Vishal Singh vs The Nainital Bank Limited

NARESH SALECHA, MEMBER (TECHNICAL)

The present appeal has been filed by the Appellant i.e., Vishal Singh, Promoter & Director of the suspended Board of Director of Corporate Debtor, Rudra Auto Tech Engineering Pvt. Ltd., under Section 61 of the Insolvency and Bankruptcy Code, 2016 (‘Code’) against the Impugned Order dated 03.06.2024 passed by the National Company Law Tribunal, Allahabad Bench ("Adjudicating Authority") in CP(IB) No. 56/ALD/2023. The Nainital Bank Limited, who is the Financial Creditor, is the Respondent herein.

The Appellant contended that the Respondent had filed CP(IB) No. 56/ALD/2023, under Section 7 of the Code read with Rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, on 20.07.2023, before the Adjudicating Authority, seeking initiation of Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor.

The Appellant submitted that upon receipt of notice, the Corporate Debtor duly filed a detailed reply along with all requisite annexures, raising a categorical preliminary objection that the Section 7 Application was ex-facie barred by limitation. It was specifically pleaded that the Date of Default was 23.10.2018, and therefore the limitation period of three years expired on 22.10.2021. It was further pointed out that the Respondent committed serious illegalities by not providing adequate Term Loan and Cash Credit limits, and by resorting to illegal “teeming and lading” adjustments between the Corporate Debtor and its sister concern, Naini Auto Tech, thereby falsely portraying both units as going concerns for recovery of principal and interest, even during the period when both accounts had already been declared NPA as per RBI guidelines.

The Appellant further submitted that the Appellant specifically highlighted the statutory provisions and settled judicial precedents to establish that the Date of Default is a sine qua non for computing limitation under the Code, but despite this, the Adjudicating Authority, by the Impugned Order dated 03.06.2024, admitted the Section 7 Application and initiated CIRP against the Corporate Debtor, declared moratorium under Section 14 of the Code, and formed a prima facie view that the Application was within limitation and fulfilled the requirements of Section 7(5)(a) of the Code.

The Appellant contended that it is a settled proposition of law that the “Date of Default” is mandatory and must be specifically mentioned in Form-1/Form-5 filed under Section 7 of the Code. The Date of Default determines the limitation period for filing an application. Non-mentioning or incorrect mention of the Date of Default renders the Application incomplete and defective, thereby attracting Section 7(5)(b) of the Code. The Appellant submitted that in the present case, the Respondent has mentioned the Date of Default as 31.10.2019 in Part IV of Form-1, whereas it is an admitted position that the account of the Appellant was classified as NPA on 23.01.2019, as per RBI guidelines.

The Appellant contended that the RBI Master Circular on Prudential Norms on Income Recognition, Asset Classification and Provisioning clearly defines a Non-Performing Asset as a loan where interest or instalment of principal remains overdue for more than 90 days in the case of a term loan. Thus, once default continues beyond 90 days, the account is mandatorily to be treated as NPA. The Appellant submitted that applying the mandatory RBI norms, the deemed Date of NPA would automatically fall 90 days after the Date of Default. In the present case, reckoning the Date of Default as 23.10.2018, the deemed Date of NPA is 23.01.2019.

The Appellant contended that the Section 7 Application was filed on 20.07.2023 and even after granting the benefit of exclusion of limitation as per the Hon’ble Supreme Court’s suo motu orders relating to Covid-19, from 15.03.2020 to 28.02.2022, with an additional 90 days thereafter, the Application remains barred by limitation, a fact ignored by the Adjudicating Authority.

The Appellant submitted that the Respondent’s argument that the NPA was declared only on 23.01.2019 pursuant to an RBI audit cannot override the binding RBI Master Circular. The Date of Default cannot be altered at the whims of the Bank. The Appellant contended that the Date of Default in the present case, at the highest, could only be 23.10.2018, being 90 days prior to the Date of NPA, and the limitation expired on 22.10.2021, whereas the Application was filed only on 20.07.2023.

The Appellant contended that the Adjudicating Authority failed to properly appreciate binding judgments including B.K. Educational Services Pvt. Ltd. v. Parag Gupta & Associates, (2019) 11 SCC 633; Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries P. Ltd. &Anr., (2020) 15 SCC 1; Jignesh Shah v. Union of India, & Anr., (2019) 10 SCC 750; Laxmi Pat Surana v. Union Bank of India, (2021) 8 SCC 481 and Ramdas Dutta v. IDBI Bank Ltd., [Company Appeal (AT) (Ins) No. 1285 of 2022, all of which unequivocally hold that limitation begins from the Date of Default and not from the Date of NPA.

