M/S. RADHA EXPORTS (INDIA) PVT. LIMITEDversusK.P. JAYARAM & ANR.

272                      [2020]REPORTS
               SUPREME COURT    8 S.C.R. 272                [2020] 8 S.C.R.


A              M/S. RADHA EXPORTS (INDIA) PVT. LIMITED
                                         v.
                             K.P. JAYARAM & ANR.
                          (Civil Appeal No. 7474 of 2019)
                                 AUGUST 28, 2020
B
              [ARUN MISHRA AND INDIRA BANERJEE, JJ.]
             Insolvency and Bankruptcy Code, 2016 – s.7 – Companies
      Act, 1956 – Limitation Act, 1963 – Clauses (19) to (21) of Part II of
      the Schedule – The respondents filed a petition on 25.04.2018
      u/s.7 of the IBC, as ‘Financial creditor’, claiming principal amount
C     of Rs.2.10 crores together with interest – According to the appellant
      company, Rs.80,40,000/- was repaid to the respondents between
      2003 to 2004 – Further, respondents requested to convert
      Rs.90,00,000/- from the outstanding loan as share application money
      for issuance of shares in the appellant company in name of
D     respondent no. 2, which was later requested to be treated as the
      said share application of ‘MK’ and to treat the same as loan from
      respondent no. 2 – Also, during the period from 2004 to 2006, the
      appellant company paid Rs.43,25,000/- to the respondents and with
      that payment the loan liability was completely liquidated – The NCLT
      vide its judgment and order dated 19.12.2018 held that the
E     respondents were not Financial creditors of the appellant company
      and the claim of the respondents was barred by limitation – Further,
      it was held that the respondents had failed to prove that there was
      any debt due from the appellant company to the respondents,
      observing that the appellant company had produced proof of
F     payments – By the impugned judgment and order dated 02.09.2019
      the Appellate Tribunal set aside the order dated 19.12.2018 of the
      NCLT – On appeal, held: Under clauses (19) to (21) of Part II of
      the Schedule of the Limitation Act 1963, the period of limitation for
      initiation of a suit for recovery of money lent, is three years from
      the date on which the loan is paid – In the instant case, the last loan
G     was advanced in 2004-2005 – Apparently, the debt was barred by
      limitation even in the year 2012, when winding up proceedings of
      the appellant company were initiated in the Madras High Court by
      the respondents – The NCLT rightly refused to admit the application
      u/s. 7 of the IBC, holding the same barred by limitation – The
H
                                       272
       M/S. RADHA EXPORTS (INDIA) PVT. LIMITED v.                           273
                 K.P. JAYARAM & ANR.

Appellate Tribunal erred in law in reversing the judgment and order         A
of the earlier Adjudicating Authority – Disputes as to whether the
signatures of the respondents are forged or whether records were
fabricated can be adjudicated upon evidence including forensic
evidence in a regular suit and not in proceedings u/s. 7 of IBC –
Even otherwise, the application u/s. 7 of the IBC was not
                                                                            B
maintainable – As the payment received for shares, duly issued to a
third party at the request of the payee as evident from official records,
cannot be a debt, not to speak of financial debt – The NCLT rightly
held that there was not financial debt in existence – Thus, impugned
judgment and order of the Appellate Tribunal is set aside and the
order of the Adjudicating Authority dismissing application is               C
restored.
       Allowing the appeal, the Court
       HELD: 1. It was for the applicant invoking the Corporate
Insolvency Resolution Process, to prima facie show the existence
in his favour, of a legally recoverable debt. In other words, the           D
respondent had to show that the debt is not barred by limitation,
which they failed to do. [Para 36][286-E]
       2. Under clauses (19) to (21) of Part II of the Schedule of
the Limitation Act 1963, the period of limitation for initiation of a
suit for recovery of money lent, is three years from the date on            E
which the loan is paid. The last loan amount is said to have been
advanced in 2004-2005. In the winding up petition, there is not a
whisper of any agreed date by which the alleged loan was to be
repaid to the Respondents. In the instant case, apparently the
debt was barred by limitation even in the year 2012, when winding
up proceedings were initiated in the Madras High Court.                     F
[Para 37][286-E-G]
       3. The NCLT rightly refused to admit the application under
Section 7 of the Insolvency Bankruptcy Code, 2016, holding the
same to be barred by limitation. The Appellate Tribunal has erred
in law in reversing the judgment and order of the earlier                   G
Adjudicating Authority. The Adjudicating Authority rightly
rejected the application as barred by limitation. The Appellate
Authority patently erred in law in reversing the decision of the
adjudicating authority and admitting the application. [Para 38][286-
G]
                                                                            H
274           SUPREME COURT REPORTS                      [2020] 8 S.C.R.


