Though Burden Of Proving That Section 7 Application Is Within Period of Limitation Is On Financial Creditor, Materials Produced By Debtor Can Be Examined – Supreme Court
A three-judge Bench of Justice L Nageswara Rao, Justice BR Gavai, and Justice BV Nagarathna has held, "The burden of prima facie proving occurrence of the default and that the application filed under Section 7 of the Code is within the period of limitation, is entirely on the financial creditor. While the decision to admit an application under Section 7 is typically made on the basis of material furnished by the financial creditor, the Adjudicating Authority is not barred from examining the material that is placed on record by the corporate debtor to determine that such application is not beyond the period of limitation."
An appeal was preferred by the Corporate Debtor before the Supreme Court against the rejection of its appeal by the National Company Law Appellate Tribunal (NCLAT) against the decision of the NCLT, Ahmadabad Bench which had admitted the application of the Respondent filed under section 7 of IBC, 2016.
The Appellant was in the business of providing underground fiber network services to corporate entities, financial institutions, and other organizations. The Respondent had advanced a loan to the Appellant which it had failed to repay. Subsequently, the account was declared as a non-performing asset (NPA).
The issues which were dealt with by the Court were –
1. Whether the application filed by the Power of Attorney holder under section 7 of the Code was maintainable; and
2. Whether the application filed by the Respondent-Bank under section 7 was time-barred.
The Court after considering the contentions of the parties made the following observations –
A. Maintainability of the application filed under section 7 of IBC by the power of attorney holder
The Court rejected the Appellant's contention that since the application was filed by the power of attorney on behalf of the Financial Creditor, the application filed under section 7 of the Code was not maintainable.
The Bench relied upon the findings of NCLT which had held that general authorization given to an officer of the financial creditor by way of a power of attorney would not disentitle him to act as the authorized representative of the financial creditor while filing an application under section 7.
The Court held that the authorization granted to the official by way of a bank resolution does not impair his authority to file an application under section 7.
"It is therefore clear that the application has been filed by an authorized person on behalf of the Financial Creditor and the objection of the Appellants on the maintainability of the application on this ground is untenable," the Court held.
B. Limitation Period
Regarding the limitation period for filing the application under section 7, the Court rejected the arguments of the Corporate Debtor that the application was time-barred as it was filed beyond the period of three years from the date of default.
The Court accepted the contention of the Respondent that NCLT committed no error in accepting its application under section 7 since the material produced by the Corporate Debtor showed acknowledgment of debt till the year 2019.
It was asserted by the Court, "The primary obligation of making out a prima facie case of default is on the financial creditor. There is no necessity for the corporate debtor to provide any information at the stage of admission of the application under Section 7 of the Code, as the burden of showing non-payment of a legally recoverable debt, which is not time-barred, is on the financial creditor."
"While the decision to admit an application under Section 7 is typically made on the basis of material furnished by the financial creditor, the Adjudicating Authority is not barred from examining the material that is placed on record by the corporate debtor to determine that such application is not beyond the period of limitation," the Bench opined.
Considering the aforesaid observations, the Court held, "if the documents constituting acknowledgement of debt beyond April, 2016 had not been brought on record by the Corporate Debtor, the application would have been fit for dismissal on the ground of lack of any plea by the Financial Creditor before the Adjudicating Authority with respect to extension of the limitation period and application of Section 18 of the Limitation Act" and dismissed the appeal.