Date Of Default Pleaded U/S 7 Of IBC Cannot Be Changed Automatically On Basis Of Arbitral Award Passed After Filing Application: NCLAT
The National Company Law Appellate Tribunal (NCLAT) New Delhi bench of Justice Ashok Bhushan (Judicial Member), Mr. Arun Baroka (Technical Member) and Mr. Barun Mitra (Technical Member) has held that the date of default mentioned in Part IV of the application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (Code) cannot be changed merely on the basis that an arbitral award...
The National Company Law Appellate Tribunal (NCLAT) New Delhi bench of Justice Ashok Bhushan (Judicial Member), Mr. Arun Baroka (Technical Member) and Mr. Barun Mitra (Technical Member) has held that the date of default mentioned in Part IV of the application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (Code) cannot be changed merely on the basis that an arbitral award was passed subsequent to the filing of the application.
It further held that while the arbitral award can serve as the basis for extending the period of limitation for filing a fresh insolvency application, it cannot be automatically considered without being specifically pleaded in Part IV of the application as the new date of default.
Brief Facts:
Excel Arcade Pvt. Ltd. (Corporate Debtor) had availed a credit facility from the Punjab & Maharashtra Cooperative Bank which later merged with the Unity Small Finance Bank Ltd. (“USFB/Respondent No. 1). Since the Corporate Debtor had allegedly defaulted in discharging their debt obligations, the Corporate Debtor was declared NPA on 12.02.2019.
The Respondent No.1 issued notices on 07.10.2019, 24.06.2020 and 28.01.2021 demanding repayment of the loan amount from the Corporate Debtor as well as its guarantors. The Respondent No.1 also initiated arbitration proceedings which got concluded by the Arbitrator by passing an award on 28.04.2022 in favour of the Respondent No.1 for an amount of Rs 106 Cr. with interest.
The Respondent No.1 also separately filed a Section 7 application against the Corporate Debtor on 10.11.2023 for an amount of Rs 149 Cr. on which the Adjudicating Authority on 21.11.2023 ordered the issue of notice to the Corporate Debtor.
The Corporate Debtor submitted written submissions before the Adjudicating Authority, raising objections on the maintainability of the Section 7 petition on the grounds of limitation. The Adjudicating Authority, after determining that a fresh limitation period began from the date of the arbitral award, found the Section 7 application to be within the prescribed limitation period.
After satisfying with the timeliness of the Section 7 petition, the Adjudicating Authority proceeded to assess the matter on its merits and held that there was a debt due and payable, and since the default exceeded the threshold limit, it admitted the Section 7 application.
Contentions:
The Appellant submitted that the date of default pleaded by Respondent No.1 was 12.11.2018, as reflected in Part-IV of Form-1 filed by the Respondent. Taking into account the excluded period under the judgment of the Supreme Court in Suo Moto Writ Petition (C) No. 03 of 2020, the limitation period expired on 28.10.2023. Therefore, the Section 7 application, filed on 08.11.2023, was barred by the law of limitation.
It was further contended that limitation cannot be extended merely by mentioning arbitration proceedings, especially when the arbitral award was not set out as the basis of default in Part-IV. Since the arbitral award was not mentioned as the reason for default, it did not automatically extend the limitation period.
Per contra, the Respondent submitted that since an arbitral award was passed on 28.04.2022, this created a fresh acknowledgment which in turn reset the period of limitation. A decree in recovery proceedings gives rise to a new limitation period for initiating CIRP if the decree remains unsatisfied.
Lastly, it was submitted that arbitral award not only finds mention in para(g) and (h) of the Part-IV but the arbitral award was also a part of record before the Adjudicating Authority. Hence the Adjudicating Authority did not commit any mistake in holding that the period of limitation stood extended from the date of the arbitral award.
Observations:
The Tribunal at the outset noted that a plain reading of Part-IV of the Section 7 application shows that the Corporate Debtor's default date, as claimed by Respondent No.1, is 12.11.2018. While Part-IV mentions the arbitral award of 28.04.2022 in paras (g) and (h), it does not state the arbitral award as the new date of default. Additionally, it notes that execution proceedings related to the arbitral award are pending before the Hon'ble Bombay High Court.
It further added that the impugned order shows that the date of default was 12.11.2018 and the date of NPA was 12.02.2019. The order also notes that arbitration proceedings were initiated against the Corporate Debtor, and an arbitral award was passed in favor of Respondent No.1 on 28.04.2022.
The Tribunal further opined that while the Adjudicating Authority maintained the date of default as 12.11.2018, it used the Suo Moto matter decision and the arbitral award to calculate the limitation period, concluding that the Section 7 application was within limitation.
Based on the above, it noted that thus, the Adjudicating Authority held that the arbitral award created a fresh cause of action and a new limitation period, even though the date of default remained 12.11.2018, as declared in Part-IV of the Section 7 application.
The Supreme Court in Dena Bank vs. C. Shivakumar Reddy & Anr. 2021 held that a judgment or decree for money in favor of the Financial Creditor, passed by the DRT or any other tribunal or court, or the issuance of a Certificate of Recovery in favor of the Financial Creditor, would trigger a fresh cause of action for the Financial Creditor.
The Apex Court also held that this would allow the initiation of proceedings under Section 7 of the IBC for the commencement of CIRP, within three years from the date of the judgment or decree, or from the date of issuance of the Certificate of Recovery, if any part of the dues under the judgment, decree, or Certificate of Recovery remains unpaid.
Similarly, the Supreme Court in Vidyasagar Prasad Vs. UCO Bank & Anr. held that even if the balance sheet is not reflected in Form 1 but once the balance sheet is brought on record before the Adjudicating Authority, the balance sheets are required to be taken into consideration while deciding the question of limitation.
The Tribunal noted that the Supreme Court in Asset Reconstruction Company (India) Ltd. Vs Bishal Jaiswal (2021) did not allow the date of default to be amended merely based on oral arguments. For extending the period of limitation, the parties involved were directed to amend their pleadings accordingly. Once a Section 7 application is filed, the date of default in Part-IV becomes binding.
Based on the above, the Tribunal held that in this case, Respondent No.1 failed to amend the Section 7 petition to change the date of default. Without a formal pleading, the Adjudicating Authority wrongly considered the arbitral award of 28.04.2022 as resetting the limitation period. Therefore, it was held that the Adjudicating Authority erred in extending the limitation period based on the arbitral award.
Accordingly, the present appeal was allowed and the impugned order was set aside.
Case Title: Deepak Mahadev Shirke Versus Unity Small Finance Bank Limited and Anr.
Case Number: Company Appeal (AT) (Insolvency) No. 490 of 2025
Judgment Date: 16/04/2025
For Appellant : Mr. Abhijeet Sinha, Sr. Advocate with Ms. Neha Nagpal, Mr. Malak Bhatt, Ms. Disha Shah and Mr. Kailash Ram, Advocates.
For Respondent : Ms. Varsha Banerjee, Mr. Aishwarya Nabh, Advocates for R-1.