Bank's Internal Classification Of Debt As NPA Won't Determine Limitation Under IBC: Supreme Court

The Supreme Court on Thursday clarified that a bank's internal classification of a loan as a non-performing asset for accounting or provisioning purposes does not by itself determine the commencement of limitation under the Insolvency and Bankruptcy Code, especially where the debt has subsequently been restructured and acknowledged through fresh agreements.The Court observed that the manner in which a bank reflects a debt in its balance sheet is not decisive for computing limitation. Where restructuring takes place and fresh working capital consortium agreements are executed acknowledging subsisting liabilities, such agreements effectively give the debt a “fresh lease of life”. In such circumstances, the later NPA dates arising from restructuring become relevant for calculating limitation.A 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 corporate insolvency resolution process was triggered on a Section 7 application filed by SBI along with Punjab National Bank, Corporation Bank and UCO Bank, alleging defaults exceeding Rs 280 crore. The National Company Law Tribunal, Bengaluru admitted the plea on December 14, 2018.The suspended Managing Director challenged the admission order on the ground of limitation, contending that the account had been declared NPA in January 2010 and that the insolvency application filed in April 2018 was beyond the three-year limitation period.Following multiple rounds of litigation, including a remand by the Supreme Court and amendments to the pleadings, the National Company Law Appellate Tribunal held that the application was within limitation in view of subsequent acknowledgments of debt.Before the Supreme Court, the appellant argued that the Section 7 application was defective as it mentioned only the NPA dates and not the actual date of default as required under the prescribed form. It was further contended that the balance sheets relied upon by the banks could not extend limitation because they were not duly authenticated or approved by shareholders.The banks submitted that the loan accounts were restructured between 2010 and 2014, fresh consortium agreements were executed acknowledging the outstanding liabilities, and the company's balance sheets for financial years 2013–14 and 2014–15, signed on September 30, 2015, constituted acknowledgment under Section 18 of the Limitation Act, thereby extending the limitation period.Rejecting the challenge, the Court held that the amended Section 7 application, filed pursuant to its earlier directions, contained all material particulars required under the statute.The Bench noted that the restructuring exercise involved execution of fresh agreements acknowledging existing dues, and that these acknowledgments revived the enforceability of the debt for limitation purposes. Disclosure of subsequent NPA dates, along with written acknowledgment in the balance sheets, sufficiently demonstrated that the claim was within limitation when the application was filed on April 25, 2018.On the evidentiary value of balance sheets, the Court reiterated that a written acknowledgment of liability signed by the party against whom the right is claimed attracts Section 18 of the Limitation Act and gives rise to a fresh period of limitation. It held that a director acts as an agent of the company for the purposes of Section 18, and therefore a balance sheet signed by a director can amount to a valid acknowledgment.Since the balance sheets were signed by a director and were relied upon by the company itself in proceedings before the Debt Recovery Tribunal, they were sufficient to extend limitation.The Court also reaffirmed that once the Adjudicating Authority is satisfied that a financial debt exists and that default above the statutory threshold has occurred, there is little discretion to refuse admission of a Section 7 application under the IBC.Accordingly, the appeal was dismissed and the insolvency proceedings against Metal Closure Pvt Ltd were upheld as being within limitation.Counsel for the appellant was Advocate Pranjal Kishore. The respondent banks were represented by Advocates Sanjay Kapur and Mukund P. Unny.Case Title : B Prashanth Hegde v. State Bank of India and Anr Case Number : Civil Appeal No. 477 of 2022 CITATION : 2026 LiveLaw (SC) 156Click here to read the judgment

Bank's Internal Classification Of Debt As NPA Won't Determine Limitation Under IBC: Supreme Court

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Bank's Internal Classification Of Debt As NPA Won't Determine Limitation Under IBC: Supreme Court

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