Supreme Court clarifies the applicability of Limitation Act to IBC: Sesh Nath Singh vs. Baidyabati Sheoraphuli Co-operative Bank Ltd. (22 March 2021)

Introduction

Date of the Judgment: 22 March 2021
Citation: (2021) ibclaw.in 18 SC
Judges: Indira Banerjee, J. and Hemant Gupta, J.

Can a financial creditor’s application under Section 7 of the Insolvency and Bankruptcy Code (IBC) be admitted if it’s filed after the standard three-year limitation period? The Supreme Court of India addressed this critical question in a recent judgment, clarifying the interplay between the Limitation Act, 1963, and the IBC. This case delves into whether the time spent pursuing remedies under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) can be excluded when calculating limitation for IBC applications. The judgment was authored by Justice Indira Banerjee, with Justice Hemant Gupta concurring.

Case Background

The case revolves around a loan of ₹1,00,00,000 (Rupees One Crore) granted by Baidyabati Sheoraphuli Co-operative Bank Ltd (Financial Creditor) to Debi Fabtech Private Ltd (Corporate Debtor), a textile and garment export business, on 15th February 2012. A cash credit account was opened, and a hypothecation agreement was executed on 17th February 2012. By May 2012, the Corporate Debtor defaulted on repayments, and the account was declared a Non-Performing Asset (NPA) on 31st March 2013. The Financial Creditor initiated proceedings under the SARFAESI Act on 18th January 2014, issuing a notice under Section 13(2), demanding ₹1,07,88,536.00. The Corporate Debtor objected to this notice on 3rd March 2014, which was rejected by the Financial Creditor on 15th July 2014. On 13th December 2014, a notice under Section 13(4)(a) of the SARFAESI Act was issued, demanding possession of secured assets. The Corporate Debtor then filed a writ petition in the Calcutta High Court on 19th December 2014, challenging the SARFAESI notices. Despite this, on 24th December 2014, the Financial Creditor took possession of the secured assets. On 11th May 2017, the District Magistrate Hooghly ordered the possession of the assets. The High Court, on 24th July 2017, issued an interim order restraining the Financial Creditor from taking further steps under the SARFAESI Act, noting a prima facie view that a Cooperative Bank could not invoke the SARFAESI Act. Subsequently, on 10th July 2018, the Financial Creditor filed an application under Section 7 of the IBC before the Kolkata Bench of the National Company Law Tribunal (NCLT), which was admitted on 25th April 2019. The Corporate Debtor appealed to the National Company Law Appellate Tribunal (NCLAT), which dismissed the appeal on 22nd November 2019. The Corporate Debtor then approached the Supreme Court.

Timeline

Course of Proceedings

The Financial Creditor initiated proceedings under Section 7 of the IBC before the Kolkata Bench of the NCLT. The Corporate Debtor opposed the petition, arguing that a writ petition challenging the SARFAESI proceedings was pending in the High Court and that the Special Officer appointed over the Financial Creditor lacked the authority to initiate proceedings. The NCLT admitted the application on 25th April 2019, initiating the Corporate Insolvency Resolution Process (CIRP). The Corporate Debtor then appealed to the NCLAT, contending for the first time that the application was barred by limitation since it was filed more than three years after the account was declared an NPA. The NCLAT dismissed the appeal, holding that the Financial Creditor was entitled to exclude the time spent on SARFAESI proceedings under Section 14(2) of the Limitation Act. The NCLAT found that after excluding the period of approximately three years and six months during which the Financial Creditor had been proceeding under the SARFAESI Act, the application under Section 7 of the IBC was within the limitation period. The Corporate Debtor then appealed to the Supreme Court.

Legal Framework

The judgment primarily deals with the interpretation of the following legal provisions:

• Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC): This section allows a financial creditor to initiate the Corporate Insolvency Resolution Process (CIRP) against a corporate debtor when a default has occurred. It states that,
  
  “A financial creditor either by itself or jointly with other financial creditors, or any other person on behalf of the financial creditor, as may be notified by the Central Government,] may file an application for initiating corporate insolvency resolution process against a corporate debtor before the Adjudicating Authority when a default has occurred.”
• Section 13(2) and 13(4) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act): These sections empower secured creditors to take possession of secured assets and enforce security interest without court intervention.
• Section 14 of the Limitation Act, 1963: This section allows for the exclusion of time spent in prosecuting a civil proceeding in a court without jurisdiction when calculating the limitation period for a subsequent application. It states,
  
