Supreme Court Sets Aside Winding Up Order Due to Limitation: Jignesh Shah vs. Union of India (25 September 2019)

Introduction

Date of the Judgment: 25 September 2019
Citation: (2019) INSC 937
Judges: R.F. Nariman, J., R. Subhash Reddy, J., and Surya Kant, J. (authored by R.F. Nariman, J.)

Can a time-barred winding-up petition under the Companies Act, 1956 be revived by transferring it as an application under the Insolvency and Bankruptcy Code, 2016? The Supreme Court of India addressed this crucial question in a recent judgment. The core issue revolved around whether the limitation period for initiating a winding-up process could be circumvented by transferring it to a new legal framework. The Supreme Court, in this case, clarified that the Limitation Act, 1963 applies to proceedings under the Insolvency and Bankruptcy Code, 2016, and a time-barred claim cannot be revived by transferring it to the new code.

Case Background

The case originated from a share purchase agreement between Multi-Commodity Exchange India Limited (MCX), MCX Stock Exchange Limited (MCX-SX), and IL&FS Financial Services Ltd. (IL&FS) on 20th August 2009. As part of this agreement, La-Fin Financial Services Pvt. Ltd. (La-Fin), a group company of MCX, issued a Letter of Undertaking to IL&FS. This letter stated that La-Fin would purchase shares of MCX-SX from IL&FS within a period of one to three years from the date of investment. The three-year period expired in August 2012.

On 3rd August 2012, IL&FS exercised its option to sell its shares, asking La-Fin to purchase them as per the Letter of Undertaking. La-Fin, on 16th August 2012, refused, stating it had no legal or contractual obligation to buy the shares. Subsequently, on 19th June 2013, IL&FS filed a suit in the Bombay High Court seeking specific performance of the Letter of Undertaking or, alternatively, damages. The cause of action for the suit was stated to have arisen on 16th August 2012.

On 13th October 2014, the Bombay High Court issued an injunction order restraining La-Fin from alienating its assets, subject to prior attachments by the Economic Offences Wing (EOW). On 3rd November 2015, IL&FS issued a statutory notice to La-Fin under Sections 433 and 434 of the Companies Act, 1956, claiming INR 232,50,00,000/- was due. La-Fin replied on 18th November 2015, disputing the debt and asserting its commercial soundness. On 21st October 2016, IL&FS filed a winding-up petition against La-Fin in the Bombay High Court under Section 433(e) of the Companies Act, 1956.

With the enactment of the Insolvency and Bankruptcy Code, 2016 on 1st December 2016, the winding-up petition was transferred to the National Company Law Tribunal (NCLT) as a Section 7 application under the Code. IL&FS, in the statutory form, indicated the date of default as 19th August 2012. The NCLT admitted the winding-up petition on 28th August 2018, stating that a financial debt had been incurred by La-Fin. The National Company Law Appellate Tribunal (NCLAT) dismissed the appeal against this order on 21st January 2019, agreeing that the transaction fell under the definition of “financial debt” and that the limitation period was not applicable. This led to the filing of a writ petition and a civil appeal in the Supreme Court.

Timeline

Legal Framework

The case primarily involves the interpretation and application of the following legal provisions:

• Section 433(e) of the Companies Act, 1956: This section specifies that a company may be wound up by the Tribunal if it is unable to pay its debts.
• Section 434 of the Companies Act, 1956: This section outlines when a company is deemed unable to pay its debts. It includes scenarios such as a creditor’s demand for payment being neglected for three weeks, an unsatisfied decree, or proof to the Tribunal’s satisfaction that the company cannot pay its debts.
• Section 7 of the Insolvency and Bankruptcy Code, 2016: This section deals with the initiation of corporate insolvency resolution process by a financial creditor.
• Section 238A of the Insolvency and Bankruptcy Code, 2016: This section states that the provisions of the Limitation Act, 1963, shall apply to proceedings or appeals before the Adjudicating Authority, the National Company Law Appellate Tribunal, the Debt Recovery Tribunal, or the Debt Recovery Appellate Tribunal.
• 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 in the Act.

The interplay between these provisions is crucial in determining whether a winding-up petition, initially filed under the Companies Act, 1956, can be admitted as an application under the Insolvency and Bankruptcy Code, 2016, if the limitation period has expired.

