NCLAT Upholds Initiation of Insolvency Proceedings Against Privilege Power Infrastructure Ltd.

Appellate Tribunal confirms debt acknowledgment and fraud discovery as key factors in the timely filing of insolvency application by Unity Small Finance Bank Ltd.

In a significant ruling, the National Company Law Appellate Tribunal (NCLAT), Principal Bench, New Delhi, upheld the decision of the National Company Law Tribunal (NCLT), allowing the initiation of the Corporate Insolvency Resolution Process (CIRP) against Privilege Power Infrastructure Limited (PPIL). The case, brought forth by Unity Small Finance Bank Ltd. (formerly Punjab and Maharashtra Co-operative Bank), revolved around the acknowledgment of debt, the discovery of fraud, and the validity of financial transactions under the Insolvency and Bankruptcy Code, 2016.

The appellant, Mr. Sarang Kumar Wadhawan, argued that the insolvency application was time-barred and tainted by fraudulent transactions. However, the NCLAT, comprising Justice Ashok Bhushan, Chairperson, Barun Mitra, and Arun Baroka, Members (Technical), dismissed these claims, citing multiple legal provisions that justified the application’s timeliness and validity.

Central to the Tribunal’s decision was the acknowledgment of debt through various transaction documents and balance confirmations, which constituted a "Promise to Pay" under Section 25(3) of the Indian Contract Act, 1872. This acknowledgment effectively granted a fresh cause of action, thereby extending the limitation period.

Moreover, the Tribunal recognized the impact of fraud discovery on the limitation period. It noted that the fraud, involving significant financial irregularities, was uncovered in 2019 following a re-audit and recasting of financial statements by the Reserve Bank of India (RBI). This discovery meant that the limitation period did not commence until the fraud was revealed, aligning with Section 17 of the Limitation Act, 1963.

The NCLAT also emphasized that the transactions in question qualified as "Financial Debt" under Section 5(8) of the Insolvency and Bankruptcy Code, 2016, despite allegations of fraudulent elements. The existence of debt and default was sufficiently established, supporting the continuation of insolvency proceedings.

The judgment underscores the Tribunal's commitment to uphold the principles of insolvency law while ensuring that procedural technicalities, such as limitation periods and fraud, are judiciously considered in the resolution process.

Bottom Line:

Insolvency and Bankruptcy Code - Section 7 application filed within limitation due to acknowledgment of debt under Section 18 and 19 of the Limitation Act, 1963, and "Promise to Pay" under Section 25(3) of the Indian Contract Act, 1872.

Statutory provision(s):  

• Insolvency and Bankruptcy Code, 2016 - Section 7  
• Limitation Act, 1963 - Sections 17, 18, 19  
• Contract Act, 1872 - Section 25(3)

Sarang Kumar Wadhawan v. Unity Small Finance Bank Ltd., (NCLAT)(Principal Bench, New Delhi) : Law Finder Doc Id # 2796840