Mr. S. Arun, Suspended Director Of M/s. Sargam Metals Pvt. Ltd vs Mr. Neeraj Agarwal, (Proprietor Of Ambal Agencies) And Mr. K J Vinodh, Interim Resolution Professional Of M/s. Sargam Metals Pvt. Ltd.

(Hybrid Mode)

[ORAL JUDGMENT: Justice Sharad Kumar Sharma, Member (Judicial)]

In the instant Appeal, the Appellant, the suspended director of the Corporate Debtor M/s. Sargam Metals Pvt. Ltd., puts a challenge to the impugned order of 28.11.2024 that was passed by the Ld. NCLT Chennai Bench in CP(IB) No. 211/CHE/2022. The consequential effect of the impugned order, had been that the application preferred by the Respondent under Section 9 of the I & B Code, 2016, has been allowed and the Corporate Debtor (CD) has been put under Corporate Insolvency Resolution Process (CIRP).

Ld. Senior Counsel for the Appellant has submitted that, the manner in which the Ld. Tribunal has proceeded to decide the controversy qua the admission of an application under Section 9 of the Code, is absolutely preposterous and contrary to the documents on record and is based on wrongful appreciation of the evidence. He has contended that Ld. NCLT has incorrectly held that the proceedings initiated under Section 9 of the Code, at the behest of the Respondents was not barred by limitation and that, the corporate debtor had acknowledgement of liability by issuing the cheques later on and that, because these two issues have not been appropriately dealt with by the Ld. Tribunal, the impugned order stands vitiated and it deserves to be set aside by this Appellate Tribunal.

The facts which should be borne out from the record are the Corporate Debtor (CD), i.e., M/s. Sargam Metals Private Limited stood incorporated in accordance with the provisions of the Companies Act as back as on 25.05.1970 and it is engaged in the business of manufacturing of electrical and electronics unitized systems, semi-unitized systems and aluminium composite panel claddings. The operational creditor (OC), the respondent-1 herein, is engaged in supply of aluminium ingots, sheets, coils, and scrap and during the course of the said business, had supplied the above items to the Corporate Debtor and had raised certain invoices with the Corporate Debtor . The Corporate Debtor, in turn had made a part payment as against the said invoices, and an amount of Rs. 265 lakhs remained unpaid and outstanding thereafter, despite of repeated demands raised by the Respondent.

In these circumstances, the parties admittedly entered into a memorandum of understanding (MoU) on 21.07.2018, whereby the outstanding amount of Rs. 265 lakhs was converted into a fresh loan due and payable from the said date, to be repaid in instalments of at least Rs. 25 lakh every quarter starting from 01.07.2018. subsequent to the signing of MoU, the corporate debtor repaid a part amount of Rs. 46.95 lakh only as per the MoU and for the balance amount of Rs. 218.05 lakh, issued 5 (five) post-dated cheques on 16.06.2021 which on presentation got dishonoured with the remarks ‘account closed’. Subsequently, the OC issued the demand notice under Section 8 of the Code, on 22.06.2022 and thereafter, filed the application under Section 9 of the Code on 05.09.2022 as against the CD. The said application was admitted by Ld. NCLT, Chennai-II by virtue of the order dated 28.11.2024 which is impugned in the instant appeal by the Appellant.

It is argued by the Ld. Senior Counsel for the Appellant that the proceedings would be barred by limitation because the date of default as per MoU is 01.07.2018 as per the particulars given in part -IV of the application filed under section 9 of the Code . He states that the section 9 application should have been filed within 3 years of the said date, that is, on or before 30.06.2021 as per the Limitation Act, which got extended to 29.05.2022 on account of the exclusion granted by Hon’ble Supreme Court vide its judgement in Suo Motu WP(C) No. 03/2020. However, the section 9 application was filed on 05.09.2022 and hence it is hopelessly barred by limitation. He states that Ld. NCLT has erroneously permitted the respondent to change the date of default to 16.06.2021 by filing of a rejoinder in contravention of the ratio laid down by Hon’ble Supreme Court in the matter of Ramesh Kymal v. Siemens Gamesa Renewable Power Private Limited. He has further stated that Ld. NCLT has also erroneously determined that the limitation period got extended because of the issue of 5 cheques of Rs. 50 lakh each on 16.06.2021 by the CD which constituted as an acknowledgement of the debt on part of the CD. He has further argued that the respondent OC did not mention the Suo motu judgement in his pleadings before Ld. NCLT and hence he is not entitled to get the benefit of the said judgement.

