer of the financial creditor by means of a

power of attorney, would not disentitle such officer to act as

the authorised representative of the financial creditor while

filing an application under Section 7 of the Code, merely

because the authorisation was granted through a power of

9 | Page
attorney. Moreover, the NCLAT in Palogix Infrastructure

(supra) has held that if the officer was authorised to sanction

loans and had done so, the application filed under Section 7

of the Code cannot be rejected on the ground that no

separate specific authorisation letter has been issued by the

financial creditor in favour of such officer. In such cases, the

corporate debtor cannot take the plea that while the officer

has power to sanction the loan, such officer has no power to

recover the loan amount or to initiate corporate insolvency

resolution process, in spite of default in repayment. We

approve the view taken by the NCLAT in Palogix

Infrastructure (supra).

12. In the present case, Mr. Praveen Kumar Gupta has been

given general authorisation by the Bank with respect to all

the business and affairs of the Bank, including

commencement of legal proceedings before any court or

tribunal with respect to any demand and filing of all

necessary applications in this regard. Such authorisation,

having been granted by way of a power of attorney pursuant

to a resolution passed by the Bank’s board of directors on

06.12.2008, does not impair Mr. Gupta’s authority to file an

application under Section 7 of the Code. It is therefore clear

that the application has been filed by an authorised person

10 | P a g e
on behalf of the Financial Creditor and the objection of the

Appellants on the maintainability of the application on this

ground is untenable.

Limitation

13. Mr. Rana Mukherjee, learned Senior Counsel appearing

for the Appellants, contended that the date of default is

shown as 30.09.2014 in the application filed under Section 7

of the Code. He submitted that the application under Section

7 filed on 25.04.2019 was barred by limitation as it was not

filed within three years from the date of default. He further

argued that apart from the debit balance confirmation letter

dated 07.04.2016, no other document extending the period

of limitation has been filed along with the application under

Section 7 of the Code. No other information has been

provided by the Financial Creditor to show that the

application under Section 7 was filed within the period of

limitation. The balance sheet referred to by the Financial

Creditor in the application relates to the financial year 2015-

2016 which does not save the period of limitation. He

argued that the application ought to have been rejected at

the threshold in view of the absence of any pleading or proof

that the application was filed within limitation. Reliance was

placed by him on a judgment of this Court in Babulal

11 | P a g e
Vardharji Gurjar v. Veer Gurjar Aluminium Industries

Private Limited & Anr.2.

14. In response, Mr. Alok Kumar, learned Counsel appearing

for the Financial Creditor, submitted that no error was

committed by the Adjudicating Authority in admitting the

application filed under Section 7 of the Code, after perusing

the documents filed by the Financial Creditor along with the

application. It was further submitted that the material

placed on record by the Corporate Debtor before the

Adjudicating Authority clearly shows acknowledgement of the

debt till the year 2019. Therefore, the application under

Section 7 filed on 25.04.2019 cannot be said to be beyond

the period of limitation in terms of Section 18 of the

Limitation Act.

15. Section 7 (1) of the Code enables a financial creditor to

file an application for initiating corporate insolvency

resolution process against a corporate debtor before the

adjudicating authority when a default has occurred. Sub-

section (2) thereof provides that the application shall be in

the form and manner as prescribed. Sub-section (3)

obligates the financial creditor to furnish the record of default

recorded with the information utility or such other record or

evidence of default as may be specified, along with the

2 (2020) 15 SCC 1

12 | P a g e
application. On the basis of records of an information utility

or on the basis of other evidence furnished by the financial

creditor under sub-section (3), the Adjudicating Authority

within a period of 14 days shall ascertain the existence of a

default, as stipulated under sub-section (4). According to

sub-section (5), the Adjudicating Authority may admit the

application filed under sub-section (2), where the

Adjudicating Authority is satisfied that a default has occurred,

the application filed is complete and no disciplinary

proceedings are pending against the proposed resolution

professional. As per sub-section (6), the corporate

insolvency resolution process shall commence from the date

of admission of the application.

16. Rule 4 of the 2016 Rules prescribes that the application

under Section 7 of the Code shall be filed in Form 1,

accompanied by documents and records required therein and

as specified in the Insolvency and Bankruptcy Board of India

(Insolvency Resolution Process for Corporate Persons)

Regulations, 2016. Regulation 2-A of the said Regulations

permits the financial creditor to furnish, as evidence of

default, (a) certified copy of entries in the relevant account in

the bankers’ book as defined in clause (3) of section 2 of the

Bankers’ Books Evidence Act, 1891, and (b) an order of a

13 | P a g e
court or tribunal that has adjudicated upon the non-payment

of a debt, where the period of appeal against such order has

expired. Form 1 is in a printed format and in five parts,

wherein the financial creditor shall give his particulars, the

particulars of the corporate debtor, the proposed interim

resolution professional and the financial debt. The date on

which the default has occurred shall be provided by the

financial creditor as required in Part IV. In Part V of Form 1,

the financial creditor is required to furnish documents as

listed therein as well as other documents that may be

relevant to prove the existence of financial debt, the amount

and the date of default.

