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M/S Radha Exports (India) Pvt. Ltd. v. K.P. Jayaram & Anr.

Civil Appeal · 2020 INSC 518Decided 28 Aug 2020
Civil Appeal No. 7474 of 2019
Justice Arun Mishra · Justice Indira Banerjee

Background

The respondents had advanced roughly Rs. 2.20 crores as unsecured, interest-free loans between 2002 and 2005 to a proprietorship business that was later incorporated as the appellant company. The appellant claimed the loan was fully repaid by 2006 (partly by converting Rs. 90 lakhs into share application money, later reassigned as a personal loan between individuals). Years later, in 2018, the respondents filed an application under Section 7 of the Insolvency and Bankruptcy Code (IBC) claiming to be "financial creditors" owed over Rs. 4.4 crores with interest. The NCLT dismissed this as time-barred and unproven; the NCLAT reversed that and admitted the application.

Decision Breakdown

The Supreme Court restored the NCLT's dismissal, holding that a Section 7 IBC claim is governed by the ordinary three-year limitation period under the Limitation Act, and here the respondents' own letters to the Income Tax Department showed the debt (if any) dated back to 2002-2007, making the 2018 claim hopelessly time-barred. The Court also held that the Rs. 90 lakh share-application adjustment, later treated as a personal arrangement between individuals, could not constitute a "financial debt" owed by the company. Allegations of forged signatures and fraud, the Court noted, must be proved in a regular civil suit, not decided in summary IBC proceedings.

Lesson Learnt

Insolvency proceedings under the IBC are not a shortcut to recover old, time-barred debts: a creditor must show the debt was legally recoverable within the three-year limitation period, and disputes involving allegations of fraud or forged documents must be litigated through a proper civil suit with evidence, not through the IBC's summary process.

Official source (sci.gov.in)View Judgment (PDF)

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