The Appellant has also submitted that the Respondent has suppressed the fact of having filed a section 7 application on the same alleged default which got dismissed on 14.09.2021 by Ld. NCLT on the grounds that the debt arising out of the MoU is not a financial debt and that having failed in the attempt to initiate CIRP under section 7 of the Code which he has not appealed against, the Respondent OC ought not to have been permitted to initiate CIRP against the CD under section 9 of the Code and hence the impugned order should be set aside.

In the proceedings of the instant company appeal, it has come on record that the parties have entered into a Memorandum of Understanding as it was entered between the parties on21.07.2018. The execution of the Memorandum of Understanding and the Appellants being the signatories to it is a fact which is not denied by the Counsels.

In accordance with the Memorandum of Understanding it has come on record that as a consequence of the business dealing between the Appellant and the Respondent, as on 01.12.2017, there was a balance amount which was shown to be due as 2,67,49,055/- towards the principal due which was payable by the Appellant, owing to the businesses and qua the invoices which was issued in relation thereto and that, owing to the inability of the Appellant to pay the same on account of bad market conditions, the parties had jointly agreed that the said amount will be converted into a fresh loan, that the Appellant will pay Rs. 2,67,49,055/- vide Pay Order No. 007933 dated 19.07.2018 drawn on Axis Bank as the initial payment and that the remaining amount of Rs. 265 lakh will be paid by him to the Respondent in instalments of a minimum of Rs. 25 Lakhs every quarter starting from 01.07.2018. The relevant Clause 5 of the Memorandum of Understanding dated 21.07.2018 is extracted hereunder: -

That the party of the SECOND PART has this day issued a Pay Order No. 007933 dated 19.07.2018 for Rs.

2,49,055/- drawn on Axis Bank as initial payment to the party of the FIRST PART, which payment the party of the FIRST PART hereby Acknowledge receipt of."

… … …

… … …

That the party of the SECOND PART shall pay to the party of the FIRST PART a minimum of Rs. 25 Lakhs every quarter, starting from 1.7.2018."

Despite the said MoU, it is apparent that the Appellant defaulted in repaying the amount in terms of the Memorandum of Understanding, and due to the continuance of default, the Respondent issued a notice on 22.06.2022 under Section 8 of the Code, asking the Appellant to pay the unpaid the principal amount Rs. 2,18,05,000/- along with Rs. 1,87,81,876/- as interest calculated at the rate of 18%. Finding no response to the said demand notice, the Respondent initiated the proceeding under Section 9 of the Code by filing the application in the shape of Form 5 as contemplated under Rule 6, of Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. In part-IV of the said application, the Appellant had mentioned the total amount due to be paid as Rs. 4,05,86,876/- (=2,18,05,000 + 1,87,81,876) and had specifically mentioned the date of default to be 01.07.2018.

What is important is that, to substantiate the transactions, establishing the fact that the Respondent / Operational Creditor has provided the goods to the Corporate Debtor as against the invoices, the Respondent had placed on record the ledger statement of the Corporate Debtor as reflected in the books of account of the Operational Creditor reflecting the outstanding amount. Further, in the said application preferred under Section 9 of the Code, it had pleaded the fact about the dishonouring of Cheques by filing copies of the cheques and the copy of the return memo by the bank. From the above, Ld. NCLT inferred that the fact of the debt being due and in default is established, that the debt is more than Rs. 1 crore and that the issue of cheques on 16.06.2021 constituted acknowledgement of the said debt which extended the limitation period from 01.07.2018 to 16.06.2021 and accordingly, admitted the said application filed under Section 9 of the Code by the Respondent and ordered commencement of CIRP as against the CD.