17. The date of default in the Babulal Vardharji Gurjar

case (supra) was 08.07.2011, being the date of the NPA. The

particulars of financial debt with documents and evidence on

record as required in Part V of the application were not

furnished by the financial creditor. As no foundation was laid

in the application suggesting any acknowledgement or any

other date of default, the financial creditor was not permitted

to make submissions at a later stage to the effect that the

application filed was with the limitation period. In the said

fact situation, this Court in Babulal Vardharji Gurjar

(supra) held that Section 18 of the Limitation Act and the

14 | P a g e
principles thereof were not applicable. In Dena Bank v. C.

Shivkumar Reddy & Anr.3, this Court had occasion to deal

with the pleadings and the documents required to be filed at

the time of making of an application under Section 7 of the

Code. It was observed therein that the financial creditor can

only fill in the particulars as mentioned in Form 1 and there is

no scope for elaborate pleadings. This Court was of the view

that an application under Section 7 cannot be compared with

a plaint in a suit. It was further held in the said judgment

that there is no bar for filing of documents as required under

Section 7, until a final order either admitting or dismissing

the application has been passed. While concluding, this

Court had opined that in case of inordinate delay, the

Adjudicating Authority, at its discretion, may allow or decline

the request of the applicant to file additional pleadings and /

or documents before passing the final order.

18. While examining the question of maintainability of an

application filed under Section 7 of the Code in the absence

of a plea regarding the acknowledgement of liability, this

Court in Asset Reconstruction Company (India) Limited

v. Bishal Jaiswal & Anr.4, gave an opportunity to the

financial creditor to amend its pleadings before the NCLAT on

3 2021 SCC Online SC 543
4 (2021) 6 SCC 366

15 | P a g e
payment of costs of Rs.1 lakh. In the said case, the

corporate debtor’s account was declared as NPA from 2010.

The NCLT admitted the application under Section 7 on the

ground that there was a continuing cause of action. The

NCLAT dismissed the appeal of the corporate debtor on the

ground that limitation would commence from the date on

which the Code came into force, i.e., 01.12.2016. This Court

remanded the matter back to the NCLAT to re-examine the

question of limitation. After remand, the NCLAT allowed the

appeal filed by the corporate debtor on the ground that the

three years’ period from the date of the corporate debtor’s

account being classified as NPA, prescribed under Section

137 of the Limitation Act, had expired on 30.12.2017. In the

appeal filed against the order passed by the NCLAT before

this Court, the financial creditor argued that there was

acknowledgement on the part of the corporate debtor. On

the other hand, the corporate debtor contended that there

was no pleading either before the NCLT or the NCLAT

regarding the acknowledgement of liability extending

limitation. An application was filed by the financial creditor

before this Court to amend the pleadings, arguing that such

amendment could be permitted by this Court. Noting that

the financial creditor had been remiss in pleading

16 | P a g e
acknowledgement of liability but given the staggering

amounts allegedly due, the financial creditor was given an

opportunity to amend its pleadings before the NCLAT in

support of its contention that there was acknowledgement of

liability, subject to payment of costs.

19. Any suit, appeal or application filed after the prescribed

period of limitation shall be dismissed in spite of limitation

not being set up as a defence, as per Section 3 of the

Limitation Act. Section 238A of the Code makes the

provisions of the Limitation Act applicable to the proceedings

before the Adjudicating Authority, as far as may be.

Therefore, the Adjudicating Authority is duty-bound to

scrutinise the application filed under Section 7 of the Code

and come to a conclusion on whether such application is

barred by limitation, even in the absence of any plea with

respect to limitation. (See: Noharlal Verma v. District

Cooperative Central Bank Limited, Jagdalpur5)

20. There can be no doubt that it is the responsibility of the

financial creditor to give all particulars relating to the debt

due and the date of default, along with the requisite

documents, at the time of filing of an application under

Section 7 of the Code. A plain reading of Section 7, Rule 4 of

the 2016 Rules and Form 1 makes it clear that the

5 (2008) 14 SCC 445

17 | P a g e
Adjudicating Authority may admit an application under

Section 7 only if he is satisfied that a default has occurred.