Arguments

Arguments by the Petitioners/Appellants (Jignesh Shah & Anr.):

• The primary argument was that the winding-up petition filed by IL&FS was time-barred under Article 137 of the Limitation Act, 1963. The cause of action arose in August 2012 when La-Fin refused to honor its obligation under the Letter of Undertaking. The winding-up petition was filed on 21st October 2016, which is beyond the three-year limitation period.

• The petitioners argued that the Limitation Act, 1963, applies to all Section 7 applications under the Insolvency and Bankruptcy Code, 2016, as per the Supreme Court’s judgment in B.K. Educational Services Pvt. Ltd. v. Parag Gupta and Associates [2018 SCC OnLine 1921]. This judgment clarified that the residuary Article 137 of the Limitation Act would be attracted to such cases.

• The mere filing of a suit for specific performance would not impact the limitation period for a winding-up petition. The winding-up petition is a separate and independent remedy and must stand on its own merits.

• The statutory notice issued by IL&FS under Sections 433 and 434 of the Companies Act, 1956, and the Form-1 filled by IL&FS for transferring the winding-up petition to the NCLT, both indicated the date of default as 19th August 2012, confirming that the winding-up petition was time-barred.

Arguments by the Respondents (IL&FS):

• The cause of action for the suit and the winding-up petition were separate and distinct. A winding-up petition is a proceeding ‘in rem’ concerning the commercial insolvency of the company, not just a debt recovery mechanism.

• The cause of action for the winding-up petition arose in 2015/2016 after Jignesh Shah’s arrest and the attachment of La-Fin’s assets, and when La-Fin’s assets had significantly decreased in value. The suit for specific performance kept the debt alive, and the winding-up petition was filed after the debt was kept alive.

• Limitation is a mixed question of fact and law, and the matter should be remanded to the NCLT for a determination on this issue.

Issues Framed by the Supreme Court

The Supreme Court considered the following key issue:

1. Whether the winding-up petition filed on 21st October 2016, is barred by limitation, given that the cause of action arose in August 2012.

Treatment of the Issue by the Court

Authorities

The Supreme Court relied on several authorities to reach its decision. These authorities are categorized by the legal point they address:

Applicability of Limitation Act to Insolvency Proceedings:

• B.K. Educational Services Pvt. Ltd. v. Parag Gupta and Associates [2018 SCC OnLine 1921] – Supreme Court of India: This case established that the Limitation Act, 1963, applies to applications under Sections 7 and 9 of the Insolvency and Bankruptcy Code, 2016.
• M.P. Steel Corporation v. CCE (2015) 7 SCC 58 – Supreme Court of India: This case discusses how limitation, being procedural, is generally applied retrospectively, but cannot revive a dead remedy.
• State of Kerala v. V.R. Kalliyanikutty, (1999) 3 SCC 657 – Supreme Court of India: This case held that a time-barred debt cannot be recovered through recovery proceedings.
• Union of India v. Uttam Steels Ltd., (2015) 13 SCC 209 – Supreme Court of India: This case held that an extended limitation period does not revive a claim that was already time-barred.
• Allied Motors (P) Ltd. v. CIT, (1997) 3 SCC 472 – Supreme Court of India: This case dealt with the retrospective application of amendments to tax laws.

Winding Up Proceedings and Limitation:

• Hariom Firestock Limited v. Sunjal Engineering Pvt. Ltd. (1999) 96 Comp Cas 349 – Karnataka High Court: This case held that a suit for recovery does not revive or extend the limitation period for a winding-up petition.
• Ferro Alloys Corporation Ltd. v. Rajhans Steel Ltd. (2000) Comp Cas 426 – Patna High Court: This case held that the pendency of a suit for debt realization does not benefit a winding-up proceeding if the debt is time-barred.
• Rameswar Prasad Kejriwal & Sons Ltd. v. M/s. Garodia Hardware Stores (2002) 108 Comp Cas 187 – Calcutta High Court: This case held that a winding-up petition cannot be filed after the limitation period, even if a decree has been obtained in a money suit.
• Dr. Dipankar Chakraborty v. Allahabad Bank & Ors. 2017 SCC OnLine Cal 8742 – Calcutta High Court: This case held that the invocation of the SARFAESI Act is subject to the laws of limitation.
• Indo Alusys Industries v. Assotech Contracts (India) Ltd. 2009 (110) DRJ 384 – Delhi High Court: This case held that a suit for recovery and a winding-up proceeding are distinct and independent remedies.
• Re Karnos Property Co. Ltd. (1989) 5 B.C.C. 14 – Chancery Division (Companies Court): This case held that a winding-up petition for non-payment of rates is subject to the Limitation Acts.

