Supreme Court clarifies Limitation for IBC Applications: Sagar Sharma vs. Phoenix ARC Pvt. Ltd. (2019)

Introduction

Date of the Judgment: September 30, 2019

Citation: Not Available

Judges: R. F. Nariman, J. and V. Ramasubramanian, J.

What is the correct limitation period for filing an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC)? The Supreme Court of India addressed this crucial question, clarifying that the date the IBC came into force is irrelevant for calculating limitation. The Court also reiterated that Article 137 of the Limitation Act, 1963, applies to such applications, not Article 62 as erroneously applied by the lower court. This judgment has significant implications for creditors seeking to initiate insolvency proceedings.

Case Background

The case involves a dispute between Sagar Sharma & Anr. (the Appellants) and Phoenix ARC Pvt. Ltd. & Anr. (the Respondents). The core issue revolves around the limitation period for initiating insolvency proceedings under Section 7 of the IBC. The National Company Law Tribunal (NCLT) had admitted an application under Section 7 of the IBC, which was challenged before the National Company Law Appellate Tribunal (NCLAT). The NCLAT upheld the NCLT’s decision, leading to the present appeal before the Supreme Court.

Timeline

Course of Proceedings

The National Company Law Tribunal (NCLT) admitted an application under Section 7 of the Insolvency and Bankruptcy Code (IBC). The National Company Law Appellate Tribunal (NCLAT) upheld the NCLT’s decision. The NCLAT erroneously held that the right to apply accrued to the 1st Respondent on 1st December, 2016, the date when the IBC came into force and that Article 62 of the Limitation Act, 1963 was applicable because there was a deed of mortgage between the parties. The Appellants then appealed to the Supreme Court of India.

Legal Framework

The Supreme Court referred to the following legal provisions:

• Section 7 of the Insolvency and Bankruptcy Code, 2016: This section deals with the initiation of corporate insolvency resolution process by a financial creditor. It states that a financial creditor may file an application for initiating corporate insolvency resolution process against a corporate debtor when a default has occurred. The court noted that the application under this section is not to enforce any mortgage liability.
• Article 137 of the Limitation Act, 1963: This article deals with the limitation period for any application for which no period of limitation is provided elsewhere in the Act. The Supreme Court clarified that this article applies to applications under Section 7 of the IBC.
• Article 62 of the Limitation Act, 1963: This article deals with the limitation period for suits to enforce payment of money secured by a mortgage or otherwise charged upon immovable property. The Supreme Court stated that this article is not applicable to applications under Section 7 of the IBC.
• Article 141 of the Constitution of India: This article mandates that the judgments of the Supreme Court are binding on all courts within the territory of India. The Supreme Court emphasized that its judgments must be followed in letter and spirit.

Arguments

The Supreme Court noted that the NCLAT erroneously stated that the right to apply accrued to the 1st Respondent on 1st December, 2016, the date when the IBC came into force. The NCLAT also erroneously held that Article 62 of the Limitation Act, 1963, was applicable because there was a deed of mortgage between the parties.

The Supreme Court reiterated its earlier judgment in B.K. Educational Services Private Limited vs. Parag Gupta and Associates (2018 SCC OnLine SC 1921), which clarified that the date of the IBC’s commencement is irrelevant for triggering any limitation period for applications under the Code. The Supreme Court also clarified that Article 137 of the Limitation Act, 1963, applies to applications under Section 7 of the IBC, not Article 62.

Mr. Rakesh Dwivedi, learned Senior Counsel, wished to raise a plea based on Section 22 of the Limitation Act before the NCLAT.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in this judgment. However, the core issue was:

• What is the correct limitation period for applications filed under Section 7 of the Insolvency and Bankruptcy Code, 2016?

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered the following authorities:

Judgment

The Supreme Court set aside the judgment under appeal and directed that the matter be determined afresh. The Court stated that it will be open for both sides to argue the case on facts on the footing that Article 137 of the Limitation Act alone will apply.

The NCLT order dated 29.01.2019 was stayed until further orders from the NCLAT.

How each authority was viewed by the Court?

• B.K. Educational Services Private Limited vs. Parag Gupta and Associates (2018 SCC OnLine SC 1921)*: The Court followed this authority and reiterated that the date of the IBC’s commencement is irrelevant for triggering the limitation period and that Article 137 applies to applications under Section 7 of the IBC.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily driven by the need to ensure consistency with its earlier ruling in B.K. Educational Services Private Limited vs. Parag Gupta and Associates. The Court emphasized that its judgments must be followed in letter and spirit, as mandated by Article 141 of the Constitution of India. The Court’s reasoning focused on the correct application of the Limitation Act to applications under the IBC.

The Court reasoned that:

• “…the Insolvency and Bankruptcy Code’s coming into force on 01.12.2016 is wholly irrelevant to the triggering of any limitation period for the purposes of the Code.”
• “…an application under Section 7 of the Code does not purport to be an application to enforce any mortgage liability.”
• “…it is Article 137 of the Limitation Act which will apply to such applications.”

Key Takeaways

• The date the Insolvency and Bankruptcy Code, 2016, came into force is irrelevant for calculating the limitation period for applications under Section 7 of the Code.
• Article 137 of the Limitation Act, 1963, applies to applications under Section 7 of the IBC.
• Article 62 of the Limitation Act, 1963, which deals with mortgage liabilities, does not apply to applications under Section 7 of the IBC.
• The judgments of the Supreme Court must be followed in letter and spirit, as mandated by Article 141 of the Constitution of India.

Directions

The Supreme Court set aside the judgment under appeal and directed that the matter be determined afresh. It was left open for both sides to argue the case on facts on the footing that Article 137 of the Limitation Act alone will apply.

Development of Law

The ratio decidendi of this case is that the limitation period for applications under Section 7 of the Insolvency and Bankruptcy Code, 2016, is governed by Article 137 of the Limitation Act, 1963, and not by the date the IBC came into force or Article 62 of the Limitation Act, 1963. This judgment reiterates the position of law established in B.K. Educational Services Private Limited vs. Parag Gupta and Associates.

Conclusion

The Supreme Court’s judgment in Sagar Sharma vs. Phoenix ARC Pvt. Ltd. clarifies the applicable limitation period for applications under Section 7 of the Insolvency and Bankruptcy Code, 2016. By reiterating that Article 137 of the Limitation Act, 1963, applies and that the IBC’s commencement date is irrelevant, the Court ensures consistency and proper application of the law. This decision has significant implications for creditors seeking to initiate insolvency proceedings, providing much-needed clarity on limitation issues.