Suspended Director Has Locus to Challenge Time-Barred Claims; Debt Held Time-Barred in Prior S.7 Proceeding Cannot Be Admitted in CIRP: NCLT Mumbai - 2025-07-22

NCLT Mumbai Partially Allows Suspended Directors' Plea, Excludes Phoenix ARC's Time-Barred Debt from CIRP

Mumbai, July 17, 2025 – The National Company Law Tribunal (NCLT), Mumbai Bench, has delivered a significant ruling on the scope of a Resolution Professional's (RP) duty in verifying claims and the rights of suspended directors to challenge such verifications. In a partial victory for the former management of Hotel Horizon Private Limited, the Tribunal ordered the exclusion of a claim by Phoenix ARC, holding that a debt previously declared time-barred by the NCLAT for initiating insolvency cannot be admitted as a claim within the Corporate Insolvency Resolution Process (CIRP).

The bench, comprising Hon’ble Justice V.G. Bisht (Retd.) (Member, Judicial) and SH. Prabhat Kumar (Member, Technical), also directed the RP to re-evaluate the claims of Union Bank of India (UBI) and JM Financials ARC (JMFARC), while affirming that penal interest and liquidated damages can be classified as 'financial debt'.

Case Background

The application was filed by Mr. Sagar Sharma and Mr. Vishal Sharma, the suspended directors of Hotel Horizon Private Limited, which was admitted into CIRP on November 19, 2024. The directors challenged the admission of claims by four financial creditors: UBI, Assets Care & Reconstruction Enterprise (ACRE), JMFARC, and Phoenix ARC. They sought to reconstitute the Committee of Creditors (CoC), alleging that the RP had hastily admitted inflated, fictitious, and time-barred claims without proper verification.

Arguments of the Parties

Applicants' (Suspended Directors) Contentions:

* Time-Barred Claims: The primary argument was that the claims of all four creditors were barred by limitation. They specifically highlighted that Phoenix ARC's petition to initiate insolvency on the same debt had been dismissed by the NCLAT in a prior proceeding (CP(IB) No. 1458/2017) precisely on the ground of being time-barred.

* Inflated & Fictitious Debt: They alleged that the claims were inflated through "circular transactions" where funds were disbursed and immediately taken back. They argued that claims should be based on actual disbursement for the corporate debtor's benefit.

* JMFARC's Claim: The directors produced minutes from an ICICI Bank (the original lender) meeting, showing the bank had agreed to refund a processing fee of ₹14 crores (₹0.14 billion) with interest, which the RP failed to set off from JMFARC’s claim.

* Nature of Debt: They contended that liquidated damages and penal interest are penalties and should not be classified as 'financial debt'.

Resolution Professional and CoC's Submissions:

* No Locus Standi: The RP and the CoC argued that the suspended directors lack the locus standi (the right to bring an action) to challenge the admission of claims, especially when the financial creditors in the CoC do not dispute each other’s claims.

* Limitation Act Not Applicable to Claims: They contended that the Limitation Act, 1963, applies to the initiation of proceedings before the NCLT but not to the filing of claims with an RP, as the law of limitation only bars the remedy, not the right itself.

* Acknowledgement of Debt: The CoC pointed to multiple One-Time Settlement (OTS) offers made by the corporate debtor, which they argued constituted a valid acknowledgement of debt under Section 18 of the Limitation Act, thereby extending the limitation period.

* Penal Interest is Financial Debt: They argued that charges like liquidated damages are part of the "time value of money" and fall within the definition of financial debt under the IBC.

Tribunal's Findings and Decision

The NCLT carefully analyzed each claim, delivering a nuanced judgment that balanced procedural compliance with substantive justice.

1. On the Locus of Suspended Directors: While acknowledging the NCLAT precedent in Dr. Arabinda Kumar Rath , which limits the locus of suspended management, the Tribunal carved out an exception. It held that when the challenge involves significant questions of law and fact, such as limitation and the fundamental character of a debt, the Adjudicating Authority must intervene. The Tribunal stated:

"...we note that the contention of the Applicants in relation to (i) claim of Phoenix ARC; (ii) claim of JMFARC... (iii) the limitation aspect; and (iv) characterisation of certain charges as financial debt requires adjudication by this Tribunal as these issues involve question of law and facts..."

2. The Time-Barred Claim of Phoenix ARC: This was the most critical part of the ruling. The NCLT found itself bound by a prior NCLAT order dated February 7, 2020, which had conclusively held the debt owed to Phoenix ARC to be time-barred for initiating a Section 7 application. The Tribunal noted that although new evidence of acknowledgement was presented, it was not proper for the NCLT to re-examine an issue already settled by the appellate authority, whose order was still in force. Relying on the NCLAT's decision in Ome Prakash Verma vs. Amit Jain & Ors , the bench held:

"Since, the order dated 07.02.2020 is still in force on ground of limitation, we are bound to follow the said Order... the Section 7 application filed by Phoenix ARC on basis of same debt having been held to be time barred, the same debt could not have been admitted in the CIRP of the Corporate Debtor..."

3. Reworking of JMFARC and UBI Claims: * The Tribunal accepted the applicants' argument regarding the processing fee refund for the JMFARC claim. It observed that ICICI Bank's commitment to refund the fee with interest was clear and directed the RP to rework the claim accordingly. * For UBI's claim, the Tribunal directed the RP to re-verify the amount after considering subsequent loan agreements that may have superseded the original one.

4. On Penal Interest as Financial Debt: The Tribunal rejected the applicants' contention that penal levies are not financial debt. It held that any charge connected to a lending arrangement, designed to cover risks, falls under the broad definition of 'interest' and is therefore part of the financial debt under Section 5(8) of the IBC.

Final Order

The NCLT partly allowed the application with the following key directions: * The claim of Phoenix ARC is to be excluded as it is time-barred. * The claim of JMFARC is to be recalculated after deducting the processing fee and interest as per ICICI Bank's commitment. * UBI's claim is to be re-verified based on all relevant agreements. * The claims of ACRE and UBI were held to be within the limitation period due to various acknowledgements. * Liquidated damages and penal interest were confirmed to be part of financial debt.

This judgment reinforces the principle that while an RP's role is administrative, the verification of claims must withstand judicial scrutiny, especially on fundamental legal issues like limitation and res judicata . It also clarifies that a debt judicially held to be unenforceable for initiating insolvency cannot be revived as a claim within the subsequent CIRP.