Kotak Mahindra Bank wins at SC

M Ramesh | Updated on: Aug 15, 2022

The Apex court brought in Section 25(3) of the Contract Act that says a contract without consideration is void, but also gives exceptions to the rule, one of which is a promise to pay a debt

Justice Indira Banerjee of the Supreme Court has set aside an order of the National Company Law Appellate Tribunal, New Delhi, which had closed ‘corporate insolvency resolution process (CIRP)’ against Kew Precision Parts , because the financial creditor, Kotak Mahindra Bank, had initiated CIRP after deadline prescribed by the Limitations Act.

Under the Insolvency and Bankruptcy Code, a financial creditor can initiate CIRP within three years from the date of default. In this case, Kew Precision defaulted on dues of ₹46 crore; the default date was September 30, 2015.

Justice Banerjee’s judgment in this case is like a tutorial in IBC, Contract Act and Limitation Act. Some of the points that emerge from the verdict are:

1) The right to sue for insolvency begins on the date the financial creditor declares the loan to be NPA. The 3-year period within which CIRP should commence begins on that date.

2) However, if the corporate debtor acknowledges the debt in writing, then the 3-year period begins on the date of that acknowledgement. It doesn’t matter if the written acknowledgement is undated, but then the other party must establish that the acknowledgement was written on that date. It also doesn’t matter if the acknowledgement is accompanied by a statement of refusal to pay. The acknowledgment in writing extends the period of limitation. However, the acknowledgment should lie within the 3-year period from the date the loan was declared NPA.

Using law of limitations In this case, Kew Precision Parts entered into a settlement with Kotak Mahindra Bank on December 20, 2018 (it still did not pay). The date of the settlement was after the 3-year-period ended, which was on September 20, 2018. With this in view, NCLAT allowed an appeal by Kew Precision that CIRP could not be initiated against it by the bank, because of the law of limitations.

However, the Supreme Court brought in another angle—Section 25(3) of the Contract Act. Section 25 basically says that a contract without consideration is void, but also gives exceptions to the rule, one of which is a promise to pay a debt. In this case, such a promise to pay a debt occurred on December 20, 2018, when Kew Precision and Kotak Bank entered into an agreement.

Justice Banerjee says: “The Appellate Tribunal (NCLAT) also did not notice the terms of settlement stated to have been executed on 20th December 2018, possibly because the attention of the NCLAT was not drawn to any terms of the settlement. The Appellate Tribunal (NCLAT) did not, therefore, have the occasion to consider whether Section 25(3) of the Contract Act would be attracted. The Appellate Tribunal (NCLAT), as observed above, proceeded on the basis that the CIRP proceedings were barred by limitation in the absence of any acknowledgement of debt within the period of limitation, and closed the CIRP proceedings.

Published on August 15, 2022
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