  “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 238A of the IBC: This section makes the provisions of the Limitation Act, 1963, applicable to proceedings before the Adjudicating Authority (NCLT), the National Company Law Appellate Tribunal (NCLAT), the Debt Recovery Tribunal (DRT), and the Debt Recovery Appellate Tribunal. It states,
  
  “The provisions of the Limitation Act, 1963 (36 of 1963) shall, as far as may be, apply to the proceedings or appeals before the Adjudicating Authority, the National Company Law Appellate Tribunal, the Debt Recovery Tribunal or the Debt Recovery Appellate Tribunal, as the case may be.”
• Article 137 of the Limitation Act, 1963: This article prescribes a limitation period of three years for applications for which no specific period is provided elsewhere.

These provisions are interpreted within the constitutional framework, ensuring that the IBC’s objectives of timely insolvency resolution and maximization of asset value are balanced with the principles of fairness and limitation.

Arguments

Arguments of the Appellant (Corporate Debtor):

• The application under Section 7 of the IBC was barred by limitation, as it was filed more than three years after the account was declared an NPA on 31st March 2013. The application was filed on 10th July 2018, which is beyond the three year period.
• The Financial Creditor was not entitled to the benefit of Section 14 of the Limitation Act, as proceedings under the SARFAESI Act are not civil proceedings before a court.
• The NCLT/NCLAT is not a forum for debt recovery, and therefore, the provisions of the Limitation Act should not apply.
• The Financial Creditor did not file an application under Section 5 of the Limitation Act for condonation of delay.
• The proceedings initiated by the Financial Creditor under SARFAESI Act were still pending, it was not open to the Financial Creditor to take the benefit of Section 14(2) of the Limitation Act, 1963.

Arguments of the Respondent (Financial Creditor):

• The Financial Creditor had initiated proceedings under the SARFAESI Act within the limitation period.
• The time spent pursuing remedies under the SARFAESI Act should be excluded under Section 14 of the Limitation Act.
• The Financial Creditor had enclosed a synopsis of relevant facts and significant dates, with supporting documents, which included the date of sanction of the loan, the date when the Cash Credit Account was declared NPA, the dates of the Demand Notice under Section 13(2) of the SARFAESI Act and the notice under Section 13(4), notice of date of possession under Section 13(4), the date on which possession order was issued by the District Magistrate, Hooghly, West Bengal and the date of the interim order of the High Court.

The innovativeness of the argument by the Corporate Debtor lies in its attempt to distinguish between proceedings under the SARFAESI Act and civil proceedings in a court, thereby challenging the applicability of Section 14 of the Limitation Act. The Financial Creditor’s argument is based on the premise that SARFAESI proceedings should be considered as civil proceedings for the purpose of Section 14, and that the Limitation Act should be interpreted liberally to advance the cause of justice.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether delay beyond three years in filing an application under Section 7 of IBC can be condoned, in the absence of an application for condonation of delay made by the applicant under Section 5 of the Limitation Act, 1963?
2. Whether Section 14 of the Limitation Act, 1963 applies to applications under Section 7 of the IBC? If so, is the exclusion of time under Section 14 available only after the proceedings before the wrong forum terminate?

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:

On the Applicability of the Limitation Act to IBC Proceedings:

• Gaurav Hargovindbhai Dave v. Asset Reconstruction Company (India) Ltd. And Anr. [ (2019) 10 SCC 572]: This case established that applications under Section 7 of the IBC fall under the residuary Article 137 of the Limitation Act, prescribing a three-year limitation period.
• B.K. Educational Services Private Limited v. Parag Gupta and Associates [(2019) 11 SCC 633]: The Court reiterated that Article 137 of the Limitation Act applies to applications under Sections 7 and 9 of the IBC, with the right to sue accruing when a default occurs.
• Radha Export (India) Private Limited v. K.P. Jayaram and Anr. [(2020) 10 SCC 538]: This case affirmed the applicability of the Limitation Act to IBC proceedings, holding an application under Section 7 to be time-barred.
• Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries Pvt. Ltd. and another [(2020) 15 SCC 123]: The Court held that the three-year limitation period under Article 137 of the Limitation Act, which commences from the date of default, is extendable under Section 5 of the Limitation Act.