A            4. As recorded in the said order dated 19th December, 2018
      passed by the NCLT Chennai, the Respondent Nos. 1 and 2 jointly
      addressed the letter dated 11th January, 2011 to the Income Tax
      Department confirming that the Respondent No.1 had requested
      the Appellant Company to transfer a sum of Rs.90 lakhs to his
      wife, the Respondent No.2 for allotment of shares in the Appellant
B
      Company and further acknowledged that the amount outstanding
      from the erstwhile firm to the Respondent was Rs.1,39,60,000/-
      as on 31st March, 2004. The said letter has been extracted in full
      in Paragraph (9) of the judgment and order dated 19th December,
      2018 of NCLT. [Para 39][287-A-C]
C            5. There are, as observed above cogent records including
      etters signed by the Respondent Nos. 1 and 2 which evince that
      on 6th October, 2007, Respondent No.2 resigned from the Board
      of the Appellant Company and at that time the Respondent No.2
      requested the Appellant Company to treat the share application
D     money of Rs.90,00,000/- as share application money of ‘MK’
      and to issue shares for aforesaid value to ‘MK’. The amount was
      to be treated as a personal loan from the Respondent No.2 to
      ‘MK’. A personal Loan to a Promoter or a Director of a company
      cannot trigger the Corporate Resolution Process under the IBC.
      Disputes as to whether the signatures of the Respondents are
E     forged or whether records have been fabricated can be adjudicated
      upon evidence including forensic evidence in a regular suit and
      not in proceedings under Section 7 of the IBC. [Para 40][287-C-
      E]
             6.1 Even otherwise, the application under Section 7 of the
F     IBC was not maintainable. As rightly held by the NCLT there
      was no financial debt in existence. [Para 42][287-G-H]
             6.2 The payment received for shares, duly issued to a third
      party at the request of the payee as evident from official records,
      cannot be a debt, not to speak of financial debt. Shares of a
      company are transferable subject to restrictions, if any, in its
G
      Articles of Association and attract dividend when the company
      makes profits. [Para 43][290-F]
             Innoventive Industries Ltd. v. ICICI Bank and Anr.
             (2018) 1 SCC 407 : [2017] 8 SCR 33; B.K. Educational
             Services Pvt. Ltd. v. Parag Gupta and Associates (2019)
H            11 SCC 633 : [2018] 12 SCR 794 – relied on.
       M/S. RADHA EXPORTS (INDIA) PVT. LIMITED v.                          275
                 K.P. JAYARAM & ANR.

       Vashdeo R. Bhojwani v. Abhyudaya Co-operative Bank                  A
       Ltd. (2019) 9 SCC 158 : [2019] 12 SCR 75 – referred
       to.
                           Case Law Reference
[2017] 8 SCR 33                    relied on                 Para 32
[2018] 12 SCR 794                  relied on                 Para 34       B
[2019] 12 SCR 75                   referred to               Para 35
       CIVIL APPELLATE JURISDICTION: Civil Appeal No. 7474
of 2019.
       From the Judgment and Order dated 02.09.2019 of the National
Company Law Appellate Tribunal, New Delhi in Company Appeal                C
(AT)(INS) No. 224 of 2019.
       C. A. Sundaram, Sr. Adv., P. I. Jose, Prashant K. Sharma, Jenis
Francis, Ramakrishnan N., Abhishek Gupta, Ms. Rohini Musa, Zafar
Inayat, Anupam Mishra, Advs. for the Appellant.
       M. K. S. Menon, Sashank Menon, Ms. Malini Poduval, Advs. for        D
the Respondents.
       The Judgment of the Court was delivered by
       INDIRA BANERJEE, J.
       1. This appeal, under Section 62 of the Insolvency and Bankruptcy
Code, 2016, is against a judgment and order dated 2nd September, 2019      E
of the National Company Law Appellate Tribunal (NCLAT), New Delhi,
hereinafter referred to as “the Appellate Tribunal”, allowing Company
Appeal (AT) (INS) No.224 of 2019 against an order dated 19th December,
2018 passed by a Division Bench of the National Company Law Tribunal
(NCLT) at Chennai, rejecting the application filed by the Respondents      F
under Section 7 of the Insolvency and Bankruptcy Code, 2016, inter
alia, on the ground that the alleged claim of the Respondents was barred
by limitation, on the date on which the said application had been filed.
       2. It is the case of the Appellant Company, that the Respondents
were closely acquainted with one Mr. M. Krishnan, and Mrs. Radha
                                                                           G
Gouri, who were the promoters of the Appellant Company.
       3. Between 1st November, 2002 and 12th September 2003, the
Respondents had advanced an aggregate sum of Rs.2.10 crores, in
tranches, to M/s Radha Exports, a proprietorship concern of Mrs. Radha
Gouri, for its business purposes.
                                                                           H
276            SUPREME COURT REPORTS                           [2020] 8 S.C.R.