The Appellant submitted that reliance placed by the Adjudicating Authority on Asset Reconstruction Company (India) Ltd. v. Tulip Star Hotels Ltd. & Ors. (2022) IBC Law.in 94 (SC) has been misapplied. A harmonious reading of the said judgment reinforces that limitation runs from the Date of Default and not otherwise.

The Appellant contended that the conduct of the Financial Creditor is reprehensible, as interest and penal interest continued to be debited to the loan account even after the account had become NPA, instead of being parked in a memorandum account, thereby illegally inflating the debt. The Appellant submitted that illegal and unilateral adjustments by way of teeming and lading between the Corporate Debtor and its sister concern were made with mala fide intent to artificially extend the deemed Date of NPA, clearly demonstrating abuse of position by the Financial Creditor.

The Appellant contended that despite Techno-Economic Feasibility reports by Resurgent India and Dun & Bradstreet, adequate funding was denied, while inter-firm adjustments were carried out to create a false picture of financial viability, thereby burdening both sick units.

The Appellant submitted that large-scale adjustment of Fixed Deposit Receipts belonging to both Rudra Auto Tech Engineering Pvt. Ltd. and Naini Auto Tech during February 2019 further establishes that both accounts were treated as NPA as early as 23.01.2019. The Appellant contended that multiple joint meetings between the Appellant and the Financial Creditor from December 2019 till November 2020 consistently acknowledged the NPA status and explored revival and rehabilitation packages, which further demolishes the Respondent’s stand on limitation.

The Appellant submitted that the issuance of demand notice under Section 13(2) of the SARFAESI Act and subsequent correspondence unequivocally confirms declaration of NPA on 23.01.2019, thereby fixing the Date of Default much earlier than alleged by the Financial Creditor. The Appellant contended that the Financial Creditor also failed to comply with the conditions of the lease deed executed with SIDCUL, particularly Clause 9 of the allotment letter dated 22.12.2011, by not depositing the balance land premium from the first disbursement, thereby rendering the alleged mortgage legally infirm. The Appellant submitted that even though a charge was registered under Section 77 of the Companies Act, 2013, the failure of the Financial Creditor to clear SIIDCUL dues and obtain necessary no-objection vitiates the mortgage and attracts Section 100 of the Transfer of Property Act, 1882.

The Appellant contended that the cumulative conduct of the Financial Creditor clearly establishes abuse of process, suppression of material facts, and filing of a time-barred application, which ought to have been rejected at the threshold under Section 7(5)(b) of the Code.

The Appellant submitted that for all the aforesaid reasons, the Impugned Order dated 03.06.2024 is unsustainable in law and on facts and deserves to be set aside, and the Section 7 Application filed by the Respondent/Financial Creditor deserves to be dismissed as barred by limitation and otherwise not maintainable. The Appellant requested this Appellant Tribunal to allow the appeal and set aside the Impugned Order.

Per contra, the Respondent refuted all the averments of the Appellant treating these as baseless and misleading.

The Respondent submitted that the stage of admission of an application under the Code, the Adjudicating Authority is statutorily obliged to prima facie determine: (i) that the debt in question qualifies as a financial debt; (ii) that the quantum of such debt exceeds Rs. 1 crore; and (iii) that there exists a default in repayment thereof.

The Respondent submitted that the Appellant, on the one hand, alleges that the Respondent Bank omitted to specify the date of default in its application under Section 7 of the Code, while, on the other hand, the Appellant himself concedes in subsequent grounds that the Respondent Bank has indeed mentioned the date of default as 31.10.2019.

The Respondent stated that in the application filed under Section 7 of the Code, the date of default has been correctly specified as 31.10.2019. This is because, during an inspection conducted by the RBI on that date, it came to the notice of the Respondent Bank that the account of the Corporate Debtor had turned NPA. Pursuant to the RBI guidelines, the said account was accordingly declared as NPA with retrospective effect from 23.01.2019. Consequently, the date of default has been reckoned as the date on which the NPA classification came to the notice of the Respondent Bank. The Respondent contended that that the Corporate Debtor's account was classified as NPA based on information received during the annual audit of the Respondent Bank conducted by the RBI. Accordingly, the date of default has been appropriately taken as 31.10.2019.

