A time-barred debt died in 2015. One signed OTS letter revived it.

When a Debtor's Promise to Pay Can Save a Time-Barred Insolvency Petition

Kotak Mahindra Bank had a problem. It had lent money to Kew Precision Parts Private Limited, a manufacturer of tempo and tractor components, starting in November 2012. The company defaulted. By September 2015, the account was declared a Non-Performing Asset. The bank chased its security under the SARFAESI Act. It got a One-Time Settlement offer from the debtor in December 2018—an agreed amount, in writing, signed. The debtor then defaulted on that settlement too.

So the bank filed a Section 7 application under the Insolvency and Bankruptcy Code in January 2019. The NCLT admitted it. The NCLAT reversed it, holding the application was time-barred because the original default happened in June 2015—more than three years before the IBC petition. The question for the Supreme Court was deceptively simple: could the written OTS proposal, made after the limitation period had expired, give the bank a fresh lease of life?

The Default That Started the Clock

The loan agreement between Kotak Mahindra Bank and Kew Precision Parts was signed in November 2012. The company manufactured components for tempos and tractors. By June 2015, the borrower had stopped paying. The bank formally classified the account as an NPA on 30 September 2015, and recalled the entire loan on 9 October 2015. That was the date of default for limitation purposes.

The bank then pursued its remedies under the SARFAESI Act, issuing a statutory notice under Section 13(2) on 19 November 2017. That route did not yield full recovery. Meanwhile, the corporate debtor approached the bank with a One-Time Settlement proposal in December 2018. The proposal was in writing, signed by the debtor, and offered to settle the outstanding debt for a specified amount, payable by 31 December 2018. The bank accepted. The debtor did not pay.

On 17 January 2019, Kotak Mahindra Bank filed a Section 7 application before the NCLT, New Delhi, seeking initiation of Corporate Insolvency Resolution Process against Kew Precision Parts. The NCLT admitted the application on 6 September 2019, holding that there was a continuous cause of action and that the limitation period ran from the date of the OTS agreement.

What the NCLAT Got Wrong

The corporate debtor appealed to the NCLAT. On 8 January 2020, the Appellate Tribunal reversed the NCLT's order. It held that the Section 7 application was barred by limitation under Article 137 of the Limitation Act, which prescribes a three-year period for applications. Since the default occurred in June 2015 and the application was filed in January 2019, the NCLAT concluded it was time-barred. It further held that an acknowledgment under Section 18 of the Limitation Act, made after the limitation period had expired, could not revive a time-barred claim.

The NCLAT did not consider the OTS proposal as a promise to pay a time-barred debt under Section 25(3) of the Indian Contract Act, 1872. That was the critical error.

The Doctrine That Saved the Day

Before the Supreme Court, the bank argued that the OTS proposal constituted either an acknowledgment under Section 18 of the Limitation Act or, alternatively, a promise to pay a time-barred debt under Section 25(3) of the Indian Contract Act. The corporate debtor countered that the acknowledgment was made after limitation had expired and therefore could not revive the claim.

The Bench of Justice Indira Banerjee and Justice J.K. Maheshwari examined the law with precision. They began with the foundational principle that a debt is not extinguished by limitation; only the remedy gets barred by the passage of time. A promise to pay a time-barred debt constitutes a novation—a new contract independent of the original debt.

Section 25(3) of the Indian Contract Act states: "It is a promise, made in writing and signed by the person to be charged therewith... to pay wholly or in part a debt of which the creditor might have enforced payment but for the law for the limitation of suits." The Court held that such a promise creates a fresh cause of action with its own limitation period of three years from the due date under the new agreement.

The OTS proposal dated December 2018 was in writing, signed by the corporate debtor, and acknowledged the debt. It was a clear promise to pay a time-barred debt. The bank filed its Section 7 application in January 2019—within three years of that promise. The application was therefore within limitation.

THE PLAY: A written, signed promise by a corporate debtor to pay a time-barred debt—even after the original limitation period has expired—creates a fresh cause of action under Section 25(3) of the Indian Contract Act, with its own three-year limitation period from the due date of that promise.

Why the NCLAT's Reasoning Collapsed

The Court also clarified the distinction between Section 18 of the Limitation Act and Section 25(3) of the Contract Act. Section 18 requires an acknowledgment to be made before the expiry of the limitation period to commence a fresh period. An acknowledgment made after expiry cannot revive a time-barred claim. But Section 25(3) operates differently—it creates a new contract, not merely an acknowledgment of an old one.

The NCLAT had treated the OTS proposal as an acknowledgment under Section 18 and concluded it was ineffective because it was made after limitation. The Supreme Court held that the NCLAT should have considered whether the OTS proposal constituted a promise under Section 25(3), which would have given the bank a fresh limitation period.

The Court further noted that the requirement under Section 7(5)(b) of the IBC—to give notice to the applicant to rectify defects before rejecting an application—extends to appeals, as an appeal is a continuation of original proceedings. The NCLAT had not given the bank such notice before dismissing the application as time-barred.

The Precedents That Guided the Court

The Court relied on several key precedents. In Swiss Ribbons Pvt. Ltd. v. Union of India (2019) 4 SCC 17, the Court had held that the IBC is beneficial legislation aimed at putting the corporate debtor back on its feet, and that CIRP is protective, not adversarial, to the corporate debtor's interests. In B.K. Educational Services (P) Ltd. v. Parag Gupta & Associates (2019) 11 SCC 633, the Court had established that NCLT/NCLAT has discretion to entertain applications after the prescribed limitation period if sufficient cause exists.

In Sesh Nath Singh v. Baidyabati Sheoraphuli Cooperative Bank Ltd. (2021) 7 SCC 313, the Court had held that Section 18 of the Limitation Act applies to IBC proceedings "as far as may be," and that acknowledgment must be before limitation expires. In Dena Bank (Now Bank of Baroda) v. C. Shivakumar Reddy (2021) 10 SCC 330, the Court had held that there is no bar to filing documents at any time until the final order admitting or dismissing an IBC application has been passed.

What This Means for Practitioners

For advocates advising financial creditors, this judgment is a critical tool. If your client's Section 7 application is time-barred because the original default occurred more than three years ago, look for any written, signed communication from the corporate debtor that promises to pay the debt. An OTS proposal, a settlement letter, or even an email acknowledging the debt and promising payment can create a fresh cause of action under Section 25(3) of the Indian Contract Act.

For CFOs and founders, the lesson is stark: do not sign anything that acknowledges a debt or promises to pay it after the limitation period has expired. Such a document can revive a dead claim and expose the company to insolvency proceedings. If you are in financial distress, consult legal counsel before making any written settlement offer to a creditor.

The Court also clarified that time spent pursuing remedies under the SARFAESI Act or other recovery laws cannot be excluded in computing the limitation period for CIRP initiation. So banks cannot rely on the time spent in SARFAESI proceedings to extend the limitation period for an IBC application.

The Bottom Line

A written, signed promise by a corporate debtor to pay a time-barred debt creates a fresh cause of action under Section 25(3) of the Indian Contract Act, with its own three-year limitation period—and this principle applies fully to Section 7 applications under the IBC, meaning financial creditors can revive otherwise dead claims by relying on such promises made after the original limitation period has expired.