Ld. Senior Counsel for the Appellant has argued that in accordance with the Memorandum of Understanding and the recording in part IV of the application under Section 9 of the Code the date of default is 01.07.2018, and therefore, the said application under Section 9 of the Code should have been preferred on or before 30.06.2021, that because of the ratio of Suo motu judgement the limitation period will get extended to 29.05.2022 only, but the application was filed on 05.09.2022 and hence it would be barred by limitation. In response to it, the Ld. Counsel for the Respondent has submitted that this plea of limitation as raised by the Appellant would not be available to be argued for the reason being that even if the date of default is taken as to be 01.07.2018, the issuance of five cheques on 16.06.2021 in itself will amount to be an acknowledgement of debt and the 3-year limitation period will have to be construed to commence from 16.06.2021 and as the application was filed on 05.09.2022, it will not be barred by limitation.

The Ld. Senior Counsel for the Appellant has argued to the contrary, contending that the dishonour of cheque and initiation of proceedings under Section 138 of Negotiable Instrument Act will have no bearing on the aspect of limitation, contending thereof that the date of issue of the cheques, i.e., 16.06.2021 cannot be determined as to be an acknowledgement of default for the purposes of computing the limitation for the reason being that the cheques that were issued were not in relation to the debt due to be paid as claimed by the Respondent and that the cheques which were dishonoured had been issued for purposes other than for the payment of the amount due to be paid on account of the business transactions, which was being pleaded in the application filed under Section 9 of the Code. The Ld. Counsel of the Respondent has countered the same by submitting that apart from the supply of goods which has been recorded in the invoices already placed on record, the Respondent didn't have any other transaction or business dealing or any other financial relationship with the Appellant which could have necessitated the Appellant to issue cheques. She has further submitted that issuance of a cheque by the Appellant was exclusively for the payment of the amount due to be paid as settled by virtue of the Memorandum of Understanding dated 21.07.2018 and that, the stand taken by the Appellant now that the cheque was not issued in relation to the business transaction which was subject matter of proceedings under Section 9 is neither a case developed before the Ld. NCLT nor even in the present Memorandum of Appeal raising any plea to the effect that the cheques issued were not in relation to the defaulted amount, which was due to be paid. In that eventuality, the issuance of a cheque on 16.06.2021 itself would be an acknowledgement and filing of proceedings under Section 9 of the Code on 05.09.2022 would be within the period of limitation as prescribed under law, and the bar of limitation will not come into play. She has further submitted that after 01.07.2018, the CD kept paying the instalments till 30.07.2019, sent e-mails asking for time to pay the balance and finally issued five cheques on 16.06.2021 and therefore, the date of bouncing of such cheques will represent the actual date of default which is correctly recorded by Ld. NCLT in the impugned order.

After considering the respective arguments of the Ld. Counsel for the Parties on the aspect of limitation, the MoU and the conditions therein, the email communications thereafter, the copies of cheques which bounced on presentation to the bank and the return memo sent by the bank to the Respondent, it is clear that payments continued subsequent to 01.07.2018 and the default actually occurred when the cheques issued by the CD were dishonoured and that issuance of cheques on 16.06.2021 represent acknowledgement of the debt. In that eventuality, the application filed under Section 9 of the Code on 05.09.2022 will be well within the prescribed period of limitation as contemplated under Article 137 of the Limitation Act.

The entire contention of the Appellant is based on the premises that the date of default is 01.07.2018 as per the MoU and as per the recording of the said date in part IV of Section 9 application and that the filing of the section 9 application on 05.09.2022 will be falling outside the 3-year limitation period starting from 01.07.2018 and will therefore be barred by limitation. However, the issuance of a cheque and the fact of email communications itself, as admitted by the Appellant and also the fact of part-payment of the dues on 30.07.2019 will constitute as an acknowledgement of debt and will shift the start date of limitation.

Further, the admitted position that emerges is that the Respondent did supply the material to the Appellants and the quantity and the quality of the material being supplied is not in dispute and that CD couldn't remit the amount owing to the bad market conditions and due to a shortfall in the receivables. This stand taken by the Appellant themselves will amount to be an admission acknowledging the liability in order to pay the outstanding amount as referred to in the application under Section 9 of the Code. Therefore, we are of a considered view that the debt due and in default has been admitted and acknowledged by the CD from time to time from 01.07.2018 till 16.06.2021, when the cheques given by him to the Respondent bounced.