A             4. In 2004-2005, the Respondents advanced a further sum of Rs.10
      lakhs to the said proprietorship concern, M/s Radha Exports. The said
      M/s Radha Exports thus obtained total loan of Rs.2.20 crores from the
      Respondents, during the period between 2002 and 2004. The loan was
      unsecured and free of interest.
B             5. According to the Appellant Company, M/s Radha Exports repaid
      Rs.80,40,000/- to the Respondents between 1st October, 2003 to 18th
      March 2004. As recorded in the judgment and order dated 19th December,
      2018 of the NCLT, the Respondent Nos. 1 and 2 jointly wrote a letter
      dated 11th January, 2011 to the Deputy Commissioner of Income Tax,
      Company Circle V (3), Chennai, where they stated that, as on 31st March,
C     2004, the said proprietorship concern M/s Radha Exports had a loan
      liability of Rs.1,39,60,000/- (Rs.2,20,00,000/- less Rs.80,40,000/-) to the
      Respondents. The Respondents have, in the aforesaid letter, stated that
      they had given a further loan of Rs.10 lakhs to M/s Radha Exports,
      between 2004 and 2005. The said letter is reproduced in full, in the
D     judgment and order dated 19th December, 2018, of the NCLT.
              6. The Appellant Company was incorporated under the Companies
      Act, 1956 on or about 19th July, 2004, to take over the business of the
      proprietorship concern, M/s Radha Exports, along with its assets and
      liabilities. The Appellant Company states that as on 19th July, 2004, the
      proprietorship concern, M/s Radha Exports had a loan liability of
E     Rs.1,11,85,350/-, which was taken over by the Appellant Company.
              7. On 19 th July, 2004, when the Appellant Company was
      incorporated as a Private Limited Company, to take over and continue
      the business of the proprietorship concern, M/s Radha Exports, the
      Respondents requested the Appellant Company to convert a sum of
F     Rs.90,00,000/- from out of the said outstanding loan as share application
      money for issuance of shares in the Appellant Company, in the name of
      the Respondent No.2, and the same was confirmed by the Respondents,
      by their aforesaid letter dated 11th January, 2011 addressed to the Deputy
      Commissioner of Income Tax, Company Circle V(3), Chennai. The said
      letter, a copy of which is enclosed to the Paper Book, reads:
G
              “..I have requested to transfer a sum of Rs. 90,00,000/- (Rupees
              Ninety Lakhs) to my wife A/c. Mrs. Shoba Jayaram for
              allotment of shares in Radha Exports (I) Pvt. Ltd...”
              8. Accordingly, a sum of Rs.90,00,000/- was adjusted by the
      Appellant Company, as share application money, for issuance of shares
H
        M/S. RADHA EXPORTS (INDIA) PVT. LIMITED v.                               277
                  K.P. JAYARAM & ANR.

in a Appellant Company in the name of the Respondent No.2. Thereafter,           A
the balance loan liability of the company was Rs.21,85,350/-.
        9. According to the Appellant Company, during the period from
27th July, 2004 to 23rd March, 2006, the Appellant Company paid
Rs.43,25,000/- to the Respondents, which included the balance loan of
Rs.21,85,350/- payable by M/s Radha Exports. The loan liability, which           B
the Appellant Company had taken over from the proprietorship concern
was, according to the Appellant Company, completely liquidated by
March, 2006. Particulars of the payments have been given in detail in
paragraph (12) of the judgment and order of the NCLT dated 19th
December, 2018 and are supported by Bank Statements being Annexure
A1 filed before the NCLT. The last payment appears to have been                  C
made on 23.03.2006.
        10. On or about 6th October, 2007, the Respondent No.2 resigned
from the Board of the Appellant Company. At the time of resignation,
the Respondent No.2 requested the Appellant Company to treat the share
application money of Rs.90,00,000/- as share application money of                D
Mr. M Krishnan and to issue shares of the value of Rs.90,00,000/- in the
name of Mr. M. Krishnan. The amount of share application money of
Rs.90,00,000/- transfered to Mr. M. Krishnan, was to be treated as a
personal loan from the Respondent No.2 to the said Mr. M. Krishnan.
        11. By another letter dated 11th January, 2011 addressed to the          E
Deputy Commissioner of Income Tax, Company Circle V(3), Chennai,
being Annexure A-4 to the reply filed by the Appellant Company, the
Respondent No.2 confirmed that she had requested the Appellant
Company to allot shares in the name of the said Mr. M. Krishnan against
her share application money, which the said M. Krishnan had agreed to
treat, as his personal loan from the Respondent No.2 and pay her the             F
amount at a later date.
        12. The Appellant Company claims to have issued shares of the
value of Rs.90,00,000/- in the name of Mr. M. Krishnan in 2008. According
to the Appellant Company, there is thus, no further liability to be discharged
by the Appellant Company to the Respondents. After 23rd March, 2006,             G
there had been no financial transaction between the Appellant Company
and the Respondents.
        13. However, by a legal notice dated 19th November, 2012, the
Respondents called upon the Appellant Company to repay to the
Respondents a sum of Rs.1,49,60,000/- alleged to be the outstanding
                                                                                 H
278            SUPREME COURT REPORTS                         [2020] 8 S.C.R.


A     debt of the Appellant Company, repayable to the Respondents as on 19 th
      July, 2004.
             14. By a letter dated 5th December, 2012, the Appellant Company
      refuted the claim of the Respondents, whereupon the Respondents filed
      petition being CP No.335 of 2013 in the High Court of Madras under
B     Sections 433 (e) & (f) and 434 of the Companies Act 1956, for winding
      up of the Appellant Company. The said petition was transferred to the
      Chennai Bench of NCLT and re-numbered TCP/301/(IB)/2017.
             15. The averments made in the winding up petition ex facie show
      that the claim of the Respondents was hotly disputed. In that the
      Respondents claimed that letters attributed to them, even letters
C     addressed by them to the Income Tax Authorities were forged. Some of
      the averments are extracted hereinbelow:
             “6. …….The petitioners state that the respondent’s directors
             who pretended to be the well-wishers of the petitioners, knew
             all the facts and stopped paying the interest intermittently till
D            2007. Adding insult to the injury, the respondent’s company
             created a fraudulent sale deed and the sale consideration is
             a circuitous fraudulent transaction which will clearly prove
             the fraud, cheating, forgery and various other criminal
             offences of the respondent. The respondent have illegally
E            grabbed the residential house of the petitioners. The
             petitioners had already filed a Civil Suit in C.S. No.66 of
             2013 in the Original Side of the Hon’ble High Court of
             Judicature at Madaras.
             7. The Petitioners issued a statutory notice of demand on
             19.11.2012 for claiming the amount from the respondent
F            company and its directors and they gave a reply on
             05.12.2012 making unwanted, unnecessary and defamatory
             allegations against the 1 st petitioner, who had helped the
             directors of the respondent company for purchasing a flat in
             which they presently reside and for the entire capital for
G            running the respondent company. In para 3 of the said reply,
             the respondent asked for details of the payments made by the
             petitioners to the respondent. But in para 12, the respondent
             company had stated that the transactions have been placed
             before the Income Tax Department, for which the petitioners
             had signed the affidavits. The allegations are contradictory
H
       M/S. RADHA EXPORTS (INDIA) PVT. LIMITED v.                           279
       K.P. JAYARAM & ANR. [INDIRA BANERJEE, J.]

