Between the Lines | Supreme Court: Limitation period for an application under Section 7 of the IBC for initiation of CIRP is three years from the date of default

The Supreme Court of India (“SC”) in Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries Private Limited & Another (decided on August 14, 2020), held that the limitation period for an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) is three years, as per Article 137 of the Limitation Act, 1963 (“Limitation Act”), which commences from the date of default, and is extendable only in those cases where, on facts, the delay in filing may be condoned under Section 5 of the Limitation Act.

Facts
Veer Gurjar Aluminium Industries Private Limited, later represented by the interim resolution professional (“Respondent No. 1”) had availed various loans, advances and facilities from lender banks, namely, Corporation Bank, Indian Overseas Bank and Bank of India. Accordingly, various security documents in favour of the lender banks were executed. Respondent No. 1, having defaulted in payment of the amount due, its account with Corporation Bank was classified as Non-Performing Asset (“NPA”) on July 8, 2011. Corporation Bank had later assigned the rights in relation to debts of Respondent No. 1 to JM Financial Assets Reconstruction Company Private Limited (“Respondent No. 2”). Respondent No. 1 and Respondent No. 2 are hereinafter collectively referred to as “Respondents”.

On or about March 21, 2018, during the pendency of proceedings against Respondent No. 1 before the Debts Recovery Tribunal, Aurangabad (“DRT”) under the Recovery of Debts Due to the Banks and Financial Institution Act, 1993 (“DRT Act”), Respondent No. 2 moved an application before the National Company Law Tribunal, Mumbai (“NCLT”) under Section 7 of the IBC, for initiation of Corporate Insolvency Resolution Process (“CIRP”) in relation to Respondent No. 1. Point Number 2 of Part III of the said application stated the date of default as July 8, 2011, being the date of NPA. The application was admitted by the NCLT. Aggrieved by this, Shri Babulal Vardhaji Gurjar (“Appellant”), being the director of Respondent No. 1, preferred an appeal before the National Company Law Appellate Tribunal (“NCLAT”) contending against the maintainability of the said application. The appeal was summarily dismissed by the NCLAT. Aggrieved by the order of the NCLAT, an appeal was then preferred to the SC.

The SC noted that, in appeal before the NCLAT, one of the grounds agitated was that the claim of Respondent No. 2 was barred by time, as the default was committed on July 8, 2011 and the application was filed in the month of March, 2018. The SC, after finding that the principal issue relating to limitation, though raised, was not decided by the NCLAT, remanded the matter to the NCLAT for specifically dealing with the issue of limitation. After such remand, the NCLAT held that the said application is not barred by limitation on the grounds that, the right to apply under Section 7 of the IBC accrued to Respondent No. 2 only on December 1, 2016, that is, when the IBC came into existence, and, the property of Respondent No. 1 having been mortgaged, the claim is not barred by limitation as per Article 61(b) of the Limitation Act (providing for period of limitation of twelve years for recovery of possession of the mortgaged property). Being aggrieved by this, the Appellant then approached the SC over again.

Issue
Whether the application made by Respondent No. 2 under Section 7 of the IBC for initiation of CIRP is within limitation.

Arguments

Contentions raised by the Appellant:

The learned counsel for the Appellant relied upon the decisions of the SC in B.K. Educational Services Private Limited v. Parag Gupta and Associates [AIR (2018) SC 5601] and K. Sashidhar v. Indian Overseas Bank [(2019) 12 SCC 150] and contended that, for an application under Section 7 of the IBC, Article 137 of the Limitation Act (residuary article providing period of limitation of three years for ‘other applications’) is applicable, not Article 61 (b) of the Limitation Act. Accordingly, the limitation period is of three years, which is to be counted from the date of default and if the default had occurred three years prior to the date of filing of the application, the same would not amount to debt due and payable under the IBC. In the application under consideration, Respondent No. 2 mentioned the date of default as July 8, 2011, and, for the evidence of default, only the documents pertaining to the NPA were attached, that is, until the year 2011. Hence, on the averments as taken and evidence as adduced, the application so filed by Respondent No. 2 was clearly barred by limitation.

The Appellant further relied upon Jignesh Shah and Another v. Union of India and Another [(2019) 10 SCC 750] to state that, the enforcement of the IBC in 2016 will not give a new life to the time-barred debts and if the application is filed beyond three years from the date of default, then the same will be barred by time. It was also contended that, when the said limitation period of three years starts from the date of default, acknowledgment of the debt in the balance sheet will not give any fresh date of default because default occurs only once and cannot be continuing. Reference was also made to the decision of SC in Vashdeo R. Bhojwani v. Abhyudaya Co-operative Bank Limited and Another [(2019) 9 SCC 158], wherein the SC rejected the contention suggesting continuing cause of action for the purpose of application under Section 7 of the IBC.

Placing reliance on Swiss Ribbons Private Limited and Another v. Union of India and Others [(2019) 4 SCC 17], the Appellant argued that the legislative policy has moved from “cause of action” to determination of “default” and in the present case, default having occurred when the account became NPA as on July 8, 2011, the application remains barred by limitation.

