Supreme Court clarifies Limitation for IBC Applications: Tech Sharp Engineers vs. Sanghvi Movers (2022)

Date of the Judgment: 19 September 2022
Citation: [Not Provided in Source]
Judges: Indira Banerjee, J. and J.K. Maheshwari, J.

Can a creditor initiate insolvency proceedings under the Insolvency and Bankruptcy Code (IBC) years after the debt became due, simply because they had previously pursued a winding-up petition in a High Court? The Supreme Court addressed this crucial question in the case of M/S Tech Sharp Engineers Pvt. Ltd. vs. Sanghvi Movers Limited. The court clarified that the limitation period for filing an application under Section 9 of the IBC begins from the date of default, not from the date the IBC came into force or when a previous winding-up petition was filed. This ruling has significant implications for creditors seeking to recover dues under the IBC. The judgement was delivered by a two judge bench of Indira Banerjee, J. and J.K. Maheshwari, J.

Case Background

The dispute arose from a hiring agreement between M/S Tech Sharp Engineers Pvt. Ltd. (the Appellant) and Sanghvi Movers Limited (the Respondent). The Respondent had rented a 150 MT crane to the Appellant for a project at Indian Oil Corporation Ltd. (IOCL) in Paradip, Odisha. The Respondent raised invoices totaling Rs. 38,84,709 between 3rd January 2012 and 4th March 2013.

After the Appellant failed to pay, the Respondent sent a notice on 6th May 2013 demanding payment. The Appellant acknowledged the debt on 17th May 2013, and further correspondence ensued. On 14th October 2013, the Respondent issued a statutory notice for winding up the Appellant under the Companies Act, 1956. The Appellant again acknowledged liability on 7th November 2013. Despite this, the dues remained unpaid.

On 22nd December 2015, the Respondent filed a winding-up petition in the High Court of Judicature at Madras, which was returned for curing defects and re-presented on 3rd February 2016, but again returned on 24th May 2016. The Insolvency and Bankruptcy Code (IBC) came into force on 1st December 2016. Subsequently, on 14th November 2017, the Respondent issued a demand notice under Section 8(1) of the IBC. On 30th March 2018, the Respondent filed an application under Section 9 of the IBC before the National Company Law Tribunal (NCLT) for initiating the Corporate Insolvency Resolution Process (CIRP).

Timeline:

Course of Proceedings

The National Company Law Tribunal (NCLT) dismissed the Respondent’s application under Section 9 of the IBC, citing the judgment in B.K. Educational Services Pvt. Ltd. v. Parag Gupta and Associates [(2019) 11 SCC 633], which held that the limitation period for applications under Sections 7 and 9 of the IBC is three years from the date of default. The NCLT found that the claim was time-barred as the default occurred more than three years before the application was filed.

The Respondent appealed to the National Company Law Appellate Tribunal (NCLAT), which set aside the NCLT’s order. The NCLAT held that the right to apply under Section 9 of the IBC accrued on 1st December 2016, when the IBC came into force, and therefore, the application was within the three-year limitation period. The NCLAT remitted the case back to the NCLT for admission after notice to the parties.

Legal Framework

The Supreme Court examined the following legal provisions:

• Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC): This section allows an operational creditor to initiate the Corporate Insolvency Resolution Process (CIRP) against a corporate debtor when a default has occurred.
• Section 61 of the IBC: This section provides for appeals against orders of the Adjudicating Authority (NCLT) to the National Company Law Appellate Tribunal (NCLAT).
• Section 62 of the IBC: This section provides for appeals against orders of the NCLAT to the Supreme Court.
• Article 137 of the Limitation Act, 1963: This article provides a limitation period of three years for applications where no specific period is prescribed.
• Section 5 of the Limitation Act, 1963: This section allows for condonation of delay in filing an application or appeal if sufficient cause is shown.
• Section 14(2) of the Limitation Act, 1963: This section allows for exclusion of time spent in prosecuting proceedings in a court without jurisdiction. It states:
  
  “14. Exclusion of time of proceeding bona fide in court without jurisdiction .—
  (1) …
  (2) In computing the period of limitation for any application, the time during which the applicant has been prosecuting with due diligence another civil proceeding, whether in a court of first instance or of appeal or revision, against the same party for the same relief shall be excluded, where such proceeding is prosecuted in good faith in a court which, from defect of jurisdiction or other cause of a like nature, is unable to entertain it.”
• Section 18 of the Limitation Act, 1963: This section provides that an acknowledgment of present subsisting liability, made in writing and signed by the party against whom the right is claimed, has the effect of commencing a fresh period of limitation.