      to each other and it reveals rank forgery committed by the            A
      respondents to 1 to 3.
      8. The Petitioners had not signed any documents or blank
      papers or any affidavits to the respondent or its directors.
      The directors of the respondent company are capable of
      forging the signatures of the petitioners, which has been             B
      proved on various occasions...”
                 xxx              xxx               xxx
      10. The petitioners state that from the reply notice given by
      the advocate, it is clearly understood that the respondent and
      its directors had forged the signatures of the petitioners to         C
      the Income Tax Department….
      11. The petitioners states that the petitioners had verified the
      records of the Registrar of Companies, Chennai and found
      that the 2 nd petitioner’s signature had been forged in the
      resignation letter, which has been forged immediately after
      the fraudulent sale deed. The respondent company and                  D
      directors had even forged the signatures in the application
      for Director’s Identification Number and the forgery is the
      peak of fraud and cheating committed by the respondent
      company and its directors not only against the petitioners,
      but also against the Government Departments.                          E
      15. The petitioner states that the directors of the respondent
      company had forged the signatures of the 2nd petitioner. In
      all the documents submitted to the Registrar of Companies
      from the inception of the respondent company including the
      resignation and the DIN Application form and obtained DIN
                                                                            F
      number to remove the 2 nd petitioner from the directorship,
      which the directors of the respondent company made the 2nd
      petitioner as a director to their convenience.”
      16. Allegations of forgery and fraud are not decided in proceedings
under Sections 433 and 434 of the Companies Act 1956 for winding up
of a company. Such disputes necessarily have to be adjudicated in a         G
regular suit, on the basis of evidence, including forensic examination
reports.
      17. By an order dated 4th August 2017 the NCLT dismissed the
said winding up petition, on the ground that the Respondents had failed
to comply with the provisions of Section 7(3)(b) of the Insolvency and      H
280            SUPREME COURT REPORTS                          [2020] 8 S.C.R.


A     Bankruptcy code, 2016, hereinafter “IBC”, with the liberty to file a fresh
      petition, if so advised.
             18. On 7th December 2017, the Respondents issued a fresh demand
      notice to the Appellant Company. By a letter dated 14th December 2017,
      the Appellant Company refuted the claims in the demand notice dated
B     7th December 2017, inter alia claiming that all amounts due and payable
      by the Appellant Company or its predecessor-in-interest to the
      Respondents, had duly been paid within 2007 and 2008.
             19. The Respondents, thereafter, filed a petition being CP/77/(IB)/
      CB/2018 under Section 9 of the IBC, in the NCLT (Chennai Bench)
      claiming to be an operational creditor of the Appellant Company, within
C     the meaning of Section 9 of the IBC and claiming from the Appellant
      Company Rs.2.10 Crores as principal and Rs.2,31,60,000/- towards
      interest at the rate of 24% per annum , from the year 2007.
             20. For the purpose of this appeal, it is not necessary for this
      Court to examine the discrepancies between the claim in the winding up
D     petition and the claim in the petition under Section 9 of the IBC.
             21. By an order dated 12th April 2018, a Single Bench of NCLT
      dismissed CP/77/(IB)/CB/2018 filed by the Respondent No.1, claiming
      himself to be an ‘Operational Creditor’ under Section 9 of the IBC, as
      withdrawn, with liberty to file a fresh petition in accordance with law.
E            22. Thereafter, on 25th April 2018, the Respondents filed a fresh
      petition being WC.P. No.770/IB/CB/C-II/2018 before the NCLT (Chennai
      Bench) under Section 7 of the IBC, as “Financial Creditor”, claiming
      principal amount of Rs.2.10 Crores together with interest @ 24% per
      annum from 2007, amounting to Rs. 4,41,60,000/-. The Appellant
      Company filed its counter statement in CP No.770/IB/2018 before the
F
      NCLT.
             23. By a judgment and order dated 19th December 2018, the NCLT
      meticulously recorded details of the payments made by the Appellant
      Company and/or its predecessor in interest to the Respondents,
      considered the letters written by the Respondents to the Income Tax
G     Authorities and dismissed CP No. 770/IB/CB/2018, being the petition
      filed by the Respondents under Section 7 of the IBC, inter alia, holding
      that the Respondents were not Financial Creditors of the Appellant
      Company, and in any case the claim of the Respondents was hopelessly
      barred by limitation. The NCLT held that the Respondents had failed to
H     prove that there was any debt due from the Appellant Company, to the
        M/S. RADHA EXPORTS (INDIA) PVT. LIMITED v.                           281
        K.P. JAYARAM & ANR. [INDIRA BANERJEE, J.]

