A) ABSTRACT / HEADNOTE

The decision in M/s. Radha Exports (India) Pvt. Limited v. K.P. Jayaram & Anr. authoritatively clarifies the intersection between limitation law and the initiation of insolvency proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016. The Supreme Court examined whether a creditor invoking the Corporate Insolvency Resolution Process must demonstrate the existence of a legally recoverable financial debt on the date of filing. The controversy arose from advances made between 2002 and 2005 to a proprietorship concern, later taken over by the appellant company, where substantial repayments were pleaded, and a portion of the outstanding amount was converted into share application money. After more than a decade, insolvency proceedings were initiated, alleging subsisting financial debt.

The Court scrutinised documentary evidence, including letters addressed by the respondents to the Income Tax Department, bank statements evidencing repayments, and the statutory framework governing limitation. Emphasising that the IBC is not a substitute for debt recovery, the Court reiterated that applications under Section 7 are subject to the Limitation Act, 1963. It held that once a debt becomes time-barred, it ceases to be legally enforceable and cannot form the basis of insolvency proceedings. The judgment also draws a clear distinction between financial debt and equity investment, holding that amounts adjusted towards share capital cannot be retrospectively treated as debt.

The ruling restores the order of the NCLT and sets aside the NCLAT’s decision, reinforcing that insolvency forums cannot adjudicate complex disputes of fraud or forgery and that time-barred or extinguished claims cannot trigger the IBC mechanism.

Keywords: Insolvency and Bankruptcy Code, Limitation Act, Financial Debt, Section 7 IBC, Time-barred Claims, Share Application Money

B) CASE DETAILS

C) INTRODUCTION AND BACKGROUND OF JUDGEMENT

The dispute traces its origin to financial advances made between 2002 and 2005 by the respondents to a proprietorship concern known as M/s Radha Exports. The advances were admittedly unsecured and interest-free. Subsequently, the business of the proprietorship concern was taken over by the appellant company upon its incorporation under the Companies Act, 1956. At the time of such takeover, certain liabilities were also assumed by the newly incorporated company.

The respondents’ case was that a substantial portion of the loan remained unpaid and constituted a financial debt. In contrast, the appellant company asserted that significant repayments had already been made and that Rs.90 lakhs out of the alleged outstanding amount had been consciously converted into share application money, followed by allotment of shares, later transferred to a third party at the respondents’ request.

More than a decade later, the respondents initiated winding-up proceedings before the Madras High Court, which were eventually transferred to the NCLT. After the dismissal of earlier proceedings under Sections 9 and 7 of the IBC, the respondents persisted with a Section 7 application, claiming to be financial creditors. The NCLT dismissed the application on grounds of limitation and absence of financial debt. However, the NCLAT reversed this finding, prompting the present appeal before the Supreme Court.

The judgment thus emerges against a backdrop of prolonged commercial dealings, disputed repayments, and delayed invocation of insolvency jurisdiction, raising fundamental questions about the scope of Section 7 of the IBC and the applicability of limitation principles.

D) FACTS OF THE CASE

The respondents advanced an aggregate sum of Rs.2.20 crores in several tranches between 2002 and 2005 to the proprietorship concern M/s Radha Exports. Between 2003 and 2004, repayments amounting to Rs.80,40,000 were made. Upon incorporation of the appellant company in July 2004, the remaining liabilities were taken over.

A critical development occurred when, at the respondents’ request, Rs.90,00,000 from the outstanding amount was adjusted as share application money in the name of Respondent No. 2. This adjustment was formally acknowledged in letters dated 11 January 2011 addressed to the Income Tax Department, which later became central documentary evidence. Thereafter, further payments totalling Rs.43,25,000 were made between 2004 and 2006, which according to the appellant fully extinguished the remaining loan liability.

In October 2007, Respondent No. 2 resigned from the Board of the appellant company and requested that the shares issued against the said application money be transferred to Mr. M. Krishnan, to be treated as his personal loan obligation. The appellant complied, issuing shares accordingly.

Despite no financial transactions after March 2006, the respondents issued a statutory notice in November 2012 claiming an outstanding debt of Rs.1,49,60,000. Subsequent winding-up and insolvency proceedings were initiated, accompanied by allegations of forgery and fraud, all of which were disputed by the appellant.