Contentions raised by the Respondents:

The learned counsel for the Respondents contented that, the liability in relation to the debt in question having been consistently acknowledged by Respondent No. 1 in its balance sheets and annual reports, fresh period of limitation is available from the date of every such acknowledgment and hence, the application is within time. While relying upon Jignesh Shah and Another v. Union of India and Another [(2019) 10 SCC 750], it was contended that, the provisions of Section 18 of the Limitation Act (providing for the extension of period of limitation on acknowledgment of the liability) would certainly extend the period of limitation under the IBC on any acknowledgment of debt by the corporate debtor. Relying upon M/s. Mahabir Cold Storage v. CIT, Patna [(1991) Supp (1) SCC 402], it was further submitted that the registers of a company are of prima facie evidence; and hence the balance sheet disclosing loans and borrowings and forming part of annual returns, continuously from the years 2011 to 2017,would constitute the acknowledgment of the corporate debtor of its indebtedness and the period of limitation will be extended by dint of applicability of Section 18 of the Limitation Act.

It was argued that, Section 238-A (amendment applying the provisions of the Limitation Act to the IBC) came into force with effect from June 6, 2018, which was after filing of the application in question; and testing a post facto applicable statutory provision of retrospective nature in a watertight stringent manner would result in a fatal flaw in equity. Reliance was placed on N. Balakrishnan v. Krishnamurthy [(1998) 7 SCC 123] to submit that the rules of limitation are not meant to destroy the rights of the parties.

Lastly, the learned counsel stated that, the financial creditor has been availing of another civil remedy available to it and had filed the application under Section 19 of the DRT Act well within limitation and the same is still pending and the mere date of default or date of classification of an account as NPA does not put a full stop on ‘further cause of action’ or ‘continuing cause of action’ available to the financial creditor. It was further contended that a statute should be interpreted with a view to further its objective, giving effect to the intent of the legislature, and acceptance of the Appellant’s contention of filing an application under Section 7 of the IBC within three years from the date of NPA would frustrate the objective of IBC to restructure the stressed assets and ensure maximisation of the value of stressed assets.

Observations of the Supreme Court

The SC firstly referred to its decisions in Innoventive Industries Limited. v. ICICI Bank [(2018) 1 SCC 407]) and Swiss Ribbons Private Limited and Another. v. Union of India and Others [ (2019) 4 SCC 17] to state the relevant basics and scheme of the IBC, upholding the previously established principle that the IBC is a beneficial legislation which puts the corporate debtor back on its feet, not being a mere recovery legislation for creditors. As regards to the operation of the law of limitation over the IBC proceedings, the SC referred to B.K. Educational Services Private Limited v. Parag Gupta and Associates [AIR (2018) SC 5601], wherein it was held that, since the Limitation Act is applicable to applications filed under Sections 7 and 9 of the IBC from the inception of the IBC, Article 137 of the Limitation Act gets attracted. The right to sue therefore accrues when a default occurs. If the default has occurred over three years prior to the date of filing of the application, the application would be time-barred, save and except in those cases where, in the facts of the case, Section 5 of the Limitation Act maybe applied to condone the delay in filing. In K. Sashidhar v. Indian Overseas Bank [(2019) 12 SCC 150], while referring to B.K. Educational Services Private Limited v. Parag Gupta and Associates [AIR (2018) SC 5601], and explaining the ratio therein, the SC stated that Section 238-A of the IBC was clarificatory in nature and being a procedural law, it had a retrospective effect and taking any other view would result in an incongruous situation as the provisions of the Limitation Act would apply only to some sets of cases to be decided by the same tribunal and not to the other sets.

In Gaurav Hargovindbhai Dave v. Asset Reconstruction Company (India) Limited and Another [(2019) 10 SCC 572]) the SC disapproved the approach of the adjudicating authority in applying Article 62 of the Limitation Act (providing for period of limitation of twelve years for suits to enforce payment of money secured by a mortgage immovable property) to an application under Section 7 of the IBC as it applies only to suits. Further, in Sagar Sharma and Another v. Phoenix ARC Private Limited and Another [(2019) 10 SCC 353], the SC disapproved the proposition that the date of commencement of the IBC could be the starting point of limitation. Relying upon the said judgment, the SC reconfirmed that there is nothing in the IBC to even remotely indicate if the period of limitation for the purpose of an application under Section 7 is to commence from the date of commencement of the IBC itself. Similarly, nothing provided in the Limitation Act could be taken as the basis to support the proposition.