Respondents, observing that the Appellant Company had produced proof         A
of payments.
      24. The relevant parts of the said judgment and order of the
Chennai Bench of NCLT are extracted herein below for convenience.
      “9. To prove that Rs.90,00,000 was treated as share
      application money, the Corporate Debtor filed a letter                 B
      (Annexure-A2) these Applicants together addressed to the
      Income Tax Department on 11.01.2011 confirming the first
      applicant requesting the corporate debtor to transfer a sum
      of Rs.90,00,000 to his wife (Second Applicant) for allotment
      of shares in the Corporate Debtor. Not only about this request,
      the corporate debtor counsel says, the Applicants themselves           C
      stated that they advanced monies to M/s. Radha Exports
      during the Financial Years 2001-2002, 2002-2003 and 2003-
      2004 and amount outstanding from the said the partnership
      firm on 31.03.2004 is Rs.1,39,60,000. The letter dated
      11.01.2011 addressed by the Applicants to the Deputy                   D
      Commissioner of Income Tax is as follows:...”
      10. In addition to the above letter, the Corporate Debtor has
      also placed another letter dated 11.01.2011 Second Applicant
      addressed to the Deputy Commissioner of Income Tax
      confirming that she requested the Corporate Debtor to allot            E
      shares in the name of First Applicant against her share
      application money Rs.90,00,000 on the agreement that her
      husband would pay that money to her later. The corporate
      debtor has annexed this letter as Annexure-A4 to the reply
      affidavit filed by the Corporate Debtor.
      ….                                                                     F
      17. Now going through the observations we have noted, now
      the points for consideration are, as to whether any financial
      debt is in existence in between the parties as on the date of
      filing petition u/s 7 of the Code and as to whether, assuming
      the financial debt is in existence, the debt is barred by limitation   G
      or not.
      18. It is evident from the facts that first Applicant advanced
      Rs.2,10,00,000/- Rs.2,20,00,000/- as the case may be, to a
      partnership firm during the period in between 2002 and 2003.
      It is also evident on record by 4.07.2004, the same partnership        H
282            SUPREME COURT REPORTS                        [2020] 8 S.C.R.


A           firm repaid Rs.1,08,14,650. To show that it has been paid,
            the Corporate debtor has placed proof by submitting copies
            of the statement of the statement of accounts of various banks
            reflecting payments made to these Applicants, on the contrary,
            these Applicants have not placed any material showing as to
            whether these payments were made or not.
B
            25. In this case, if we go by the case of the Applicant, it is a
            claim made basing on the money disbursed by way of cheque
            payment in the year 2002 & 2003. This money was also not
            disbursed to this Corporate Debtor, it was given to a
            partnership firm.
C           26. This Applicant, has not even placed any material disclosing
            how this debt is still alive after lapse of three years from the
            date of disbursement. Whenever any claim is made, when it is
            beyond three years period as envisaged under Article 136 of
            the Limitation Act, the person making claim is bound to disclose
D           and explain as to how the debt claim is not barred by limitation.
            No such effort has been made by these Applicants to prove
            that this is within limitation. Assuming that filing of this
            Company Petition is continuation to the winding up
            proceedings filed before the Hon’ble High Court i.e.
            15.02.2013, then also, since these Applicants have claimed
E           money was disbursed in the year 2002 to 2003, if the limitation
            period is computed from the date of disbursement, filing of
            winding up proceedings would be beyond the period of
            limitation from the date of disbursement.
            27. Given the historical facts available on record, even if the
F           Corporate Debtor statement is taken as true, the limitation
            would start running from the year 2007. Since the winding
            up petition was filed in the year 2013, even from the year
            2007, these Applicants could have filed winding proceedings
            within three years from thereof, not in the year 2013,
            Conceding everything as stated by the applicants, then also
G
            the debt claim would remain barred by limitation.
            25. On or about 13th February 2019, the Respondents filed
      Company Appeal (AT) (INS) NO.224/19 before the Appellate Tribunal,
      challenging the order dated 19th December 2018 passed by the NCLT,
      dismissing the petition of the Respondents under Section 7 of the IBC.
H
        M/S. RADHA EXPORTS (INDIA) PVT. LIMITED v.                           283
        K.P. JAYARAM & ANR. [INDIRA BANERJEE, J.]