The definition of ‘default’ under Section 3 (12) of the Code

refers to non-payment of debts which are “due and payable”

in law, meaning thereby that an application under Section 7

of the Code is maintainable only with respect to debts that

are not time-barred. (See: B.K. Educational Services

Private Limited v. Parag Gupta and Associates 6) The

primary obligation of making out a prima facie case of

default is on the financial creditor. There is no necessity for

the corporate debtor to provide any information at the stage

of admission of the application under Section 7 of the Code,

as the burden of showing non-payment of a legally

recoverable debt, which is not time-barred, is on the financial

creditor. At the same time, it is clear from the judgments of

this Court in Asset Reconstruction (supra) and Dena

Bank (supra) that non-furnishing of information by the

financial creditor at the time of filing an application under

Section 7 of the Code need not necessarily entail in dismissal

of the application. An opportunity can be provided to the

financial creditor to provide additional information required

for satisfaction of the Adjudicating Authority with respect to

the occurrence of the default.

6 (2019) 11 SCC 633

18 | P a g e

21. In the instant case, there is no dispute that the date of

default is 30.09.2014 and the application under Section 7 of

the Code was filed on 25.04.2019. According to the Financial

Creditor, Section 18 of the Limitation Act is applicable in view

of the Corporate Debtor acknowledging its debt by way of

letters, written in and after 2018, giving details of amount

repaid, acknowledging the amount outstanding and

requesting consideration of one-time settlement proposal.

Sub-section (1) of Section 18 of the Limitation Act reads as

under:

18. Effect of acknowledgement in writing. – (1)
Where, before the expiration of the prescribed period
for a suit or application in respect of any property or
right, an acknowledgement of liability in respect of
such property or right has been made in writing signed
by the party against whom such property or right is
claimed, or by any person through whom he derives
his title or liability, a fresh period of limitation shall be
computed from the time when the acknowledgement
was so signed.

It is no more res integra that Section 18 of the

Limitation Act is applicable to applications filed under Section

7 of the Code. In case the application under Section 7 is filed

beyond the period of three years from the date of default and

the financial creditor furnishes the required information

relating to the acknowledgement of debt, in writing by the

corporate debtor, before the Adjudicating Authority, with

19 | P a g e
such acknowledgement having taken place within the initial

period of three years from the date of default, a fresh period

of limitation commences and the application can be

entertained, if filed within this extended period.

22. There is no dispute that the date of default in this case

is 30.09.2014, as mentioned by the financial creditor in its

application under Section 7. A copy of the debit balance

confirmation letter dated 07.04.2016 was filed along with the

application. As the application was filed only on 25.04.2019,

which is beyond a period of three years even after taking into

account the debit balance confirmation letter dated

07.04.2016, the application was barred by limitation.

However, the Corporate Debtor had, in its reply before the

Adjudicating Authority, placed on record a letter dated

17.11.2018, which detailed the amount repaid till 30.09.2018

and acknowledged the amount outstanding as on

30.09.2018. On the basis of this letter and the record

showing that the Corporate Debtor had executed various

documents amounting to acknowledgement of the debt even

in the financial year 2019-20, the NCLT was of the opinion

that the application was filed within the period of limitation.

The said view was upheld by the NCLAT.

20 | P a g e

23. We have already held that the burden of prima facie

proving occurrence of the default and that the application

filed under Section 7 of the Code is within the period of

limitation, is entirely on the financial creditor. While the

decision to admit an application under Section 7 is typically

made on the basis of material furnished by the financial

creditor, the Adjudicating Authority is not barred from

examining the material that is placed on record by the

corporate debtor to determine that such application is not

beyond the period of limitation. Undoubtedly, there is

sufficient material in the present case to justify enlargement

of the extension period in accordance with Section 18 of the

Limitation Act and such material has also been considered by

the Adjudicating Authority before admitting the application

under Section 7 of the Code. The plea of Section 18 of the

Limitation Act not having been raised by the Financial

Creditor in the application filed under Section 7 cannot come

to the rescue of the Appellants in the facts of this case. It is

clarified that the onus on the financial creditor, at the time of

filing an application under Section 7, to prima facie

demonstrate default with respect to a debt, which is not

time-barred, is not sought to be diluted herein. In the present

case, if the documents constituting acknowledgement of the

21 | P a g e
debt beyond April, 2016 had not been brought on record by

the Corporate Debtor, the application would have been fit for

dismissal on the ground of lack of any plea by the Financial

Creditor before the Adjudicating Authority with respect to

extension of the limitation period and application of Section

18 of the Limitation Act.

24. In view of the aforesaid, the Appeal is dismissed.

…………………………………..J.

[L. NAGESWARA RAO]

…………………………………..J.

[ B. R. GAVAI ]

…………………………………..J.

[ B. V. NAGARATHNA ]

New Delhi,
September 30, 2021

22 | P a g e



Source link