In a landmark judgment that will have far-reaching implications for the banking sector and insolvency proceedings in India, the Supreme Court has ruled that a bank’s internal classification of a loan account as a Non-Performing Asset (NPA) does not automatically determine the commencement of the limitation period under the Insolvency and Bankruptcy Code, 2016 (IBC).

The Bench comprising Justice P.S. Narasimha and Justice Manoj Misra clarified that while the date of NPA is often a significant indicator of default, it is not an absolute rule for calculating the three-year limitation period, especially in cases involving debt restructuring, acknowledgments in balance sheets, or subsequent settlements.

The central question before the Apex Court was whether the "date of default"—which triggers the three-year clock for filing an insolvency application under Section 7 of the IBC—is strictly tied to the date on which a bank classifies a borrower's account as an NPA for its own accounting and regulatory provisioning purposes.

Under Article 137 of the Limitation Act, 1963, a Financial Creditor must file an application to initiate the Corporate Insolvency Resolution Process (CIRP) within three years from the date the "right to sue" accrues. In the context of the IBC, this "right to sue" generally accrues on the date of default.

The matter reached the Supreme Court through an appeal challenging an order of the National Company Law Appellate Tribunal (NCLAT). The borrower (Corporate Debtor) argued that since their account had been classified as an NPA more than three years before the bank filed the Section 7 application, the debt was "time-barred."

The bank, on the other hand, contended that although the initial NPA classification happened years ago, the debt remained "live" due to subsequent actions, including restructuring of the loan and acknowledgments of the liability made by the debtor in their annual balance sheets.

The Court emphasized that "Default" and "NPA" are two different concepts governed by different sets of rules.

Accounting vs. Legal Default: The Court noted that NPA classification is an internal process of a bank governed by Reserve Bank of India (RBI) circulars for the purpose of accounting and provisioning. However, "default" under Section 3(12) of the IBC is a broader concept meaning the non-payment of debt when the whole or any part or installment has become due and payable.
The "Continuous" Nature of Default: The Bench observed that if a debt is restructured after an NPA classification, a new "date of default" might arise if the terms of the restructured agreement are breached. Relying solely on the original NPA date would ignore the commercial realities of debt recovery and restructuring.
Section 18 of the Limitation Act: The Court reiterated the importance of Section 18 of the Limitation Act, which states that a fresh period of limitation begins if the debtor acknowledges the debt in writing before the expiry of the original three-year period. Entries in a company’s Balance Sheet are considered valid acknowledgments.

For years, many corporate debtors used the "date of NPA" as a shield to get insolvency petitions dismissed on the grounds of limitation. By clarifying that internal banking classifications are not the final word, the Supreme Court has:

Protected Creditors: Banks can now pursue insolvency even if an account was declared NPA long ago, provided they can show recent acknowledgments or restructuring attempts.
Discouraged Technical Defaults: Borrowers cannot escape their liabilities simply because of the passage of time if they have continued to interact with the bank or acknowledge the debt in their books.
Streamlined IBC Litigation: This ruling provides clarity to the NCLT and NCLAT, reducing the time spent on debating the "exact date" when a clock started ticking in complex financial cases.

Legal experts suggest that this ruling aligns the IBC with the "commercial wisdom" of lenders. Often, banks avoid dragging a company into insolvency immediately after an NPA, preferring to attempt a turnaround or restructuring. If the law were to strictly count limitation from the first NPA date, banks would be forced to file for insolvency prematurely, which would go against the IBC’s primary objective of "resolution" rather than "liquidation."

The Supreme Court’s message is clear: The IBC is a law meant for the resolution of genuine financial distress, and its procedural timelines must be interpreted in a way that reflects the actual financial relationship between a lender and a borrower. While the date of NPA is a vital piece of evidence, the "Date of Default" is a question of fact to be determined based on the unique circumstances of each case, including any intervening acknowledgments of debt.

The judgment serves as a reminder to corporate entities that acknowledging debt in financial statements carries serious legal consequences under the insolvency regime. For banks, it offers a window of relief, ensuring that their efforts to revive a stressed account through restructuring do not come at the cost of losing their right to seek legal remedy under the IBC.