       26. The Appellant Company filed a Counter Statement before the        A
Appellate Tribunal, and the Respondents filed a Rejoinder thereto.
Pursuant to the directions of the Appellate Tribunal, additional pleadings
were also filed.
       27. On 13.08.2019 the Appellant Company caused ‘Notice to
Produce Documents’ to be issued to the Respondents calling upon              B
Respondents to produce certified true copies of the Statement of
Accounts of the Respondents maintained with HSBC Bank, Punjab
National Bank and Indian Overseas Bank, from which the Respondents
claimed to have advanced money to the Appellant Company and also
certified true copies of the Statement of Accounts of the Banks, in which
the cheques issued by M/s Radha Exports (proprietary concern) were           C
deposited and encashed. It is alleged that the Respondents replied to the
Notice to Produce Documents, but did not furnish the documents and/or
the details called for by the Appellant Company.
       28. On or about 20th August 2019, the Appellant Company filed
an Additional Reply Statement, enclosing true copies of the Statement        D
of Accounts of M/s Radha Exports (Proprietary concern), the Appellant
Company and Mr. M. Krishnan reflecting the payments made to the
Respondents. Under the direction of the Appellate Tribunal, the Appellant
Company also filed a Correlation Statement of payment entries, reflected
in the Bank Statements and the statements given in the Additional Counter
Statement.                                                                   E
       29. By the impugned judgment and order dated 2nd September
2019 the Appellate Tribunal allowed the appeal of the Respondents and
set aside the order dated 19th December 2018 of the NCLT, dismissing
the application under Section 7 of the IBC.
       30. It appears that the Appellate Authority was not inclined to       F
accept the submission of the Appellant Company, that the entire amount
had been paid, for two purported reasons. The first reason was that the
Correlation Statement showed payments of certain amounts amounting
to Rs.53,05,000/- in favour of Customs, Chennai and payments amounting
to Rs.1,75,000/- in favour of one Mr. Kulasekaran. The Respondents, as       G
Financial Creditors had disputed that these payments were towards the
dues of the Financial Creditors. The second reason was that, if the total
amount had been paid, there was no reason for the Appellant Company
to take the plea that the amount was not payable, the same being barred
by limitation.
                                                                             H
284               SUPREME COURT REPORTS                          [2020] 8 S.C.R.


A            31. It is well settled in law that alternative defences are permissible
      to contest a claim. It was thus open to the Appellant Company, to refute
      the claim of the Respondents by taking the plea of limitation and also to
      contend that no amount was in fact due and payable by the Appellant
      Company to the Respondents.
B            32. In Innoventive Industries Ltd. v. ICICI Bank and Anr.1,
      the Supreme Court observed and held:-
             “27. The scheme of the Code is to ensure that when a default
             takes place, in the sense that a debt becomes due and is not
             paid, the insolvency resolution process begins. Default is
             defined in Section 3(12) in very wide terms as meaning non-
C            payment of a debt once it becomes due and payable, which
             includes non-payment of even part thereof or an instalment
             amount. For the meaning of “debt”, we have to go to Section
             3(11), which in turn tells us that a debt means a liability of
             obligation in respect of a “claim” and for the meaning of
D            “claim”, we have to go back to Section 3(6) which defines
             “claim” to mean a right to payment even if it is disputed. The
             Code gets triggered the moment default is of rupees one lakh
             or more (Section 4). The corporate insolvency resolution
             process may be triggered by the corporate debtor itself or a
             financial creditor or operational creditor. A distinction is made
E            by the Code between debts owed to financial creditors and
             operational creditors. A financial creditor has been defined
             under Section 5(7) as a person to whom a financial debt is
             owed and a financial debt is defined in Section 5(8) to mean
             a debt which is disbursed against consideration for the time
F            value of money. As opposed to this, an operational creditor
             means a person to whom an operational debt is owed and an
             operational debt under Section 5 (21) means a claim in respect
             of provision of goods or services.
             28. When it comes to a financial creditor triggering the
             process, Section 7 becomes relevant. Under the explanation
G
             to Section 7(1), a default is in respect of a financial debt
             owed to any financial creditor of the corporate debtor – it
             need not be a debt owed to the applicant financial creditor.
             Under Section 7(2), an application is to be made under sub-

H     1
          (2018) 1 SCC 407
        M/S. RADHA EXPORTS (INDIA) PVT. LIMITED v.                            285
        K.P. JAYARAM & ANR. [INDIRA BANERJEE, J.]

       section (1) in such form and manner as is prescribed, which            A
       takes us to the Insolvency and Bankruptcy (Application to
       Adjudicating Authority) Rules, 2016. Under Rule 4, the
       application is made by a financial creditor in Form 1
       accompanied by documents and records required therein. Form
       1 is a detailed form in 5 parts, which requires particulars of
                                                                              B
       the applicant in Part I, particulars of the corporate debtor in
       Part II, particulars of the proposed interim resolution
       professional in part III, particulars of the financial debt in
       part IV and documents, records and evidence of default in
       part V. Under Rule 4(3), the applicant is to dispatch a copy
       of the application filed with the adjudicating authority by            C
       registered post or speed post to the registered office of the
       corporate debtor. The speed, within which the adjudicating
       authority is to ascertain the existence of a default from the
       records of the information utility or on the basis of evidence
       furnished by the financial creditor, is important. This it must
                                                                              D
       do within 14 days of the receipt of the application. It is at the
       stage of Section 7(5), where the adjudicating authority is to
       be satisfied that a default has occurred, that the corporate
       debtor is entitled to point out that a default has not occurred
       in the sense that the “debt”, which may also include a disputed
       claim, is not due. A debt may not be due if it is not payable in       E
       law or in fact. The moment the adjudicating authority is
       satisfied that a default has occurred, the application must be
       admitted unless it is incomplete, in which case it may give
       notice to the applicant to rectify the defect within 7 days of
       receipt of a notice from the adjudicating authority. Under
                                                                              F
       sub-section (7), the adjudicating authority shall then
       communicate the order passed to the financial creditor and
       corporate debtor within 7 days of admission or rejection of
       such application, as the case may be.”
       33. The proposition of law which emerges from Innoventive
Industries Ltd. (supra) is that the Insolvency Resolution Process begins      G
when a default takes place. In other words, once a debt or even part
thereof becomes due and payable, the resolution process begins. Section
3(11) defines ‘debt’ as a liability or obligation in respect of a claim and
the claim means a right to payment even if it is disputed. The Code gets
triggered the moment default is of Rs.1,00,000/- or more. Once the
                                                                              H
286               SUPREME COURT REPORTS                       [2020] 8 S.C.R.