The Respondents had relied upon Jignesh Shah and Another v. Union of India and Another [(2019) 10 SCC 750] to contend that the provisions of Section 18 of the Limitation Act certainly extend the period of limitation under the IBC on any acknowledgment of debt by the corporate debtor. The SC rejected this contention and observed that, in the said judgment, the SC held that an acknowledgment of liability under Section 18 of the Limitation Act would certainly extend the limitation period, but a suit for recovery, which is a separate and independent proceeding distinct from the remedy of winding up, would, in no manner, impact the limitation within which the winding-up proceeding is to be filed, by somehow keeping the debt alive for the purpose of the winding-up proceeding. The illustrative reference to Section 18 of the Limitation Ac tin the said judgement had only been in relation to suit or other proceedings, wherever it could apply, and where the period of limitation could get extended because of acknowledgment of liability. Further, it is evident that in the same judgement, SC had also observed that a suit for recovery, which is a separate and independent proceeding distinct from the remedy of winding up, would, in no manner, impact the limitation within which the winding up proceeding is to be filed. The observation in relation to the proceeding for winding up, perforce, applies to the application seeking initiation of CIRP under the IBC and accordingly, the observations in the said judgement does not, in any manner, alter the decision by SC in B.K. Educational Services Private Limited v. Parag Gupta and Associates [AIR (2018) SC 5601].

The SC lastly observed that, even if it be assumed that the principles relating to acknowledgement as per Section 18 of the Limitation Act are applicable for extension of time for the purpose of the application under Section 7 of the IBC, the question of limitation is essentially a mixed question of law and facts and when a party seeks application of any particular provision for extension of the period of limitation, the relevant facts are required to be pleaded and requisite evidence is required to be adduced. In the present case, only the date of default as July 8, 2011 has been stated for the purpose of maintaining the application, and not even a foundation is laid in the application for suggesting any acknowledgement or any other date of default. That being the position, the submissions sought to be developed on behalf of Respondent No. 2 at the later stage could not be permitted and no case for extension of period of limitation was available to be examined. Additionally, the SC analysed the reasoning of the NCLAT and determined the primary two reasons that were weighed by the NCLAT to hold the application to be within the limitation period, that is, the right to apply under Section 7 of the IBC accrued when the IBC came into force and that the period of limitation is twelve years as is the case for recovery of possession of the mortgaged property.

Disproving the rationale of the NCLAT, the SC summed up its observations, stating that, when Section 238-A of the IBC is read with the consistent decisions of the SC, the following basics undoubtedly come to the fore:

• The IBC is a beneficial legislation intended to put the corporate debtor back on its feet and is not a mere money recovery legislation;
• CIRP is not intended to be adversarial to the corporate debtor but is aimed at protecting the interests of the corporate debtor;
• The intention of the IBC is not to give a new lease of life to debts which are time-barred;
• The period of limitation for an application seeking initiation of CIRP under Section 7 of the IBC is governed by Article 137 of the Limitation Act and is, therefore, three years from the date when right to apply accrues;
• The trigger for initiation of CIRP by a financial creditor is default on the part of the corporate debtor, that is to say, that the right to apply under the IBC accrues on the date when default occurs;
• The default referred to in the IBC is that of actual non-payment by the corporate debtor when a debt has become due and payable;
• If default had occurred over three years prior to the date of filing of the application, the application would be time-barred save and except in those cases where, on facts, the delay in filing may be condoned; and
• An application under Section 7 of the IBC is not for enforcement of mortgage liability and Article 62 of the Limitation Act does not apply to the said application.

Decision of the Court

The application made by Respondent No. 2 under Section 7 of the IBC was clearly barred by limitation for having been filed much later than the period of three years from the date of default as stated in the application. Accordingly, SC set aside the order of the NCLT and the NCLAT and held that all the proceedings thereunder shall stand annulled.

Vaish Associates Advocates View

In the present case, while indicating that the essence of the IBC is to ensure the revival of the corporate debtor and not to act as a mere money recovery mechanism, the SC reaffirmed that an application under Section 7 of the IBC for initiation of CIRP against a corporate debtor is governed by the residuary Article 137 of the Limitation Act. Accordingly, the period of limitation for such an application is three years, which commences from the date of default, which is extendable only by application of Section 5 of the Limitation Act if a case for condonation of delay is made out. The SC also reiterated that the date of commencement of the IBC cannot be construed to be the starting point of limitation, thereby giving a new life to time-barred claims.

Furthermore, the SC rejected the argument that the acknowledgement of liability by Respondent No. 1 in its audited balance sheets from the year 2011 until the year 2017 will provide a fresh period of limitation under Section 18 of the Limitation Act. The SC emphasized that the application in question specifically stated the date of default as July 8, 2011, being the date of NPA, and neither any other date of default had been stated in the application nor any suggestion about any acknowledgement had been made. Looking at the very averment regarding default in the application and for want of any other averment regarding acknowledgement, the SC held that no case of extension of limitation was available to be examined.

The reasoning adopted by the NCLAT that the right to apply under Section 7 of the IBC accrued when the IBC came into force; and that the period of limitation is twelve years, which in fact relates to suits for recovery of possession of the mortgaged property, were heavily criticized by the SC for not being in conformity with the pronouncement of the SC as previously laid down in B.K. Educational Services Private Limited v. Parag Gupta and Associates [AIR (2018) SC 5601] and Sagar Sharma and Another v. Phoenix Arc Private Limited and Another [(2019) 10 SCC 353].

For more information please write to Mr. Bomi Daruwala at [email protected]