Now coming to the question of whether Ld. NCLT should have permitted the Respondent to change the date of default in his pleading, Ld. Counsel for the Respondent has submitted that the date of default as recorded in the section 9 application can be corrected during rejoinder argument in the light of the provisions contained under Section 9 (5) proviso, which has made the provision as to be directory in nature and not mandatory and that it is the duty of the Tribunal to provide an opportunity to cure the aforesaid defect rather than dismissing the application as time-barred.

For the aforesaid purpose, she has referred to the judgment reported in 2017, Volume 16, SCC, page 143, Surendra Trading Company vs Juggilal Kamlapat Jute Mills Company. The relevant portions being Para 22-24 are extracted hereunder: -

The Respondent has taken a specific stand that the inadvertent error in recording the date of default as mentioned in the demand notice or the section 9 application can be permitted to be corrected in light of the judgment reported in Company Appeal (AT) (CH) (Ins) No. 325/2023 in M/s Raj Television Network Limited versus M/s. Thaicom Public Company Limited, Rajendra Bhai Panchal v. Jay Manak Steels 2020 SCC OnLine NCLAT 730 and Silvassa Cement v. Noor India Buildcon CA(Ins) 675/2020 (NCLAT) where it has been observed that an inadvertent error in the date of default in the demand notice and Section 9 application can be permitted to be corrected , mistakes in the demand notice is not fatal unless it causes an extreme prejudice to the Corporate Debtor and that dismissal of section 9 application for a technical Form 5 defect is not warranted and incompleteness should not be equated with non-maintainability and that the correction of the error should be permitted when it projects the correct position of law. Based on the above, she has argued that the change of date of default is permissible under the circumstances of the instant case and the date of default has to be construed from the date of the acknowledgement, which in the instant case happens to be 16.06.2021.

Countering the same, The Ld. Senior Counsel for the Appellant has made reference to the judgment. as reported in 2021, Volume 3, SCC page 224, Ramesh Kymal vs M/S. Siemens Gamesa Renewable Power pvt ltd. And particularly, he has referred to Para 11 of the said judgment. The same is extracted hereunder: -

Under Section 9(1), the operational creditor may file an application before the adjudicating authority for initiating the corporate insolvency resolution process (“CIRP”), after the expiry of a period of ten days from the date of delivery of the notice (or invoice demanding payment) under sub-section (1) of Section 8, if the operational creditor does not receive payment from the corporate debtor or a notice of the dispute under sub-section (2) of Section 8. The appellant having specified 30-4-2020 as the date of default, this appeal must proceed on that basis. It is necessary to make this clear at the outset because an attempt has been made during the course of the submissions by Mr Neeraj Kishan Kaul, learned Senior Counsel appearing on behalf of the appellant, to submit that though the demand notice mentions the date of default as 30-4-2020, the “actual first date of default” was 21-1-2020 when the letter of resignation was tendered and that the “second date of default” was 23-3-2020 when the sixty days' notice period from the letter of resignation submitted by the appellant concluded. This attempt to set back the date of default to either 21-1-2020 or 23-3-2020 is plainly untenable for the reason that it is contrary to the disclosure made by the appellant in the demand notice which has been issued in pursuance of the provisions of Section 8(1) and Section 9 of the IBC. The demand notice triggers further actions which are adopted towards the initiation of the insolvency resolution process.

But having undergone the facts and circumstances of the said case, we are of the view that in the aforesaid case Hon’ble Apex Court was considering the aspect pertaining to the alleged attempt of the operational creditor Mr. Ramesh Kymal to escape the provision of Section 10A by redating the date of default to get his section 9 application admitted and it was under those circumstances Hon’ble Apex Court had observed that the date of default, as mentioned in the demand notice, cannot be shifted in order to escape the statutory bar of Section 10A. Since the circumstances of the said case being entirely distinct to the one at hand, this ratio will not be applicable to the instant case.