The Court noted that the Limitation Act applies to proceedings under the IBC and that the right to sue accrues when a default occurs. The Court emphasized that the NCLT/NCLAT has the discretion to entertain an application/appeal after the prescribed period of limitation, provided there is sufficient cause for the delay.

Arguments

The Appellant argued that:

• The limitation period for filing an application under Section 9 of the IBC is three years from the date of default, as per the judgment in B.K. Educational Services Pvt. Ltd. v. Parag Gupta and Associates [(2019) 11 SCC 633].
• The cause of action arose when the default occurred, which was in 2013, and not when the IBC came into force.
• The pendency of the winding-up petition in the High Court of Judicature at Madras does not extend the limitation period for filing an application under the IBC.
• There was no acknowledgement of liability after 7th November 2013, and the last payment was made in June 2013.
• The High Court of Judicature at Madras had the jurisdiction to entertain the winding up petition.

The Respondent argued that:

• The right to apply under Section 9 of the IBC accrued on 1st December 2016, when the IBC came into force.
• There was a continuous cause of action, and the claim was within the period of limitation.
• The winding-up petition filed in the High Court of Judicature at Madras was an appropriate forum for relief, and the claim was not barred by limitation.
• The winding up petition became infructuous by operation of law.

The innovativeness in the argument was that the Respondent claimed that the cause of action arose when the IBC came into force and the winding up petition was a continuous cause of action.

Submissions of Parties

Issues Framed by the Supreme Court

The Supreme Court did not frame specific issues in this judgment, but the core issue was:

1. Whether the application under Section 9 of the IBC was barred by limitation.

Treatment of the Issue by the Court

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

Authorities

The Court considered the following authorities:

The Court also considered the following legal provisions:

Judgment

The Supreme Court held that the application filed by the Respondent under Section 9 of the IBC was barred by limitation. The Court emphasized that the limitation period for initiating CIRP under the IBC is three years from the date of default. The Court further clarified that the pendency of a winding-up petition in a High Court does not extend the limitation period for filing an application under Section 9 of the IBC.

The Court observed that the last acknowledgment of liability by the Appellant was on 7th November 2013, and the last payment was made in June 2013. Since the application under Section 9 of the IBC was filed on 30th March 2018, it was clearly beyond the three-year limitation period.

The Court set aside the order of the NCLAT and restored the order of the NCLT, which had dismissed the application as barred by limitation. However, the Court clarified that the Respondent was not barred from pursuing any other remedy available under the law.

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

The Court relied on the following authorities:

• B.K. Educational Services Pvt. Ltd. v. Parag Gupta and Associates [(2019) 11 SCC 633]* The Court followed this judgment, reiterating that the limitation period for applications under Sections 7 and 9 of the IBC is three years from the date of default.
• Radha Export (India) Private Ltd. v. K.P . Jayaram and Anr. [(2020) 10 SCC 538]* The Court followed this case, which held that an application under Section 7 of the IBC was barred by limitation.
• Babulal Vardharji Gurjar v . Veer Gurjar Aluminium Industries Private Ltd. and Anr. [(2020) 15 SCC 15]* The Court followed this case, which held that the limitation period of three years from the date of default is extendable under Section 5 of the Limitation Act, 1963.
• Ramlal, Motilal & Chhotelal v. Rewa Coalfields Ltd. [AIR 1962 SC 361]* The Court followed this case, which affirmed that Section 5 of the Limitation Act gives the Court a discretion to be exercised judicially.
• Krishna v. Chathappan [1889 SCC Online Mad 16]* The Court followed this case, which affirmed that Section 5 of the Limitation Act gives the Court a discretion to be exercised judicially.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the principle of limitation and the need for timely initiation of legal proceedings. The Court emphasized that the limitation period for filing an application under Section 9 of the IBC is three years from the date of default, as established in the case of B.K. Educational Services Pvt. Ltd. v. Parag Gupta and Associates [(2019) 11 SCC 633]. The Court was also influenced by the fact that there was no acknowledgement of liability after 7th November 2013.