The NCLT, after detailed scrutiny of bank records and correspondence, dismissed the Section 7 application. The NCLAT reversed this finding, leading to the present appeal.

E) LEGAL ISSUES RAISED

i. Whether an application under Section 7 of the IBC is maintainable in respect of a time-barred debt?
ii. Whether amounts converted into share application money can be treated as financial debt?
iii. Whether insolvency proceedings can be invoked where the existence of debt itself is seriously disputed?

F) PETITIONER / APPELLANT’S ARGUMENTS

The counsels for the appellant submitted that the alleged debt was fully discharged by 2006 and that the Section 7 application filed in 2018 was hopelessly barred by limitation. It was contended that under Clauses (19)–(21) of the Limitation Act, the period for recovery of money lent is three years from the date of lending. The last disbursement having occurred in 2004–2005, the claim had become unenforceable long before the initiation of insolvency proceedings.

It was further argued that share application money could never constitute financial debt, as it lacks the element of time value of money. The appellant relied on contemporaneous letters and bank statements to demonstrate repayments and adjustment of liabilities, contending that insolvency proceedings were being misused as a recovery mechanism.

G) RESPONDENT’S ARGUMENTS

The counsels for the respondents argued that the debt continued to subsist and that repayments alleged by the appellant were either unrelated or fabricated. It was contended that the NCLAT rightly appreciated discrepancies in the appellant’s correlation statements and that the existence of limitation should not defeat substantive justice under the IBC.

The respondents further alleged forgery of documents and maintained that the share allotment was not a genuine conversion but a device to defeat repayment obligations.

H) JUDGEMENT 

The Supreme Court allowed the appeal, restoring the order of the NCLT. It categorically held that IBC proceedings are subject to the Limitation Act, reiterating that the Code does not create a new right to recover time-barred debts. The Court relied on its earlier pronouncements holding that a debt must be legally recoverable on the date of filing.

The Court found that the last loan was advanced in 2004–2005 and that there was no agreed date of repayment. Consequently, limitation commenced from the date of disbursement itself. Even the winding-up petition filed in 2012 was beyond limitation, rendering subsequent insolvency proceedings unsustainable.

On the issue of financial debt, the Court held that share application money, once accepted and shares issued, loses its character as debt. It further observed that a personal loan to a director or promoter cannot trigger CIRP against the company. Allegations of fraud and forgery were held to be outside the scope of Section 7 proceedings.

a) RATIO DECIDENDI

The ratio of the judgment lies in the principle that only a legally enforceable financial debt can trigger insolvency proceedings. A debt barred by limitation is not “due” in law and therefore cannot constitute default under the IBC. The Court reaffirmed that the Limitation Act applies proprio vigore to Sections 7 and 9 of the IBC.

b) OBITER DICTA

The Court observed that insolvency forums are not equipped to adjudicate allegations of fraud, forgery, or complex factual disputes, which must be decided in regular civil proceedings. It cautioned against the misuse of the IBC as a pressure tactic for recovery of disputed or stale claims.

c) GUIDELINES

i. Adjudicating Authorities must examine limitation at the threshold.
ii. Applicants must demonstrate existence of a legally recoverable debt.
iii. Share capital contributions cannot be recharacterised as financial debt.

I) CONCLUSION & COMMENTS

The judgment reinforces the foundational premise that the IBC is a resolution mechanism, not a debt recovery tool. By insisting on strict compliance with limitation principles, the Court prevents resurrection of dead claims under the guise of insolvency. The decision brings clarity on the treatment of share application money and delineates the boundaries of insolvency jurisdiction, ensuring procedural discipline and commercial certainty.

J) REFERENCES

a) Important Cases Referred

i. Innoventive Industries Ltd. v. ICICI Bank – [2017] 8 SCR 33
ii. B.K. Educational Services Pvt. Ltd. v. Parag Gupta and Associates – [2018] 12 SCR 794
iii. Vashdeo R. Bhojwani v. Abhyudaya Co-operative Bank Ltd. – [2019] 12 SCR 75

b) Important Statutes Referred

i. Insolvency and Bankruptcy Code, 2016
ii. Limitation Act, 1963
iii. Companies Act, 1956