The Ld. Senior Counsel for the Appellant has referred to yet another judgment of Deepak Mahadev Shirke vs Unity Small Finance Bank Limited, as reported in 2025, SCC Online and NCLAT, page 677. Para 22 is extracted hereunder: -

From a reading of the above-quoted paragraphs of the Bishal Jaiswal judgment supra, it is clear that the Hon'ble Supreme Court did not allow the date of default to be amended merely on the basis of oral arguments. For extending the period of limitation, the concerned parties were directed by the Hon'ble Apex Court to necessarily amend their pleadings. Once the Section 7 application is filed, the date of default in Part-IV becomes binding. We however notice that in the instant case, the Respondent No. 1 failed to bring about change in the date of default through a formal amendment in the Section 7 petition. The date of default has been held to be the date of arbitral award by the Adjudicating Authority without the Respondent No. 1 having made a formal pleading to that effect. The Respondent No. 1 not having amended their petition or made pleadings to the effect that the date of default had changed, the Adjudicating Authority could not have held that the arbitral award of 28.04.2022 had reset the limitation period. In the given facts and circumstances, we are therefore inclined to agree with the Appellant that the Adjudicating Authority has erred in extending the period of limitation basis the arbitral award."

If para 22 of the above judgement is taken into consideration, it was an issue pertaining to seeking an amendment in the date of default. The instant case is not a case where the amendment was sought in the date of default as given in the demand notice, but rather a case where the aspect of default was being considered under the facts of the surrounding circumstances and other documents on record, particularly when the other documents utilized for determining the date of default were the documents admitted by the Appellant. Further, the ratio propounded therein was confined with regards to seeking an amendment in the date of default as given in an application filed under Section 7. Factually, the said issue happens to be entirely different to the one involved consideration in the instant company appeal, and hence the same would not be applicable.

Further, Ld. Counsel for the Respondent has made reference to the judgment of Hon'ble NCLAT in the case of Rajendrakumar Kundanmal Jain vs. Vijal A. Jain and Others (2021 SCC Online NCLAT 175) to support her contention that issue of a cheque, even if it is later dishonoured, qualifies as a clear acknowledgment of the debt and serves as a valid starting point for computing the limitation period under section 18 of the Limitation Act. The relevant para is extracted hereunder: -

We have perused the records of the case, considered the arguments advanced on behalf of the parties and gone through the written submissions filed on behalf of Appellant.

Wherein the instant case it is born from the record that the Appellant have issue cheque on 12.01.2016 for sum of Rs. 44,298/- in favour of the Respondent No. 1 which amounts from acknowledgment of the debt although the said cheque dishonoured for the reason “payment stopped by drawer” (Exhibits “D & D-1) at page 25 to 26 of the petition filed before the NCLT."

Owing to the aforesaid, we can logically conclude that

The Memorandum of Understanding confirms existence of the debt and its default,

The email communications and the issue of cheques by the CD would amount to be subsequent acknowledgements of the said debt.

The date of default for the purposes of initiation of proceedings under Section 9 herein would be when the bank returned the cheques due to the closure of account.

The business transactions and issuance of the invoices for the goods supplied and the balance outstanding amount due to be paid as a result of the said transactions is not a fact that has been denied.

It is not the case of the Appellant at any point of time that apart from the financial liabilities flowing from the invoices, the Appellant had any other financial liability towards the Respondent in relation to which the cheques were issued.

In any case as per the ratio of Suo motu judgement of Hon’ble Apex Court dated 10.01.2022, the limitation in the instant case stands extended by 16 months and 6 days to 06.07.2023 and the application under section 9 was filed on 05.09.2022, well before the said date.

Hence, in these eventualities, the application couldn't have been held to be barred by limitation, and the same has been rightly allowed by the Ld. Tribunal by virtue of the impugned order admitting the proceedings under Section 9 of the Code. In the entire pleadings there is no denial by the Appellant as regards to the part payments made towards the goods supplied for which the invoices were raised, nor the dishonouring of the cheques given by the CD to the Respondent.

Hence, the 'company appeal' stand 'dismissed'. All interlocutory applications would stand 'closed'.