When Is a Loan Too Old to Recover? Limitation, DRT Recovery Certificates and the IBC Section 7 Clock

A loan default does not create a liability that a lender can enforce forever. Under the Limitation Act 1963, the right to recover a debt through a court or tribunal generally expires three years after the cause of action arises, as codified on indiacode.nic.in. Once that three-year window closes, the debt becomes "time-barred": it still exists in accounting terms, but the forum for compelling repayment is shut.

The hard question for borrowers is not whether a three-year clock exists, but when it starts. The Supreme Court's ruling in Kotak Mahindra Bank Ltd v A. Balakrishnan, delivered on 30 May 2022, reset that starting point for a large class of recovery actions by holding that a recovery certificate issued by a Debts Recovery Tribunal (DRT) creates a fresh cause of action and a new three-year period, within which a creditor can file an insolvency petition under Section 7 of the Insolvency and Bankruptcy Code 2016. This article maps the statutory position, the procedure, and the defences a borrower can still raise after 30 May 2022.

The Statutory Position

Three statutes govern most secured-loan recovery in India, and each carries its own timeline. The foundational one is the Limitation Act 1963. Its residuary provision, Article 137, prescribes a three-year period for applications where no specific period is laid down, and the Supreme Court has repeatedly applied Article 137 to recovery and insolvency proceedings. Section 238A of the Insolvency and Bankruptcy Code 2016, inserted with effect from 6 June 2018, expressly makes the Limitation Act 1963 applicable to proceedings before the National Company Law Tribunal (NCLT), so a stale claim cannot be revived merely by relabelling it as insolvency, per the text on indiacode.nic.in.

The second statute is the Recovery of Debts and Bankruptcy Act 1993 (the RDDB Act), under which a bank proceeds before a DRT and, on succeeding, obtains a recovery certificate quantifying the amount due. The third is the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (SARFAESI), under which a secured creditor can enforce security without court intervention, including by taking possession of the mortgaged asset under Section 13(4). The borrower's countervailing right under SARFAESI is an appeal to the DRT under Section 17 within 45 days of the enforcement measure.

The fourth piece is the insolvency route. A Section 7 petition under the Insolvency and Bankruptcy Code 2016 lets a financial creditor trigger a corporate insolvency resolution process, but only where the default is at least Rs 1 crore. That threshold was raised from the original Rs 1 lakh by a Government of India notification dated 24 March 2020, which took much small-ticket corporate debt out of the insolvency forum entirely. The table below maps the four provisions borrowers meet most often.

The practical lesson of this map is that the same unpaid loan can sit inside several timelines at once, and the creditor will choose whichever forum is still open. A borrower who tracks only the original default date can be caught out when a later recovery certificate reopens the insolvency door.

Procedure Step by Step

The following sequence describes how a secured corporate loan typically moves from default to an insolvency petition, with the limitation checkpoint flagged at each stage. The dates are the statutory periods, not estimates.

1. Default and NPA classification. A loan account is classified as a non-performing asset (NPA) after the borrower misses scheduled payments for 90 days under the RBI's income-recognition norms. The cause of action for recovery first arises here, and the three-year clock under Article 137 of the Limitation Act 1963 begins to run from the date of default.

1. SARFAESI demand notice under Section 13(2). The secured creditor issues a 60-day demand notice calling on the borrower to clear the dues. If the borrower does not comply within those 60 days, the creditor may proceed to enforcement.

1. Enforcement under Section 13(4). The creditor takes possession of the secured asset. This is the measure the borrower can challenge, and it starts the 45-day period for a Section 17 appeal to the DRT.

1. DRT proceedings and the recovery certificate. Where the creditor pursues the RDDB Act route, the DRT adjudicates the claim and issues a recovery certificate fixing the amount due. Under Kotak Mahindra Bank Ltd v A. Balakrishnan (30 May 2022), the issue of this certificate is itself a fresh cause of action, starting a new three-year limitation period.

1. Section 7 IBC petition. If the certified default is at least Rs 1 crore, the financial creditor can file an insolvency petition before the NCLT within three years of the recovery certificate, even if the original default is far older than three years. The Rs 1 crore floor has applied since the notification dated 24 March 2020.

1. Admission and moratorium. On admission of the Section 7 petition, a moratorium under Section 14 of the Insolvency and Bankruptcy Code 2016 freezes recovery actions against the corporate debtor for the duration of the resolution process.

A borrower modelling the cost of staying in default versus settling should price each of these stages. Our foreclosure calculator shows the saving from closing a loan early, and the debt consolidation calculator compares the blended cost of folding multiple dues into one facility before enforcement begins.

Borrower Defences Available

The strongest defence is limitation itself. If a creditor files a recovery application or a Section 7 petition more than three years after the relevant cause of action, and no fresh cause of action (such as a recovery certificate or a written acknowledgement of debt) has reset the clock, the claim is liable to be dismissed as time-barred under the Limitation Act 1963. Crucially, limitation is not waived merely because the creditor delayed; the burden is on the creditor to show the petition is within three years.