A     Adjudicating Authority is satisfied that a default has occurred, the
      application must be admitted, unless it is otherwise incomplete and not in
      accordance with the rules. The judgment is however, not an authority
      for the proposition that a petition under Section 7 of the IBC has to be
      admitted, even if the claim is ex facie barred by limitation.
B            34. On the other hand, in B.K. Educational Services Pvt. Ltd. v.
      Parag Gupta and Associates2, this Court held:-
             “42. It is thus clear that since the Limitation Act is applicable
             to applications filed under Sections 7 and 9 of the Code from
             the inception of the Code, Article 137 of the Limitation Act
             gets attracted. “The right to sue”, therefore, accrues when a
C            default occurs. If the default has occurred over three years
             prior to the date of filing of the application, the application
             would be barred under Article 137 of the Limitation Act, save
             and except in those cases where, in the facts of the case,
             Section 5 of the Limitation Act may be applied to condone the
D            delay in filing such application.”
             35. The judgment in B.K. Educational Services Pvt. Ltd. (supra)
      was referred to and relied upon by the Court in Vashdeo R. Bhojwani v.
      Abhyudaya Co-operative Bank Ltd.3.
             36. It was for the applicant invoking the Corporate Insolvency
E     Resolution Process, to prima facie show the existence in his favour, of
      a legally recoverable debt. In other words, the respondent had to show
      that the debt is not barred by limitation, which they failed to do.
             37. Under clauses (19) to (21) of Part II of the Schedule of the
      Limitation Act 1963, the period of limitation for initiation of a suit for
      recovery of money lent, is three years from the date on which the loan
F
      is paid. The last loan amount is said to have been advanced in 2004-
      2005. In the winding up petition, there is not a whisper of any agreed
      date by which the alleged loan was to be repaid to the Respondents. In
      the instant case, apparently the debt was barred by limitation even in the
      year 2012, when winding up proceedings were initiated in the Madras
G     High Court.
             38. The NCLT rightly refused to admit the application under
      Section 7 of the IBC, holding the same to be barred by limitation. The
      Appellate Tribunal has erred in law in reversing the judgment and order
      2
          (2019) 11 SCC 633
      3
H         (2019) 9 SCC 158
        M/S. RADHA EXPORTS (INDIA) PVT. LIMITED v.                              287
        K.P. JAYARAM & ANR. [INDIRA BANERJEE, J.]

of the earlier Adjudicating Authority. The Adjudicating Authority rightly       A
rejected the application as barred by limitation. The Appellate Authority
patently erred in law in reversing the decision of the adjudicating authority
and admitting the application.
       39. As recorded in the said order dated 19th December, 2018 passed
by the NCLT Chennai, the Respondent Nos. 1 and 2 jointly addressed
                                                                                B
the letter dated 11th January, 2011 to the Income Tax Department
confirming that the Respondent No.1 had requested the Appellant
Company to transfer a sum of Rs.90 lakhs to his wife, the Respondent
No.2 for allotment of shares in the Appellant Company and further
acknowledged that the amount outstanding from the erstwhile firm
M/s. Radha Exports to the Respondent was Rs.1,39,60,000/- as on 31 st           C
March, 2004. The said letter has been extracted in full in Paragraph (9)
of the judgment and order dated 19th December, 2018 of NCLT.
       40. There are, as observed above cogent records including letters
signed by the Respondent Nos. 1 and 2 which evince that on 6th October,
2007, Respondent No.2 resigned from the Board of the Appellant
                                                                                D
Company and at that time the Respondent No.2 requested the Appellant
Company to treat the share application money of Rs.90,00,000/- as share
application money of Mr. M. Krishnan and to issue shares for aforesaid
value to Mr. M. Krishnan. The amount was to be treated as a personal
loan from the Respondent No.2 to Mr. M. Krishnan. A personal Loan to
a Promoter or a Director of a company cannot trigger the Corporate              E
Resolution Process under the IBC. Disputes as to whether the signatures
of the Respondents are forged or whether records have been fabricated
can be adjudicated upon evidence including forensic evidence in a regular
suit and not in proceedings under Section 7 of the IBC.
       41. It is, however, made clear that the observations made above,
                                                                                F
with regard to limitation are based on the pleadings and annexures in the
winding up proceedings under Sections 433/434 of the Companies Act,
1956 filed in Madras High Court, which were transferred to the NCLT
and also the pleadings in CP/77/ (IB)/CB/2018 and WCP No. 770/IB/
CB/C-II/2018 filed before the Chennai Bench of NCLT. Any suit filed
by the Respondents against Mr. Krishnan or against the company will             G
be decided on its own merits without being swayed by the observations
made in this judgment.
       42. Even otherwise, the application under Section 7 of the IBC
was not maintainable. As rightly held by the NCLT there was no financial
debt in existence. In this context, it would be pertinent to refer to the       H
following provisions of the IBC:-
288      SUPREME COURT REPORTS                         [2020] 8 S.C.R.


