Bank's insolvency plea against defaulting firm: can a late 'promise to pay' revive a dead claim?

The bank missed the 3-year deadline to file for insolvency. Then the company made a settlement offer. The question: can that offer resurrect a dead claim?

By January 2019, Kotak Mahindra Bank had already lost three years and four months since Kew Precision Parts defaulted on its loans. The bank had tried everything — declared the account a non-performing asset, recalled the loan, issued notices under the SARFAESI Act (a law that lets banks seize assets without going to court). Nothing worked. The company, a manufacturer of tempo and tractor components, wasn't paying.

Then, in December 2018, something shifted. Kew Precision Parts sent the bank a one-time settlement proposal — an offer to pay Rs. 24.55 crores and close the debt. The bank accepted. The company agreed. Then the company defaulted on the settlement too.

Frustrated, the bank filed for insolvency under Section 7 of the Insolvency and Bankruptcy Code (IBC) — the provision that lets a financial creditor ask the National Company Law Tribunal (NCLT) to start a Corporate Insolvency Resolution Process (CIRP) against a defaulting company. The NCLT admitted the application. But the company appealed, and the National Company Law Appellate Tribunal (NCLAT) reversed the order. The NCLAT held that the bank's application was dead on arrival — barred by the three-year limitation period that starts ticking from the date of default.

The bank had missed that deadline by over a year. But the settlement offer, the bank argued, should change everything.

The Supreme Court had to decide a question that cuts to the heart of commercial law in India: can a late 'promise to pay' breathe life into a claim that the law has already declared dead?

When the clock ran out

The facts were not in dispute. Kotak Mahindra Bank had extended credit to Kew Precision Parts starting November 2012. The company defaulted on repayments. On 30 September 2015, the bank declared the account a non-performing asset (NPA) — a formal recognition that the loan had gone bad. The loan was recalled on 9 October 2015.

Under the Limitation Act, 1963, a financial creditor has three years from the date of default to file an application under Section 7 of the IBC. This period is governed by Article 137 of the Limitation Act — the residuary article that applies to any application for which no specific limitation period is provided.

The default, according to the bank's own case, occurred in June 2015. The NPA was declared in September 2015. The bank filed its Section 7 application in January 2019 — well past the three-year mark.

But between the default and the filing, something happened. In December 2018, Kew Precision Parts made a one-time settlement (OTS) offer to the bank. The bank accepted. The company agreed to pay Rs. 24.55 crores. Then the company failed to honour even that agreement.

The bank argued that this OTS proposal was not just a settlement offer — it was a legal lifeline. It could either be treated as an 'acknowledgment' of debt under Section 18 of the Limitation Act, or as a 'promise to pay a time-barred debt' under Section 25(3) of the Indian Contract Act, 1872. Either way, the bank said, the limitation clock should reset.

The NCLT and NCLAT split

The NCLT, New Delhi, agreed with the bank. On 6 September 2019, the adjudicating authority admitted the Section 7 application and initiated the Corporate Insolvency Resolution Process against Kew Precision Parts. The NCLT found that there was a "continuous cause of action" — the OTS proposals kept the debt alive.

But the NCLAT reversed that decision on 8 January 2020. The appellate tribunal held that the application was time-barred. The OTS offer, made in December 2018, came after the limitation period had already expired in June 2018 (three years from the June 2015 default). An acknowledgment made after the limitation period has expired, the NCLAT held, cannot revive a dead claim.

The bank appealed to the Supreme Court.

What the law says about dead claims

The Supreme Court bench — Justice Indira Banerjee and Justice J.K. Maheshwari — had to interpret two key provisions that sit at the intersection of the IBC and the Limitation Act.

Section 18 of the Limitation Act says that if a debtor acknowledges a debt in writing before the limitation period expires, a fresh limitation period starts from the date of that acknowledgment. But the key phrase is "before the expiry of the limitation period." An acknowledgment made after the period has expired is worthless — it cannot revive a claim that the law has already buried.

