Supreme Court clarifies limitation period for IBC applications: Vashdeo R Bhojwani vs. Abhyudaya Co-operative Bank Ltd (2019)

Introduction

Date of the Judgment: 02 September 2019
Citation: Not available in the provided document.
Judges: Justice Rohinton Fali Nariman and Justice Surya Kant

Can a financial creditor initiate insolvency proceedings under the Insolvency and Bankruptcy Code (IBC) against a corporate debtor for a default that occurred more than three years ago? The Supreme Court of India addressed this crucial question in the case of Vashdeo R Bhojwani vs. Abhyudaya Co-operative Bank Ltd, clarifying the applicability of the Limitation Act to IBC applications. This judgment settles the question of whether a continuous default allows for an indefinite period to initiate proceedings.

The core issue revolved around whether the limitation period under the Limitation Act, 1963, applies to applications filed under Section 7 of the IBC. The Court examined if a ‘continuing default’ could extend the limitation period indefinitely. The bench, comprising Justices Rohinton Fali Nariman and Surya Kant, delivered a unanimous judgment, clarifying the scope of limitation in IBC cases.

Case Background

The case involves a financial default by Respondent No. 2, which was declared a Non-Performing Asset (NPA) by Abhyudaya Co-operative Bank Limited on 23 December 1999. The default amounted to Rs. 6.7 Crores. A Recovery Certificate was issued on 24 December 2001 for this outstanding amount.

On 21 July 2017, Respondent No. 1 filed a petition under Section 7 of the IBC before the National Company Law Tribunal (NCLT), claiming the outstanding amount along with interest from 1998. The Respondent No. 1 argued that they became the Financial Creditor due to a merger with another Cooperative Bank in 2006, which had originally assigned the loan.

The NCLT admitted the Section 7 petition on 05 March 2018, stating that because the default was continuing, no limitation period would apply.

Timeline:

Course of Proceedings

The NCLT admitted the Section 7 petition, reasoning that the default was ongoing, and therefore, no limitation period applied. The NCLT thus concluded that the petition was maintainable.

An appeal was filed before the National Company Law Appellate Tribunal (NCLAT), which was dismissed on 05 September 2018. The NCLAT upheld the NCLT’s decision, stating that the cause of action was continuous, and the Recovery Certificate of 2001 showed a clear default with no valid defense.

Legal Framework

The Supreme Court considered the applicability of the Limitation Act, 1963, to applications filed under Section 7 of the IBC. Specifically, Article 137 of the Limitation Act, which prescribes a limitation period of three years for applications where no specific period is provided, was considered.

The Court referred to its earlier judgment in *B.K. Educational Services Private Limited vs. Parag Gupta and Associates*, [2018 (14) Scale 482], which clarified that the Limitation Act applies to applications under Sections 7 and 9 of the IBC from its inception.

The Court also examined Section 23 of the Limitation Act, which deals with continuing breaches and wrongs.

Arguments

The appellant argued that the application under Section 7 of the IBC was barred by limitation as the default occurred more than three years before the filing of the application. The appellant relied on the judgment in *B.K. Educational Services Private Limited vs. Parag Gupta and Associates* to assert that Article 137 of the Limitation Act applies to IBC applications.

The respondent contended that Section 23 of the Limitation Act applies, arguing that the default was a continuing wrong, which would save the limitation period. The respondent claimed that the cause of action was ongoing and therefore the application was not time-barred.

Issues Framed by the Supreme Court

The primary issue before the Supreme Court was:

1. Whether the application under Section 7 of the IBC was barred by limitation.

Treatment of the Issue by the Court

Authorities

Cases:

• B.K. Educational Services Private Limited vs. Parag Gupta and Associates, 2018 (14) Scale 482 – Supreme Court of India: This case established that the Limitation Act applies to applications under Sections 7 and 9 of the IBC from the inception of the Code, attracting Article 137 of the Limitation Act.
• Balkrishna Savalram Pujari and Others vs. Shree Dnyaneshwar Maharaj Sansthan & Others, [1959] Supp. (2) S.C.R. 476 – Supreme Court of India: This case clarified the concept of a “continuing wrong” under Section 23 of the Limitation Act, stating that it applies only when the injury itself continues, not merely the effects of the injury.

