A bank's loan was time-barred. A settlement letter changed everything.

The debt was 3 years old. The bank was told it was too late. Then a settlement letter arrived — and the Supreme Court said: that changes everything.

In January 2019, Kotak Mahindra Bank walked into the National Company Law Tribunal (NCLT — a specialised court for company and insolvency cases) with a single question: could it force a borrower into insolvency for a default that had happened three and a half years earlier? The NCLT said yes. The appellate tribunal said no — the debt was dead, killed by the three-year limitation clock. But the Supreme Court found something the lower courts had missed: a settlement letter, written after the debt was time-barred, that might have brought it back to life.

When the loan went bad

Kew Precision Parts Private Limited made tempo and tractor components. In November 2012, Kotak Mahindra Bank lent the company money for business expansion. The company paid for a while, then stopped. By September 2015, the bank declared the account a Non-Performing Asset (NPA — a loan that has stopped generating income for the bank). The default, as the bank later admitted, had occurred in June 2015.

The bank tried to recover the money through the SARFAESI Act (a law that lets banks seize and sell a defaulter's assets without going to court). It issued a statutory notice in November 2017. The file grew thick with demand letters, but nothing worked. The company's factory floor fell silent.

The settlement letter signed in December

Then, in December 2018 — three and a half years after the default — the company offered a one-time settlement. On 20 December 2018, both sides agreed: Kew Precision Parts would pay Rs.24.55 crores to close the loan. The company's directors signed the settlement letter, the ink still fresh on the paper. It never paid a rupee.

On 4 January 2019, the bank filed an application under Section 7 of the Insolvency and Bankruptcy Code (IBC — the law that allows creditors to push a defaulting company into a court-supervised restructuring or liquidation process). The NCLT admitted the petition and started the Corporate Insolvency Resolution Process (CIRP — the formal restructuring process).

The NCLAT bench reads the clock

The company appealed to the National Company Law Appellate Tribunal (NCLAT — the court that hears appeals from the NCLT). The NCLAT bench looked at the dates and found a problem. The default had occurred in June 2015. The bank had filed its insolvency application in January 2019. Article 137 of the Limitation Act (the provision that sets a three-year deadline for filing applications when no other deadline is specified) applied to IBC cases — the Supreme Court had already settled that in B.K. Educational Services v. Parag Gupta. Three years from June 2015 meant the deadline expired in June 2018. The bank had filed seven months late. The courtroom fell silent as the judgment was read.

The NCLAT set aside the NCLT order. The debt was time-barred, it said. The insolvency process could not continue.

A letter signed, a promise broken

The bank appealed to the Supreme Court. Its argument was simple: the December 2018 settlement letter was not just a negotiation. It was a written promise to pay a debt — and under Section 25(3) of the Indian Contract Act (a provision that makes a written promise to pay a time-barred debt enforceable as a fresh contract), that promise created a new, independent obligation. The bank's lawyer held the letter, its signature lines filled, as he argued before the bench. The three-year clock for that new obligation started on 20 December 2018, when the payment was due. The bank had filed its insolvency application on 4 January 2019 — well within three years.

The company argued the opposite: the settlement letter was at best an acknowledgment under Section 18 of the Limitation Act (a written admission of liability that can extend the limitation period). But Section 18 only works if the acknowledgment is made before the limitation period expires. By December 2018, the limitation period had already ended. An acknowledgment of a dead debt could not revive it.

The critical distinction the court drew

The Supreme Court bench — Justice Indira Banerjee and Justice J.K. Maheshwari — saw a crucial difference between the two legal provisions that the NCLAT had missed. The judges' chambers were filled with the weight of old case files and the smell of paper.

Section 18 of the Limitation Act, the court explained, requires an acknowledgment to be made while the limitation period is still running. It does not need a promise to pay — just a written admission that the debt exists. If you acknowledge a debt in year two of a three-year period, the clock resets. But if you acknowledge it in year four, the debt is already dead. The acknowledgment cannot bring it back.

Section 25(3) of the Indian Contract Act works differently. It applies only to debts that are already time-barred. It requires an express written promise to pay — not just an acknowledgment. And when that promise exists, it creates a fresh contract, enforceable on its own terms, independent of the original debt. The old clock does not restart. A new clock begins.

"A written promise to pay a time-barred debt under Section 25(3) of the Indian Contract Act constitutes a valid contract and novation," the court held, "creating a fresh cause of action enforceable within three years from the due date of payment under the new agreement, independent of the original debt."

Why the case went back

The Supreme Court found that the NCLAT had not considered whether the December 2018 settlement letter amounted to a promise under Section 25(3). The NCLAT had treated the letter as a mere acknowledgment and concluded that since the limitation period had expired, nothing could save the bank's application. But if the letter contained an express written promise to pay, the analysis would be fundamentally different. The file felt thin in the hands of the judges as they considered what had been missed.

The court also noted a procedural point: under Section 7(5)(b) of the IBC (which requires the NCLT to give the applicant notice and an opportunity to fix defects before rejecting an application), the bank should have been heard on whether the settlement letter created a fresh cause of action. The NCLAT, hearing an appeal, should have applied the same principle — since an appeal is a continuation of the original proceedings.

The Supreme Court set aside the NCLAT order and sent the case back. The NCLAT was directed to examine whether the December 2018 settlement letter constituted a promise under Section 25(3) of the Indian Contract Act, and if so, whether the bank's insolvency application was within the limitation period calculated from the date payment was due under that new agreement.

What this means for lenders and borrowers

For banks holding time-barred debts, this judgment opens a door. A written settlement offer — even one made after the limitation period has expired — can create a fresh enforceable obligation if it contains an express promise to pay. The key is the language: an acknowledgment of a dead debt does nothing, but a promise to pay a dead debt creates a new contract.

For borrowers, the lesson is equally sharp. Signing a settlement letter after the limitation period has expired is not a harmless gesture. If the letter contains a clear promise to pay, it can restart the enforcement clock — and bring the insolvency hammer down on a company that thought it had escaped.

The distinction between Section 18 of the Limitation Act and Section 25(3) of the Indian Contract Act is now clearer than ever. One requires a timely admission; the other thrives on a late promise. The settlement letter that arrives after the clock has run out is not necessarily a dead document — it can be a new beginning, provided the words are right.

For legal practitioners, the lesson is precise: when drafting settlement letters for time-barred debts, ensure the language contains an express written promise to pay — not just an acknowledgment of liability — to create a fresh, enforceable contract under Section 25(3) of the Indian Contract Act. The difference between a dead acknowledgment and a living promise is often just a line of text.

THE PLAY: When drafting settlement letters for time-barred debts, ensure the language contains an express written promise to pay — not just an acknowledgment of liability — to create a fresh, enforceable contract under Section 25(3) of the Indian Contract Act.

The settlement letter arrived three years too late. The Supreme Court said: for a promise, three years is just the beginning.