A     “3. Definitions.- In this Code, unless the context otherwise
      requires,—
       …….
      (8) “corporate debtor” means a corporate person who owes a
      debt to any person;
B     …….
      (10) “creditor” means any person to whom a debt is owed and
      includes a financial creditor, an operational creditor, a secured
      creditor, an unsecured creditor and a decree-holder;
      (11) “debt” means a liability or obligation in respect of a claim
C     which is due from any person and includes a financial debt and
      operational debt;
      (12) “default” means non-payment of debt when whole or any
      part or instalment of the amount of debt has become due and
      payable and is not paid by the debtor or the corporate debtor, as
D     the case may be.
                  xxx                      xxx                      xxx
      5. Definitions.- In this Part, unless the context otherwise
      requires,-
      ……...
E     (7) “financial creditor” means any person to whom a financial
      debt is owed and includes a person to whom such debt has been
      legally assigned or transferred to;
      (8) “financial debt” means a debt alongwith interest, if any, which
      is disbursed against the consideration for the time value of money
F     and includes—
      (a) money borrowed against the payment of interest;
      (b) any amount raised by acceptance under any acceptance credit
      facility or its de-materialised equivalent;
      (c) any amount raised pursuant to any note purchase facility or
G     the issue of bonds, notes, debentures, loan stock or any similar
      instrument;
      (d) the amount of any liability in respect of any lease or hire
      purchase contract which is deemed as a finance or capital lease
      under the Indian Accounting Standards or such other accounting
      standards as may be prescribed;
H
 M/S. RADHA EXPORTS (INDIA) PVT. LIMITED v.                              289
 K.P. JAYARAM & ANR. [INDIRA BANERJEE, J.]

(e) receivables sold or discounted other than any receivables sold       A
on nonrecourse basis;
(f) any amount raised under any other transaction, including any
forward sale or purchase agreement, having the commercial effect
of a borrowing;
(g) any derivative transaction entered into in connection with           B
protection against or benefit from fluctuation in any rate or price
and for calculating the value of any derivative transaction, only
the market value of such transaction shall be taken into account;
(h) any counter-indemnity obligation in respect of a guarantee,
indemnity, bond, documentary letter of credit or any other instrument    C
issued by a bank or financial institution;
(i) the amount of any liability in respect of any of the guarantee or
indemnity for any of the items referred to in sub-clauses (a) to (h)
of this clause;
           xxx               xxx               xxx
                                                                         D
7. Initiation of corporate insolvency resolution process by
financial creditor.- (1) A financial creditor either by itself or
jointly with other financial creditors, or any other person on behalf
of the financial creditor, as may be notified by the Central Govt.
may file an application for initiating corporate insolvency resolution
process against a corporate debtor before the Adjudicating               E
Authority when a default has occurred.
           xxx               xxx               xxx
8. Insolvency resolution by operational creditor.- (1) An
operational creditor may, on the occurrence of a default, deliver a
demand notice of unpaid operational debtor copy of an invoice            F
demanding payment of the amount involved in the default to the
corporate debtor in such form and manner as may be prescribed.
(2) The corporate debtor shall, within a period of ten days of the
receipt of the demand notice or copy of the invoice mentioned in
sub-section (1) bring to the notice of the operational creditor—         G
    (a) existence of a dispute, if any, on record of the pendency of
    the suit or arbitration proceedings filed before the receipt of
    such notice or invoice in relation to such dispute;
    (b) the payment of unpaid operational debt—
                                                                         H
290                SUPREME COURT REPORTS                          [2020] 8 S.C.R.


A                     (i) by sending an attested copy of the record of electronic
                      transfer of the unpaid amount from the bank account of the
                      corporate debtor; or
                      (ii) by sending an attested copy of record that the operational
                      creditor has encashed a cheque issued by the corporate
B                     debtor.
              Explanation.—For the purposes of this section, a “demand notice”
              means a notice served by an operational creditor to the corporate
              debtor demanding payment of the operational debt in respect of
              which the default has occurred.”
C             43. The definition of ‘financial debt’ in Section 5(8) makes it
      clear that ‘financial debt’ means a debt along with interest, if any,
      disbursed against the consideration for time value of money and
      would include money raised or borrowed against the payment of interest;
      amount raised by acceptance under any acceptance credit facility or its
      de-materialised equivalent; amount raised pursuant to any note
D     purchase facility or the issue of bonds, notes, debentures, loan
      stock or any similar instrument; the amount of any liability in respect
      of any lease or hire purchase contract which is deemed as a finance or
      capital lease under the Indian Accounting Standards or such other
      accounting standards as may be prescribed; receivables sold or
E     discounted other than any receivables sold on non-recourse basis or any
      amount raised under any other transaction, including any forward sale
      or purchase agreement, having the commercial effect of a borrowing.
      Explanation to Section 5(8) which relates to real estate projects is of no
      relevance in the facts and circumstances of this case. The payment
      received for shares, duly issued to a third party at the request of the
F     payee as evident from official records, cannot be a debt, not to speak of
      financial debt. Shares of a company are transferable subject to restrictions,
      if any, in its Articles of Association and attract dividend when the company
      makes profits.
              44. The appeal is, for the reasons discussed above, allowed. The
G     impugned judgment and order of the Appellate Tribunal is set aside and
      the order of the Adjudicating Authority dismissing the application, is
      restored.

      Ankit Gyan                                                      Appeal allowed.

H