Can a financial creditor maintain an application for insolvency resolution when the corporate debtor’s account was classified as a Non-Performing Asset (NPA) nearly a decade prior to the filing? This question was examined by the Supreme Court of India in the landmark case of B. Prashanth Hegde v. State Bank of India & Anr.1 which explored the intricate relationship between the technical date of default, the internal accounting practices of banks, and the legal weight of debt acknowledgments in extending the period of limitation. The issue engages a practical dimension of the Insolvency and Bankruptcy Code’s (IBC) functionality, questioning whether a historical entry in a bank’s ledger can permanently bar a creditor from seeking remedy, even if the debtor has spent the intervening years seeking concessions and restructuring the very same debt.
The circumstances of the case involved a consortium of banks, led by the State Bank of India (SBI), which had extended credit facilities exceeding ₹280 crores to M/s. Metal Closure Pvt. Ltd. Although the banks had internally classified the account as an NPA as early as 2010, to comply with Reserve Bank of India (RBI) regulatory norms, the parties spent the subsequent years engaged in active and continuous restructuring negotiations. These efforts were not merely informal discussions but culminated in a series of formal Working Capital Consortium Agreements, the final one being executed in 2014. These agreements reorganized the repayment schedules and interest rates, essentially treating the debt as a live and manageable obligation. When the restructuring ultimately failed and the corporate debtor defaulted under the revised terms, SBI declared the account as an NPA again in May 2014 and eventually filed for the Corporate Insolvency Resolution Process (CIRP) in April 2018. The appellant challenged this filing, arguing that because the initial “default” occurred in 2010, the three-year limitation period under Article 137 of the Limitation Act2 had long since expired, rendering the 2018 application time-barred and legally dead.
The Supreme Court’s judgement focused on the vital distinction between an internal banking classification and a “default” for the purposes of the IBC. The Court observed that the mere classification of an account as an NPA by a bank for the purposes of provisioning and balance sheet management does not permanently fix the date of default if the parties subsequently enter into fresh agreements that reorganize the debt. The execution of the 2014 Consortium Agreement was viewed by the Court as a significant legal event that refreshed the relationship between the creditor and the debtor, creating a new set of obligations and, consequently, a potential new date of default. Furthermore, the Court emphasized that under Section 18 of the Limitation Act, an acknowledgment of liability in writing such as those found in a company’s duly signed balance sheets or within the recitals of a restructuring agreement effectively resets the clock for limitation purposes. The Court clarified that the law of limitation is intended to prevent the litigation of stale claims, not to provide a loophole for debtors who have stayed in the hands of their creditors through repeated promises of repayment and formal admissions of liability.
In reaching this conclusion, the Court drew heavily upon established judicial precedents to create a cohesive legal narrative. It relied on the principles laid down in ARCIL v. Bishal Jaiswal (2021)3, which settled the law that entries in a corporate debtor’s balance sheets constitute a valid acknowledgment of debt under Section 18, provided they are made before the limitation period expires. The Court also invoked Dena Bank v. C. Shivakumar Reddy (2021)4 to clarify that any offer of a one time settlement or a written recognition of a live claim within the initial three-year window serves to extend the period during which a creditor can move the court. The Court also addressed the appellant’s argument regarding pending criminal proceedings and counterclaims, referencing Innoventive Industries Ltd. v. ICICI Bank (2018)5 to reiterate that the primary focus of the Adjudicating Authority must be the existence of a debt and a default; collateral disputes or the pendency of other legal proceedings do not act as a bar to the initiation of the CIRP if the financial debt is clearly established and acknowledged. By applying these precedents, the Court noted that the corporate debtor had acknowledged its liabilities in its balance sheets for the years 2014 and 2015, which were signed as late as September 2015. These acknowledgments, occurring within three years of the 2014 agreement, pushed the expiration of the limitation period well beyond the date the insolvency application was actually filed in 2018.
Conclusion
The judgment reinforces a narrative of commercial reality over procedural technicality. The Court concluded that the IBC is a beneficial piece of legislation designed to resolve insolvency and maximize the value of assets, and its objectives cannot be defeated by a debtor who, after repeatedly acknowledging a debt through formal agreements and financial statements, attempts to hide behind an earlier, superseded date of default. The ruling serves as a reminder that the “date of NPA” is not a static shield for debtors but a dynamic point that must be viewed in the context of the parties’ ongoing commercial conduct. By ensuring that the flow of credit is protected through a sensible interpretation of limitation laws, the Supreme Court has affirmed that as long as a debt is “live” through continuous acknowledgment and restructuring, the doors of the insolvency courts remain open to creditors seeking a resolution to financial distress, thereby preserving the integrity of the Indian banking and insolvency framework.
Citations
Expositor(s): Adv. Jahnobi Paul