The Respondent submitted that the application under Section 7 of the Code, was filed on 27.06.2023 and is not barred by limitation, as the Corporate Debtor unequivocally acknowledged the financial debt owed to the Respondent Bank through its Letter of Acknowledgement dated 31.12.2021, duly signed by the Appellant, Mr. Vishal Singh, and Ms. Sweety Singh, the Suspended Directors of the Corporate Debtor; further, the existence of such debt was admitted in the Corporate Debtor's audited balance sheets for the financial years ended 31.03.2019, 31.03.2020, and 31.03.2021, wherein under the head "Short Term Borrowings," Cash Credit (Loan Repayable on Demand from Banks) was recorded at Rs. 59,05,09,718/- for the years ended 31.03.2019 and 31.03.2020, and similarly at Rs. 59,05,09,718/- for the year ended 31.03.2021, while under the head "Long Term Borrowings," amounts of Rs. 7,41,21,374/- were acknowledged for the years ended 31.03.2019 and 31.03.2020, and Rs. 11,19,52,853/- for the year ended 31.03.2021. Additionally, in terms of the Hon'ble Supreme Court of India's judgment in Miscellaneous Application No. 21/2022 in Miscellaneous Application No. 665/2021 in Suo Moto Writ Petition (Civil) No. 3/2020 (regarding cognizance for extension of limitation), the period from 15.03.2020 to 28.02.2022 stands excluded for computing limitation under any general or special law in respect of all judicial or quasi-judicial proceedings, thereby rendering the subject application well within the prescribed limitation period.

The Respondent stated that the date of default is ordinarily the date on which the default in repayment of the debt is committed by the Corporate Debtor. In the present case, however, it was during the annual inspection by the RBI that the Respondent Bank became aware that the Corporate Debtor had committed such default and that its account had turned NPA. Accordingly, the date of default is the date on which the RBI audit team directed the account to be declared as NPA. The respondent argues that the default date in the Section 7 application merely proves the repayment default occurred and confirms timely filing within the limitation period. The bank specified this date, making the application complete any appellant objection doesn't render it deficient. Even if the default predates NPA classification, the filing remains within limitation, as the corporate debtor acknowledged the debt in its balance sheets for FY2019, 2020, and 2021.

The Respondent stated that the Respondent Bank has not, at any stage, shifted or altered the date of default as alleged by the Appellant. The date of default is, and has consistently been, the date on which the RBI inspection team directed the Respondent Bank to declare the Corporate Debtor's account as NPA.

The Respondent submitted that that upon an acknowledgement of the debt by the Corporate Debtor, whether through its balance sheets or a Letter of Acknowledgement, the Respondent Bank acquires a fresh cause of action for instituting the application under Section 7 of the Code.

The Respondent submitted that while admitting an application under Section 7, the Adjudicating Authority does not adjudicate upon the legality or quantum of interest/penal interest levied on the loan account, rendering the ground raised by the Appellant wholly baseless and bereft of merit; furthermore, the grounds raised by the Appellant in the Appeal are extraneous and irrelevant in the context of proceedings under the Code, as in the present matter, the Adjudicating Authority is required to examine only whether there exists a financial debt exceeding Rs. 1 crore and whether the Corporate Debtor has committed a default thereunder.

Concluding its arguments, the Respondent contended that the appeal is devoid of merits and therefore deserves to be dismissed with cost.

We have already noted the submissions of both the parties in the previous discussion. It is a case of the Appellant that the Impugned Order has been wrongly passed as the date of default in the present case was 23.10.2018 and therefore the period of limitation had expired on 23.10.2021, whereas the Respondent initiated an application under Section 7 of the Code on 20.07.2023. Thus, the application was barred by limitation and therefore, the Adjudicating Authority erred in allowing the same.

The Appellant further argued before us that even the benefit of judgement of the Hon’ble Supreme Court of India in the matter of Suo-moto Writ Petition (Civil) No. 03 of 2020 granting the extension of limitation period from 15.03.2020 to 20.02.2022, does permit such admission of Section 7 petition. We take into consideration that the application should have been filed by the Respondent within 90 days from 01.03.2022 i.e., on or before 01.06.2022 whereas the application was filed on 20.07.2023.

