NCLAT Upholds Insolvency Proceedings Against Privilege Power, Rules Limitation Suspended Till Discovery of PMC Bank Fraud
Introduction
The National Company Law Appellate Tribunal (NCLAT), New Delhi, upheld the initiation of Corporate Insolvency Resolution Process (CIRP) against Privilege Power and Infrastructure Pvt. Ltd. (PPIL), dismissing an appeal filed by its shareholder, Sarang Kumar Wadhawan. The appellate tribunal comprising Chairperson Ashok Bhushan and Members Barun Mitra and Arun Baroka affirmed that the application filed by Unity Small Finance Bank Ltd., successor to Punjab and Maharashtra Co-operative Bank (PMC Bank), was well within limitation under Section 17 of the Limitation Act, 1963, as the fraud was discovered only in 2019.
Factual Background
In 2007, PMC Bank extended an overdraft facility of ₹11.81 crore to PPIL, a group company of Housing Development and Infrastructure Ltd. (HDIL). The account was classified as non-performing on August 31, 2012. In 2019, following the Reserve Bank of India’s intervention in the PMC Bank scam, a re-audit of the bank’s books revealed irregularities in several loan accounts, including that of PPIL. The re-audit concluded on December 27, 2019, identifying fraudulent transactions. Subsequently, Unity Small Finance Bank Ltd., as PMC Bank’s successor, filed a Section 7 application under the Insolvency and Bankruptcy Code (IBC) in 2020, seeking initiation of CIRP against PPIL.
Procedural Background
The National Company Law Tribunal (NCLT), Mumbai, by its order dated February 2023, admitted the Section 7 application and initiated CIRP against PPIL. Aggrieved by this order, shareholder Sarang Kumar Wadhawan filed an appeal before the NCLAT, contending that the petition was time-barred and vitiated by fraudulent documentation.
Issues
1. Whether the CIRP application filed by Unity Small Finance Bank was barred by limitation.
2. Whether the overdraft facility availed in 2007 and the facility documents of 2017–2018 constituted distinct transactions.
Contentions of the Parties
The Appellant, Sarang Kumar Wadhawan, argued that the default had occurred in 2012 when the account was declared NPA, rendering the 2020 insolvency petition time-barred. He alleged that the subsequent documents of 2017–2018 were fabricated to revive a time-barred debt and that the entire transaction formed part of a fraudulent scheme between PPIL and PMC Bank’s former management.
The Respondent Bank contended that the limitation period did not commence until the discovery of fraud in 2019, in line with Section 17 of the Limitation Act. It was further submitted that the debtor-creditor relationship continued through acknowledgments and the maintenance of an active overdraft account, evidencing a subsisting liability.
Reasoning and Analysis
The NCLAT held that Section 17 of the Limitation Act applies to cases where fraud conceals the right to sue, and the limitation begins only upon discovery of such fraud. Since the Administrator’s re-audit exposing fraudulent accounts was completed on December 27, 2019, the insolvency petition filed in 2020 was within limitation. The tribunal observed that PPIL had continuously acknowledged its indebtedness to PMC Bank through various documents, reflecting an ongoing debtor-creditor relationship. Rejecting the appellant’s claim that the 2007 and 2017 facilities were distinct, the Bench noted that both formed part of a continuous financial arrangement. It emphasized that the later security documents and acknowledgments substantiated the continuity of liability and the validity of the debt under the IBC framework.
Implications
The ruling reinforces that limitation under the IBC is subject to Section 17 of the Limitation Act when fraud is subsequently unearthed. It clarifies that continuous acknowledgment of liability through audited records or security renewals sustains the validity of debt claims. The decision also underscores that insolvency cannot be resisted on limitation grounds when concealment or fraudulent conduct delays the discovery of default.
Order
The NCLAT dismissed the appeal filed by Sarang Kumar Wadhawan and upheld the NCLT’s order initiating CIRP against Privilege Power and Infrastructure Pvt. Ltd. It held that the petition was filed within the permissible period of limitation, as the fraud was discovered only upon re-audit in 2019.
In this case the appellant was represented by Ms. Menaka Guruswamy, Sr. Advocate with Ms. Disha Shah, Ms. Bhumika Yadav, Mr. Rohan Talwar and Mr. Avinash Mathew, Advocates.