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.
• Article 137 of the Limitation Act, 1963: This article prescribes a limitation period of three years for applications where no specific period is provided.
• Section 23 of the Limitation Act, 1963: This section deals with continuing breaches and wrongs, stating that a fresh period of limitation begins at every moment of the time during which the breach or wrong continues.

Judgment

How each authority was viewed by the Court?

• B.K. Educational Services Private Limited vs. Parag Gupta and Associates, 2018 (14) Scale 482*: The Court followed this authority to reiterate that the Limitation Act is applicable to applications under Section 7 of the IBC.
• Balkrishna Savalram Pujari and Others vs. Shree Dnyaneshwar Maharaj Sansthan & Others, [1959] Supp. (2) S.C.R. 476*: The Court relied on this authority to distinguish between a continuing wrong and the continuing effect of a wrong, holding that the present case did not fall under the ambit of a continuing wrong.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the legal principle that limitation periods are crucial for ensuring legal certainty and preventing stale claims. The Court emphasized that the issuance of the Recovery Certificate in 2001 was a definitive event that triggered the start of the limitation period. The Court also emphasized that a continuing wrong is not the continuing effect of a wrong. The Court was disinclined to accept the argument of a continuing wrong as it would defeat the purpose of the Limitation Act.

Logical Reasoning:

The Court considered the respondent’s argument that the default was a continuing wrong under Section 23 of the Limitation Act. However, it rejected this argument, citing the *Balkrishna Savalram Pujari* case, which distinguished between a continuing wrong and the continuing effect of a wrong. The Court held that the issuance of the Recovery Certificate was a complete injury, and therefore, the limitation period began from that date.

The Supreme Court stated, “…It is the very essence of a continuing wrong that it is an act which creates a continuing source of injury and renders the doer of the act responsible and liable for the continuance of the said injury. If the wrongful act causes an injury which is complete, there is no continuing wrong even though the damage resulting from the act may continue…”

The Court further stated, “Following this judgment, it is clear that when the Recovery Certificate dated 24.12.2001 was issued, this Certificate injured effectively and completely the appellant’s rights as a result of which limitation would have begun ticking.”

The Court concluded, “This being the case, and the claim in the present suit being time barred, there is no debt that is due and payable in law.”

Key Takeaways

• The Limitation Act, 1963, applies to applications under Section 7 of the IBC from the inception of the Code.
• Article 137 of the Limitation Act prescribes a three-year limitation period for such applications.
• The concept of a “continuing wrong” under Section 23 of the Limitation Act does not apply to defaults where the injury is complete, such as the issuance of a Recovery Certificate.
• Financial creditors must initiate insolvency proceedings within three years from the date of default or the date of a definitive event that establishes the debt.
• The judgment emphasizes the importance of adhering to limitation periods to ensure legal certainty and prevent stale claims.

Directions

The Supreme Court allowed the appeal and set aside the orders of the NCLT and NCLAT. There were no directions given regarding costs.

Development of Law

The ratio decidendi of the case is that the Limitation Act, 1963, applies to applications under Section 7 of the IBC, and the limitation period begins from the date of default or when the right to sue accrues. The judgment clarifies that the concept of a “continuing wrong” does not extend the limitation period indefinitely and that the issuance of a Recovery Certificate constitutes a complete injury, triggering the limitation period. This decision reinforces the importance of adhering to limitation periods in insolvency proceedings.

Conclusion

The Supreme Court’s judgment in Vashdeo R Bhojwani vs. Abhyudaya Co-operative Bank Ltd clarifies the applicability of the Limitation Act to applications under Section 7 of the IBC. The Court held that a three-year limitation period applies from the date of default or the issuance of a Recovery Certificate, rejecting the argument of a continuing wrong. This decision reinforces the importance of adhering to limitation periods and provides clarity on the timeline for initiating insolvency proceedings.