Section 25(3) of the Indian Contract Act works differently. It says that a written promise to pay a time-barred debt is a valid contract — even though the original debt is no longer enforceable. This is not an acknowledgment of an old debt; it is a new promise, creating a fresh cause of action. The limitation period for enforcing this new promise runs three years from the date the payment under the new agreement was due.

The bank argued that the OTS proposal fell under Section 25(3). The company had made a written promise to pay Rs. 24.55 crores. That promise, even if it concerned a time-barred debt, was a new contract. The bank could enforce it. And if the bank could enforce the promise, it could also use that promise as the basis for a Section 7 IBC application — because the IBC does not require the underlying debt to be alive; it only requires a "debt" and a "default."

The precedents the court leaned on

The Supreme Court had already settled several related questions in earlier cases. In Swiss Ribbons Pvt. Ltd. v. Union of India (2019), the court had upheld the constitutional validity of the IBC and clarified that the limitation period for Section 7 applications is three years under Article 137. In B.K. Educational Services (P) Ltd. v. Parag Gupta & Associates (2019), the court held that the Limitation Act applies to IBC proceedings through Section 238A of the Code — a provision inserted to make the Limitation Act applicable to all IBC proceedings.

In Sesh Nath Singh v. Baidyabati Sheoraphuli Cooperative Bank Ltd. (2021), the court had held that an acknowledgment under Section 18 of the Limitation Act can extend the limitation period, but only if the acknowledgment is made before the period expires. And in Dena Bank (Now Bank of Baroda) v. C. Shivakumar Reddy (2021), the court had examined the interplay between the SARFAESI Act and the IBC, holding that time spent pursuing SARFAESI remedies cannot be excluded when computing the limitation period for an IBC application.

The bank's case faced a double problem. First, the OTS proposal came after the limitation period had expired — so Section 18 could not help. Second, the time spent pursuing SARFAESI remedies — the bank had issued a notice under the SARFAESI Act in November 2017 — could not be excluded from the limitation calculation.

Why the promise might still matter

But Section 25(3) of the Indian Contract Act offered a different path. The Supreme Court had to decide whether a promise to pay a time-barred debt, made in writing, could serve as the foundation for a fresh IBC application.

The court's reasoning turned on the nature of the promise. Under Section 25(3), a promise to pay a time-barred debt is not a revival of the old debt — it is a novation, a new contract that replaces the old one. The old debt is dead. But the new promise is alive. And if the new promise is breached — if the company fails to pay the Rs. 24.55 crores as agreed — that breach constitutes a fresh default. A fresh default starts a fresh limitation period of three years from the date the payment under the new agreement was due.

The bank had filed its Section 7 application in January 2019. The OTS proposal was made in December 2018. If the OTS constituted a valid promise under Section 25(3), and if the company defaulted on that promise, the bank's application might still be within the limitation period — because the three years would run from the date of default under the new agreement, not from the original default in 2015.

The court's central holding

The Supreme Court did not finally decide whether the bank's application was within limitation. Instead, the court found that the NCLAT had erred by not considering the applicability of Section 25(3) of the Indian Contract Act at all. The NCLAT had simply held that the application was time-barred because the original default occurred more than three years before the filing. The appellate tribunal had not examined whether the OTS proposal constituted a fresh promise under Section 25(3), creating a new cause of action.

The court also noted that Section 7(5)(b) of the IBC requires the NCLT to give the applicant notice to rectify defects before rejecting an application. This requirement, the court held, extends to appeals — because an appeal is a continuation of the original proceedings. The NCLAT should have considered whether the bank could amend its application to plead the Section 25(3) promise as a fresh cause of action.

The Supreme Court set aside the NCLAT order and remanded the matter back to the NCLAT for fresh consideration. The NCLAT was directed to examine whether the OTS proposal constituted a valid promise under Section 25(3) of the Indian Contract Act, and whether that promise could form the basis of a Section 7 IBC application.

THE PLAY: A written promise to pay a time-barred debt, made after the limitation period has expired, can create a fresh cause of action under Section 25(3) of the Indian Contract Act — but only if the promise is clear, unconditional, and signed by the debtor, and only if the creditor files the insolvency application within three years of the default under the new promise.

The bank had missed the deadline. But the company's own letter might have handed the bank a second chance.