On the Interpretation of Section 5 of the Limitation Act:

• Ramlal Motilal and Chhotelal v. Rewa Coalfields Ltd. [AIR 1962 SC 361]: The Court affirmed that Section 5 of the Limitation Act gives the Courts a discretion to be exercised judicially.
• Shakuntla Devi Jain vs. Kuntal Kumar [AIR 1969 SC 575]: The Court held that the expression ‘sufficient cause’ should be construed liberally to advance substantial justice.
• State of West Bengal v. Administrator, Howrah Municipality and Others [(1972) 1 SCC 366]: This case reiterated that the term ‘sufficient cause’ should be interpreted liberally to promote justice.

On the Applicability of Section 14 of the Limitation Act:

• State of Goa v. Western Builders [(2006) 6 SCC 239]: This case established that Section 14 of the Limitation Act applies to applications for setting aside arbitral awards.
• Consolidated Engineering Enterprises v. Principal Secretary, Irrigation Department and Ors. [(2008) 7 SCC 169]: A three-judge bench of the Supreme Court held that Section 14 of the Limitation Act applies to applications for setting aside arbitral awards.
• Commissioner, M.P. Housing Board and Ors. v. Mohanlal & Co. [(2016) 14 SCC 199]: The Court held that Section 14 of the Limitation Act should be interpreted liberally to advance the cause of justice.

On the Interpretation of Explanations in Statutes:

• Bihta Co-operative Development Cane Marketing Union Ltd. and Anr. v. Bank of Bihar and Ors. [AIR 1967 SC 389]: The Court held that an explanation must be read to harmonize with and clear up any ambiguity in the main section.
• S. Sundaram Pillai and Others v. V.R. Pattabiraman and Others [(1985) 1 SCC 591]: The Court clarified that an explanation to a statutory provision is meant to explain or clarify ambiguities.

On the Definition of Civil Proceedings:

• S.A.L. Narayan Rao and Anr. v. Ishwarlal Bhagwandas and Anr. [AIR 1965 SC 1818]: The Constitution Bench of the Court defined civil proceedings as those asserting a civil right and claiming relief for its breach.

On the SARFAESI Act:

• United Bank of India v. Satyawati Tandon and Ors. [(2010) 8 SCC 110]: The Court highlighted the radical nature of the SARFAESI Act in empowering secured creditors to recover dues without court intervention.

On Statutory Interpretation:

• New India Sugar Mill Limited v. Commissioner of Sales Tax, Bihar [AIR 1963 SC 1207]: The Court stated that expressions in statutes should be understood in a sense that best harmonizes with the statute’s object.
• Busching Schmitz Private Ltd. v. P.T. Menghani [AIR 1977 SC 1569]: The Court held that an object-oriented approach should be adopted in statutory interpretation.

Judgment

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

Reasoning of the Court:

The Supreme Court held that the NCLT is not a substitute for a collection forum, as the ultimate object of an application under Section 7 or 9 of the IBC is the realization of a ‘debt’ by invocation of the Insolvency Resolution Process, which may or may not result in recovery of the debt. The Court observed that the explanation to Section 14 of the Limitation Act is merely clarificatory and does not restrict the exclusion of time only to terminated proceedings. The Court held that the provisions of the Limitation Act, 1963 apply to proceedings before the Adjudicating Authority (NCLT), the National Company Law Appellate Tribunal (NCLAT), the Debt Recovery Tribunal (DRT), and the Debt Recovery Appellate Tribunal. The Court also held that Section 5 of the Limitation Act does not mandate a formal application and the Court can condone delay if sufficient cause is shown. The Court found that the Financial Creditor had been diligently pursuing remedies under the SARFAESI Act, which should be considered as a civil proceeding for the purposes of Section 14 of the Limitation Act. The Court highlighted that the term ‘sufficient cause’ should be interpreted liberally to promote justice. This liberal interpretation is essential to ensure that the objectives of the IBC are achieved, including timely resolution of insolvency and maximization of asset value.

Decision

The Supreme Court dismissed the appeal filed by the Corporate Debtor, affirming the NCLAT’s decision. The Court held that:

• Section 14 of the Limitation Act applies to applications under Section 7 of the IBC.
• The time spent pursuing remedies under the SARFAESI Act can be excluded when calculating the limitation period for filing an application under Section 7 of the IBC.
• A formal application under Section 5 of the Limitation Act is not required for condonation of delay.
• The explanation in Section 14 is only clarificatory and does not restrict the exclusion of time only to terminated proceedings.

