In a recent ruling, the Supreme Court addressed a significant issue related to the time limits for commencing insolvency proceedings as outlined in the Insolvency and Bankruptcy Code (IBC).

The central issue in this case revolved around determining whether the commencement of the limitation period should be based on the date of the initial default or the declaration of a loan account as non-performing.

The Supreme Court bench comprising Justices Aniruddha Bose and Vikram Nath ruled that the initiation of insolvency proceedings should adhere to a three-year limitation period, commencing from the date of the initial default. Furthermore, it was established that a recovery certificate issued under the Debt Recovery Act could be considered equivalent to a decree for the purpose of pursuing insolvency proceedings under the IBC.

Recovery proceedings were initiated when multiple banks, including Union Bank of India, IDBI, Oriental Bank of Commerce, Bank of Baroda, Karnataka Bank, Syndicate Bank, and Punjab National Bank, provided financial assistance to Totem Infrastructures Limited, the corporate debtor, in the form of loans and bank guarantees. Subsequently, when the corporate debtor failed to meet its financial obligations, the lending banks initiated recovery proceedings against them.

The lending banks, whose exposure had been exposed, submitted applications to the Debt Recovery Tribunals (DRT) in Hyderabad and Bengaluru, requesting the recovery of the unpaid amounts. Subsequently, the respective DRTs issued several recovery certificates, affirming the outstanding debts owed by the corporate debtor.

The State Bank of India (SBI) lodged an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) with the National Company Law Tribunal (NCLT) in Hyderabad. This application was grounded on the recovery certificates issued by the Debt Recovery Tribunals (DRTs). The NCLT accepted the application and imposed a moratorium, suspending further legal actions against the corporate debtor.

The appellant lodged an appeal against the NCLT's ruling with the National Company Law Appellate Tribunal (NCLAT). The appeal was based on two primary grounds: the limitation period and the application's reliance on an RBI circular dated 12.02.2018.

The appellant contended that the application under the Insolvency and Bankruptcy Code (IBC) relied on the RBI circular, which had been invalidated by the Supreme Court in the case of Dharani Sugars and Chemicals Ltd. vs. Union of India and Others, rendering it ultra vires.

The NCLT took into consideration a letter issued by the corporate debtor on 29.01.2020 as an acknowledgment of the debt. This acknowledgment influenced the calculation of the limitation period in the case.

The NCLAT affirmed the NCLT's ruling, including the acknowledgment of debt, and rejected the appeal. Additionally, the NCLAT addressed the dispute concerning the RBI circular.

The central issue brought before the Supreme Court revolved around the statute of limitations concerning the commencement of insolvency proceedings under the Insolvency and Bankruptcy Code (IBC).

The Court made a distinction between acknowledgment as defined in Section 18 of the Limitation Act, 1963, and a promise under Section 25 of the Contract Act, 1872. Although both could reset the limitation period, Section 18 acknowledgments had to be made within the existing limitation period and didn't necessitate a promise to pay. In contrast, Section 25(3) of the Contract Act required a distinct, unequivocal promise to pay a debt that had already exceeded the time limit, which could be inferred from the document itself.

The Court deliberated on an argument regarding the commencement of the limitation period, specifically concerning the date of declaring the debtor's loan account as non-performing. The Court cited relevant precedents but reiterated that the limitation period for Section 7 IBC applications was governed by Article 137 of the Limitation Act.

Regarding the doctrine of election, which prevents pursuing the same right in different forums for the same cause of action, the Court clarified that it did not apply in this case because the recovery proceedings had commenced prior to the existence of the IBC. The issuance of a recovery certificate created a new cause of action for initiating the Corporate Insolvency Resolution Process (CIRP), as established in the case of Kotak Mahindra Bank Limited vs. A. Balakrishnan and Anr.

The Court deliberated on recovery certificates issued under the Debt Recovery Act, recognizing them as decrees that came with a twelve-year enforcement period according to Article 136 of the Limitation Act. It stressed the importance of utilizing these recovery certificates as a basis for initiating Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code (IBC).

The Court also ordered the separation of claims based on the 2015 recovery certificate and provided clarification on the limitation period for commencing CIRP based on such recovery certificates. The Court's decision was grounded in legal principles, precedent cases, and statutory provisions.

The Supreme Court rejected the appeal and concurrently issued directives regarding the separation of the claim linked to the 2015 recovery certificate from the combined claim. It also provided clarification on how the limitation period applies to the initiation of Corporate Insolvency Resolution Process (CIRP) proceedings under the Insolvency and Bankruptcy Code (IBC) when relying on recovery certificates.

Case: Tottempudi Salalith vs. State Bank of India & Ors, CIVIL APPEAL NO.2348 OF 2021.

Read/Download Order: TOTTEMPUDI SALALITH Vs.STATE BANK OF INDIA & ORS.