The Appellant also challenged the alleged debt on the strength of the acknowledgement of the debts even after the date of NPA, as the same was not in accordance with the guidance note issued by the Institute of Chartered Accountant (‘ICAI’) particularly in terms of Clause 8.3.1.2 on the revised schedule – VI to the Companies Act, 1956. The Appellant empathetically pleaded that in the guidance note under “8.3.1- long term borrowing” it has been categorically mentioned that in terms of guidance note, borrowings need to be further classified into different types of borrowings as per guidance note in terms of Clause 8.3.1.1. The Appellant pleaded that in terms of Clause 8.3.1.2, the borrowings were required to be classified as secured and unsecured loans and nature of security was required to be specified separately in each case.

It is the case of the Appellant that the balance-sheets of the Corporate Debtor where acknowledgements have been reflected, do not contain such classification and therefore, such acknowledgements cannot be treated as valid. The Appellant submitted that this issue is squarely covered in the ratio of judgment delivered by the Hon’ble Supreme Court of India in the matter of Collector of Central Excise vs. Dai Ichi Karkaria Limited [ 1999 (112) ELT 353 SC/ 1999 (7) SCC 448].

We asked the Appellant, if any other point are pressed in the appeal before us other than two points mentioned by the Appellant i.e., debt was not crystalized in terms of 8.3.1.2 of guidance note issued by ICAI and further, the acknowledgement could not have been relied upon by the Respondent, the answer of the Appellant was negative. Therefore, points raised by the Appellant are only relating to law of limitation based on the alleged incorrect acknowledgements of debt in the balance sheets of the Corporate Debtor, the Appellant once again confirmed the same.

On these points we observe that, the Respondent Bank refuted all the allegations and stated that the Appeal is devoid of any merit and present appeal is nothing except misuse of process of law with only intent to derail process for the resolution of the Corporate Debtor. The Respondent Bank submitted that there is no dispute regarding disbursal of loans and non payment of i.e., default by the Appellant and therefore, the Respondent had no choice but to file Section 7 petition before the Adjudicating Authority.

The Respondent Bank pleaded that all the relevant balance sheets of the Corporate Debtor reflect and acknowledge clearly the liability of the Corporate Debtor towards the Respondent Bank. The Respondent further submitted that there was yet another OTS proposal from the Appellant to the Respondent Bank, which further acknowledged the debt extending the limitation period.

Since, the issue is limited to the limitation which is based on the acknowledgements of the debt by the Corporate Debtor in the balance sheets, we shall also refer to the relevant balance sheets of the Corporate Debtor.

At this stage, we take into consideration that the Respondent Bank had granted six loans as the following details :-

We further note that the Appellant failed to repay the instalments in time and accordingly the demand notice under Section 13(2) of the SARFAESI Act, 2002 was issued by the Respondent Bank to the Corporate Debtor.

We also take into consideration that the bank accounts of the Appellant were declared as NPA w.e.f. 23.01.2019. We further note that the Impugned Order has gone into the various documentation while establishing the debt and default which included the mortgaged deeds, sanction letters issued by the Respondent Bank, record of the default with CIBIL and NeSL, etc.

We also note that Section 7 petition was filed by the Respondent and in part IV, the total amount of outstanding debt is stated to be Rs.100,56,04,473/-and the date of default is stated to be 31.10.2019. Bearing in mind that the disbursement of loan has not been contested by the Appellant, this is taken as undisputed fact.

Having regard to the fact that the Respondent claim of default took place on 31.10.2019, whereas the Appellant claims that the default date should have been considered as 23.10.2018 and therefore, the period of limitation should have expired on 23.10.2021. Thus, we find that the bone of contention between the Appellant and Respondent is about date of default and its impact on the limitation. We observe that taking into account the judgement of the Hon’ble Supreme Court of India in Suo-Moto (Supra), according to which the limitation period from 15.03.2020 to 28.02.2022 was extended. Thus, we have to examine whether this period was further extended by any acknowledgement by the Corporate Debtor, since the admittedly and undisputedly, the Section 7 petition was filed by the Respondent on 20.07.2023 beyond the period of 28.02.2022 as per the Hon’ble Supreme Court of India judgement in Suo-moto.

During the pleadings, it has been brought to our notice that in Section 7 application filed by the Respondent, the date of default was mentioned as 31.10.2019 which was based on the inspection conducted by RBI. We also take into consideration that the Corporate Debtor had acknowledged the debt of Respondent Bank in the letter of acknowledgement dated 31.12.2021, which was signed by the present Appellant along with Ms. Sweety Singh as Suspended Director of the Corporate Debtor i.e. by both the Suspended Directors of the Corporate Debtor. We shall take into consideration the relevant acknowledgements which have been made by the Corporate Debtor. We also need to note that the debt is also acknowledged in the balance sheet of the Corporate Debtor for the period ending 2019 to 2021 under the heading of short terms borrowing and long term borrowings.