The Court found that the Financial Creditor had been diligently pursuing its remedies under the SARFAESI Act, and hence, the application under Section 7 of the IBC was not time-barred. The Supreme Court’s decision clarifies that the Limitation Act applies to IBC proceedings and that the time spent on other legal remedies can be excluded under Section 14 of the Act. This ruling ensures that creditors are not penalized for pursuing other legal avenues before resorting to the IBC, thus promoting a more just and equitable insolvency resolution process.

Ratio Decidendi

The ratio decidendi of the Supreme Court’s decision can be summarized as follows:

1. Applicability of Limitation Act to IBC Proceedings: The Limitation Act, 1963, applies to proceedings under the Insolvency and Bankruptcy Code, 2016. This means that applications under Section 7 of the IBC must be filed within the prescribed limitation period, which is three years from the date of default, as per Article 137 of the Limitation Act.
2. Exclusion of Time Under Section 14 of the Limitation Act: Section 14 of the Limitation Act, which allows for the exclusion of time spent in prosecuting a civil proceeding in a court without jurisdiction, applies to applications under Section 7 of the IBC. This means that if a creditor has been diligently pursuing remedies in another forum, such as under the SARFAESI Act, the time spent in those proceedings can be excluded when calculating the limitation period for an IBC application.
3. Liberal Interpretation of ‘Sufficient Cause’: The term ‘sufficient cause’ under Section 5 of the Limitation Act should be interpreted liberally to advance substantial justice. This means that a formal application for condonation of delay is not mandatory, and the court can condone delay if a sufficient cause is demonstrated.
4. SARFAESI Proceedings as Civil Proceedings: Proceedings under the SARFAESI Act are considered civil proceedings for the purposes of Section 14 of the Limitation Act. This allows for the exclusion of time spent on SARFAESI proceedings when calculating the limitation period for an IBC application.
5. Clarification of Explanation in Section 14: The explanation to Section 14 of the Limitation Act is merely clarificatory and does not restrict the exclusion of time only to terminated proceedings. The exclusion of time under Section 14 is available from the date of initiation till the date of termination of the earlier proceedings.

These legal principles establish that the Limitation Act applies to IBC proceedings, but with a flexible approach that allows for the exclusion of time spent on other legal remedies. This ensures that creditors are not penalized for pursuing other legal avenues before resorting to the IBC, thus promoting a more just and equitable insolvency resolution process. The ratio decidendi of the case provides a comprehensive framework for determining the limitation period for IBC applications, especially when other legal proceedings are involved.

Obiter Dicta

While the primary focus of the judgment was on the applicability of Section 14 of the Limitation Act to IBC proceedings, the Supreme Court also made certain observations that can be considered obiter dicta:

• NCLT as a Resolution Forum, Not a Recovery Forum: The Court reiterated that the NCLT is not a substitute for a debt recovery forum. The primary objective of the IBC is to resolve insolvency and maximize asset value, not merely to recover debts. This is an important distinction that underscores the purpose of the IBC as a mechanism for corporate restructuring and revival, rather than a simple debt collection tool.
• Liberal Interpretation of Limitation Act: The Court emphasized the need for a liberal interpretation of the Limitation Act, particularly in the context of insolvency proceedings. This indicates a judicial inclination towards a pragmatic approach that does not unduly penalize creditors who have diligently pursued other legal remedies before resorting to the IBC. This observation reinforces the principle that the Limitation Act should be interpreted in a manner that promotes justice and fairness.
• Importance of Timely Insolvency Resolution: The Court’s decision indirectly underscores the importance of timely insolvency resolution. By allowing the exclusion of time spent on other legal proceedings, the Court aims to ensure that creditors are not unduly delayed in accessing the IBC mechanism, thereby promoting the timely resolution of corporate insolvencies. This observation is in line with the overall objectives of the IBC, which seeks to provide a time-bound framework for insolvency resolution.

These obiter dicta provide valuable insights into the Supreme Court’s understanding of the IBC and its interplay with other legal frameworks. While not directly binding, these observations offer guidance for future cases and highlight the court’s commitment to a balanced and pragmatic approach to insolvency law.

Flowchart

Ratio Table

Sentiment Analysis