The second defence is the statutory appeal. Against enforcement under Section 13(4) of SARFAESI 2002, the borrower can appeal to the DRT under Section 17 within 45 days. A pre-deposit is not mandatory at this first stage, though the tribunal may direct one; this makes the Section 17 route the most accessible first line of challenge. If the DRT rules against the borrower, the next appeal lies to the Debts Recovery Appellate Tribunal (DRAT) under Section 18 within 30 days. Here a deposit does bite: no appeal is entertained unless the borrower deposits 50% of the debt due (as claimed by the creditor or determined by the DRT, whichever is less), which the DRAT may reduce to not less than 25% for reasons recorded in writing.

The third route is a negotiated exit. A one-time settlement (OTS) under the lender's board-approved compromise-settlement policy lets a borrower close the account for a reduced lump sum, stopping enforcement before a recovery certificate is issued. Settlement economics are sensitive to the cost of funds; with the RBI repo rate held at 5.25% as of 5 August 2026, a borrower refinancing to fund a settlement should compare the settlement discount against the interest on fresh borrowing. The personal loan EMI calculator helps size that refinancing cost. For the meaning of the core terms, see the Oquilia glossary entries on SARFAESI, the Debts Recovery Tribunal and secured loans.

A borrower should note one asymmetry: limitation protects you only if the clock has genuinely run out and has not been restarted. A part-payment or a written acknowledgement of the debt resets the three-year period under Sections 18 and 19 of the Limitation Act 1963, so loose correspondence admitting liability can inadvertently revive an otherwise dead claim.

Recent Tribunal/HC Position

The controlling authority is Kotak Mahindra Bank Ltd v A. Balakrishnan, decided by the Supreme Court of India on 30 May 2022 (indiankanoon.org). The borrower argued that the bank's Section 7 petition was time-barred because the default and NPA classification were more than three years old by the time the insolvency petition was filed. The bank relied on a recovery certificate that the DRT had issued within the three years preceding the petition.

The Supreme Court held that a recovery certificate issued by a DRT gives the financial creditor a fresh cause of action to initiate insolvency, and a new three-year limitation period runs from the date the certificate is issued. The Court reasoned that the holder of a recovery certificate is a financial creditor entitled to file a Section 7 petition, and that limitation for such a petition does not run only from the original date of default or NPA classification. On that basis the insolvency petition, filed within three years of the certificate, was held to be within time.

The significance for borrowers is precise and sobering. An old default that looks safely time-barred can be revived for insolvency purposes if the creditor obtained a recovery certificate in the intervening years. The decision aligns the IBC with the RDDB Act 1993 by treating the certificate as a distinct, certified debt. Borrowers defending a Section 7 petition after 30 May 2022 must therefore check the date of the recovery certificate, not merely the date of the original default, before pleading limitation. Where no certificate exists, the original three-year bar under Article 137 of the Limitation Act 1963 continues to apply with full force.

In practice, the judgement makes documentary discipline the borrower's first defence. Before conceding that a Section 7 petition is in time, a borrower should assemble three dates: the original default date that triggered the 90-day NPA classification, the date of any recovery certificate issued under the RDDB Act 1993, and the date of the insolvency petition itself. If more than three years separate the petition from both the default and the latest certificate, the claim is prima facie barred under Article 137 of the Limitation Act 1963. Equally, a borrower should avoid signing any acknowledgement of liability, because an acknowledgement within the live three-year window resets the clock under Section 18 of the Limitation Act 1963 and can hand the creditor a fresh limitation period it would otherwise have lost on 30 May 2022's logic.

FAQ

When does a loan become time-barred in India?

Under the Limitation Act 1963, most recovery claims must be filed within three years of the cause of action. For a simple loan, the clock starts on the date of default, so a suit or application filed more than three years later is ordinarily barred unless a fresh cause of action has intervened.

Does a recovery certificate restart the limitation period?

Yes. The Supreme Court held in Kotak Mahindra Bank Ltd v A. Balakrishnan (30 May 2022) that a DRT recovery certificate creates a fresh cause of action and a new three-year limitation period running from the date the certificate is issued, within which a Section 7 insolvency petition can be filed.

What is the minimum default for a Section 7 IBC petition?

A financial creditor can file a Section 7 petition under the Insolvency and Bankruptcy Code 2016 only where the default is at least Rs 1 crore. This threshold was raised from Rs 1 lakh by a Government of India notification dated 24 March 2020.

How long do I have to appeal a SARFAESI action?

An appeal against an enforcement measure under Section 13(4) of SARFAESI 2002 lies to the DRT under Section 17 within 45 days. A pre-deposit is not mandatory at this stage, although the tribunal may direct one.

How much must I deposit to appeal to the DRAT?

An appeal to the DRAT under Section 18 of SARFAESI 2002 must be filed within 30 days and is not entertained unless the borrower deposits 50% of the debt due (as claimed by the creditor or determined by the DRT, whichever is less). The DRAT may reduce this to not less than 25% for reasons recorded in writing.

Can a one-time settlement stop recovery?

A one-time settlement under the lender's board-approved compromise policy can close the account for a reduced lump sum before a recovery certificate is issued, halting further enforcement. With the RBI repo rate at 5.25% as of 5 August 2026, borrowers should weigh the settlement discount against the cost of any fresh borrowing used to fund it.

Does NPA classification start the limitation clock?

NPA classification, which the RBI norms trigger after 90 days of default, generally marks the cause of action from which the three-year period under Article 137 of the Limitation Act 1963 begins. However, a later recovery certificate can start a fresh three-year period from its own date, per the 30 May 2022 ruling in Kotak Mahindra Bank Ltd v A. Balakrishnan.