The balance sheet as on 31.03.2020 reads as under :-

In this connection, we also reproduce the notes on short terms borrowing and long terms as indicated in the balance sheets which reads as following:-

From above, we observe that as per note “short term borrowing”, the Corporate Debtor has admitted cash credit to the extent of Rs. 59,05,09,718/- and under the heading of long term borrowings, the Corporate Debtor has admitted the amount of Rs. 7,41,21,374/-.

We will also take into consideration the balance sheet and the relevant notes as on 31.03.2021 which read as under :-

Similarly, in the balance sheets as on 01.04.2021, the short term borrowings have been shown to the tune of Rs. 59,05,09,718/- and the long term borrowings have been shown as Rs. 11,19,52,853/-. Thus, the acknowledgements of debts of the Corporate Debtor are clear.

As per the Suo-moto judgement of the Hon’ble Supreme Court of India, the period from 15.03.2020 to 20.02.2020, stand automatically excluded for the purpose of limitation. The Section 7 petition was filed by the Respondent on 27.06.2023 which fall within limitation on the strength of acknowledgements of the debts by the Corporate Debtor in the balance sheets as discussed above.

We also take into account the acknowledgement letters of debt signed by the Suspended Directors of the Corporate Debtor as well as the personal guarantors of the loan dated 31.12.2021 addressed to the Respondent Bank which read as under :-

Thus, all six loans have been acknowledged by the Suspended Directors of the Corporate Debtor on 31.12.2021, thereby extending the limitation further.

Based on above analysis, we are of the considered view that there was clear debt for which default took place and the same was duly acknowledged by the Corporate Debtor in their various balance sheets as well as the acknowledgement letters discussed and quoted above.

Having decided the point of limitation, now we shall examine the other aspect raised by the Appellant, regarding the non-compliance of Clause 8.3.1.2 of the guidance note issued by ICAI and based on which the Appellant pleaded before us that the acknowledgment in the balance sheet cannot be treated as valid acknowledgement.

We take into consideration that the guidance note which has been provided by the Appellant in the rejoinder reply dated 18.01.2025 and the guidance note quoted by the Appellant reads as under :-

It is the case of the Appellant that since balance sheets did not provides the bifurcation of borrowing of the Corporate Debtor under proper heads as mandated by the guidance notes issued by the ICAI, the acknowledgement relied upto, for limitation purpose is perverse. On this issue, we do not find any merit in the contentions of the Appellant for the simple reason that it was for the Appellant to prepare the balance-sheet in according with the laid down Accounting standards and guidance note issued by the ICAI. The Appellant, having not complied with the same, if at all, cannot now take shelter of the same at this stage. Having said so, we do not find Clause 8.3.1.2 at all related to the controversy, the Appellant tried to raise in the pleadings before us and has brought out in the rejoinder reply. The purported claims of the Appellant regarding non classification of the borrowing into sub-classification as per guidance note, do not support the cause of the Appellant as the sub-classification is basically for secured creditors and unsecured creditors. In either case, any financial creditor, even being unsecured creditor, is within the right to file Section 7 petition in case default occurs.

Since, the claim 8.3.1.2 of the guidance note itself is negated by us, there is no need for us to refer to the judgement quoted by the Appellant in this regard. However, for the sake of completeness, we shall refer to the said judgement of Collector of Central Excise (supra) also. The relevant portion of the judgement reads as under :-

We are of considered view that the Apex Court judgement only confirms that the ICAI is the authoritative body in the matter of laying down the Accounting standards and the guidance notes. We do not find this issue at all applicable as the applicability of accounting standard is not an issue before us.

Incidentally, the appeal was heard and was reserved for judgement on 19.01.2026 granting 07 days for submitting written submissions vide our order dated 19.01.2026. We are constrained to record that till date no written submissions have been submitted, hence we have decided the same, based on record available with us. In any case, written submissions perhaps would have only given same/similar details, as such no prejudice would have been caused to either of the parties.

Based on above detailed analysis, we do not find any error in the Impugned Order. The Appeal devoid of any merits stands rejected. No Cost. I.A., if any, are closed.