Bank's Classification Of Debt As NPA For Balance Sheet Purposes Not Decisive For Limitation Under IBC: Supreme Court

The Supreme Court on Thursday observed that the manner in which a bank classifies a loan as a non-performing asset for accounting or provisioning purposes does not determine the starting point of limitation under the Insolvency and Bankruptcy Code, particularly where the debt has been restructured and acknowledged in fresh agreements.

“In our view, how a bank classifies its debt for managing its balance sheet is not a factor determining the starting point of limitation more so, when the debt is restructured and is acknowledged in fresh working capital consortium agreements entered for availing credit facilities. What is relevant is that by virtue of execution of these working capital consortium agreements the banks got a fresh lease of life for their dues and based on those agreements, new NPA date(s) became relevant as starting point for computing limitations,” the top court observed.

A Division Bench of Justice P.S. Narasimha and Justice Manoj Misra dismissed an appeal filed by the suspended Managing Director of Metal Closure Pvt Ltd and upheld the maintainability of insolvency proceedings initiated by a consortium of banks led by State Bank of India.

The case arose out of a CIRP plea filed by SBI along with Punjab National Bank, Corporation Bank and UCO Bank against Metal Closure Pvt Ltd, alleging defaults exceeding Rs 280 crore.

The National Company Law Tribunal, Bangalore admitted the application on December 14, 2018. The suspended Managing Director challenged the admission order, contending that the application was barred by limitation on the ground that the account had been declared NPA in January 2010 and that the insolvency plea filed in April 2018 was therefore beyond three years.

After multiple rounds of litigation, including remand by the Supreme Court and amendment of pleadings, the National Company Law Appellate Tribunal ultimately held that the insolvency application was within limitation in view of subsequent acknowledgments of debt.

Before the Supreme Court, the suspended director argued that the Section 7 application was defective because it mentioned only the NPA dates and did not specify the actual date of default as required under the prescribed form. It was also contended that the balance sheets relied upon by the banks could not extend limitation as they were not duly authenticated or approved by shareholders.

The banks submitted that the loan accounts had been restructured between 2010 and 2014, that fresh working capital consortium agreements had been executed acknowledging subsisting liabilities, and that the company's balance sheets for the financial years 2013–14 and 2014–15, signed on September 30, 2015, constituted acknowledgment under Section 18 of the Limitation Act, thereby extending limitation.

Rejecting the director's plea, the court held that the amended Section 7 application, which had been taken on record pursuant to its earlier directions, disclosed all material particulars necessary to satisfy the provision.

The bench noted that during the restructuring exercise, the parties executed working capital consortium agreements acknowledging existing dues, and that such acknowledgments gave the debt a “fresh lease of life.”

In that context, the Court held that disclosure of later NPA dates, coupled with acknowledgment in the balance sheets, sufficiently demonstrated that the claim was not time barred when the application was filed on April 25, 2018.

On the effect of balance sheets, the court reiterated that an acknowledgment of liability in writing, if signed by the party against whom the right is claimed, attracts Section 18 of the Limitation Act and results in a fresh period of limitation.

“A director of a company can be considered its agent for the purposes of Section 18 of 1963 Act,” the Bench held.

Since the balance sheets were signed by a director and were relied upon by the company itself in proceedings before the Debt Recovery Tribunal, the court held that they were sufficient to constitute acknowledgment within the meaning of Section 18.

The court also reiterated that once the Adjudicating Authority is satisfied that a financial debt exists and that a default above the statutory threshold has occurred, there is “hardly any discretion left” to deny admission of an application under Section 7 of the IBC. Dismissing the appeal, the bench upheld the insolvency proceedings against Metal Closure Pvt. Ltd. as being within limitation.

For Appellants:Advocate Pranjal Kishore

For Respondents: Advocates Sanjay Kapur and Mukund P Unny