The Court rejected the argument that the pendency of a winding-up petition in the High Court could extend the limitation period for filing an application under the IBC. The Court noted that the High Court had the jurisdiction to entertain the winding-up petition and that the winding-up petition was not a valid ground to extend the limitation period under Section 14(2) of the Limitation Act. The Court also rejected the argument that the right to apply under Section 9 of the IBC accrued when the IBC came into force, holding that the right accrued when the default occurred.

Fact:Law

The following table shows the ratio of fact:law percentage that influenced the court to decide.

Logical Reasoning

The Court’s reasoning was based on the following key points:

• The limitation period for initiating CIRP under the IBC is three years from the date of default, as established in B.K. Educational Services Pvt. Ltd. v. Parag Gupta and Associates [(2019) 11 SCC 633].
• The pendency of a winding-up petition in a High Court does not extend the limitation period for filing an application under Section 9 of the IBC.
• The last acknowledgment of liability by the Appellant was on 7th November 2013, and the last payment was made in June 2013.
• The High Court of Judicature at Madras had the jurisdiction to entertain the winding up petition.
• The application under Section 9 of the IBC was filed on 30th March 2018, which was beyond the three-year limitation period.

The Court rejected the Respondent’s argument that the right to apply under Section 9 of the IBC accrued when the IBC came into force. The Court held that the right accrued when the default occurred.

The Court also considered the provisions of Section 14(2) of the Limitation Act, 1963, which allows for exclusion of time spent in prosecuting proceedings in a court without jurisdiction. The Court held that the Madras High Court had jurisdiction to entertain the winding-up petition, and therefore, the time spent in pursuing the winding-up petition could not be excluded for the purpose of computing the limitation period for the application under Section 9 of the IBC.

The Court quoted from the judgment:

“It would be absurd to hold that the CIRP could be initiated by filing an application under Section 7 or Section 9 of the IBC, within three years from the date on which an application under those provisions of the IBC could have first been made before the NCLT even though the right to sue may have accrued decades ago.”

“The fact that an application for initiation of CIRP, may have been filed within three years from the date of enforcement of the relevant provisions of the IBC is inconsequential. What is material is the date on which the right to sue accrues, and whether the cause of action continuous.”

“A claim may not be barred by limitation. It is the remedy for realisation of the claim, which gets barred by limitation.”

Key Takeaways

• The limitation period for filing an application under Section 9 of the IBC is three years from the date of default.
• The pendency of a winding-up petition in a High Court does not extend the limitation period for filing an application under Section 9 of the IBC.
• The right to apply under Section 9 of the IBC accrues when the default occurs, not when the IBC came into force.
• Creditors must be diligent in pursuing their claims within the prescribed limitation period.
• The Court’s decision reinforces the importance of adhering to the limitation period in insolvency proceedings.

Directions

The Supreme Court set aside the order of the NCLAT and restored the order of the NCLT, which had dismissed the application as barred by limitation. However, the Court clarified that the Respondent was not barred from pursuing any other remedy available under the law.

Development of Law

The Supreme Court clarified that the limitation period for initiating CIRP under the IBC is three years from the date of default, and the pendency of a winding-up petition in a High Court does not extend this limitation. The ratio decidendi of the case is that the limitation period for an application under Section 9 of the IBC begins from the date of default, not from the date of enforcement of the IBC or the filing of a winding-up petition. This reinforces the position of law established in B.K. Educational Services Pvt. Ltd. v. Parag Gupta and Associates [(2019) 11 SCC 633].

Conclusion

The Supreme Court’s judgment in M/S Tech Sharp Engineers Pvt. Ltd. vs. Sanghvi Movers Limited clarifies that the limitation period for initiating CIRP under the IBC is three years from the date of default. The pendency of a winding-up petition in a High Court does not extend this limitation. This ruling emphasizes the importance of timely action by creditorsseeking to recover their dues under the IBC and reinforces the principle of limitation in insolvency proceedings. It also clarifies that the date of enforcement of the IBC or the date of filing of a winding up petition does not extend the limitation period. The judgment provides a clear direction for creditors and adjudicating authorities regarding the application of limitation in the context of the IBC.