Other Relevant Authorities:

• Board of Regents of the University of the State of New York et. al. v. Mary Tomanio 100 S. Ct. 1790 – Supreme Court of the United States of America: This case held that the time for filing a cause of action is not tolled during the period in which a litigant pursues a related, but independent cause of action.
• Martiza Alamo-Hornedo v. Juan Carlos Puig and Jose Perez-Riera 745 F.3d 578 – US Court of Appeals, First Circuit: This case held that a separate and independent action, barred by limitation, cannot be brought within limitation merely because a prior suit had been filed.
• Re: Messrs: Bhimji Nanji and Co. (1969) Mh.L.J. 827 – Bombay High Court: This case, under the Presidency-towns Insolvency Act, 1909, discussed the subsistence of a debt at the hearing of an insolvency petition.
• Rajender Singh and Ors. v. Santa Singh and Ors. (1973) 2 SCC 705 – Supreme Court of India: This case discussed the policy underlying statutes of limitation.
• M/s Madhusudan Gordhandas & Co. v. Madhu Woollen Industries Pvt. Ltd. (1971) 3 SCC 632 – Supreme Court of India: This case discusses the principles for admitting a winding-up petition under Section 433(e) of the Companies Act, 1956.
• Pradeshiya Industrial & Investment Corporation of U.P. v. North India Petrochemicals Ltd. and Anr. (1994) 3 SCC 348 – Supreme Court of India: This case discussed the concept of “inability to pay its dues” in a commercial sense.
• Mediquip Systems (P) Ltd. v. Proxima Medical System GMBH (2005) 7 SCC 42 – Supreme Court of India: This case discusses the discretionary nature of a winding-up order under Section 433(e) of the Companies Act, 1956.

Judgment

How each authority was viewed by the Court?

• The Court relied on B.K. Educational Services Pvt. Ltd. v. Parag Gupta and Associates [2018 SCC OnLine 1921]* to establish that the Limitation Act, 1963, applies to applications under the Insolvency and Bankruptcy Code, 2016.
• The Court followed the principles laid down in Hariom Firestock Limited v. Sunjal Engineering Pvt. Ltd. (1999) 96 Comp Cas 349*, Ferro Alloys Corporation Ltd. v. Rajhans Steel Ltd. (2000) Comp Cas 426*, Rameswar Prasad Kejriwal & Sons Ltd. v. M/s. Garodia Hardware Stores (2002) 108 Comp Cas 187*, Dr. Dipankar Chakraborty v. Allahabad Bank & Ors. 2017 SCC OnLine Cal 8742*, Indo Alusys Industries v. Assotech Contracts (India) Ltd. 2009 (110) DRJ 384*, and Re Karnos Property Co. Ltd. (1989) 5 B.C.C. 14* to hold that a suit for recovery does not extend the limitation period for a winding-up petition.
• The Court distinguished the judgment in Re: Messrs: Bhimji Nanji and Co. (1969) Mh.L.J. 827*, stating that it was in a different context.
• The Court cited Board of Regents of the University of the State of New York et. al. v. Mary Tomanio 100 S. Ct. 1790* and Martiza Alamo-Hornedo v. Juan Carlos Puig and Jose Perez-Riera 745 F.3d 578* to emphasize that the pursuit of a separate remedy does not toll the limitation period for another.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the strict application of the Limitation Act, 1963, to insolvency proceedings. The Court emphasized that the Insolvency and Bankruptcy Code, 2016, was not intended to revive time-barred debts. The Court also highlighted that a winding-up petition is a distinct remedy, and the filing of a suit for specific performance does not extend the limitation period for a winding-up petition. The Court was not persuaded by the arguments that the cause of action for the winding-up petition arose later due to the company’s commercial insolvency. The Court stressed that the trigger for limitation is the date of default in payment of the debt.

Fact:Law Ratio

Final Order

The Supreme Court allowed the appeal and set aside the orders of the National Company Law Appellate Tribunal (NCLAT) and the National Company Law Tribunal (NCLT). The Court held that the winding-up petition was time-barred and could not be revived as a Section 7 application under the Insolvency and Bankruptcy Code, 2016.

Flowchart

Conclusion

The Supreme Court’s judgment in Jignesh Shah vs. Union of India is a landmark decision that clarifies the applicability of the Limitation Act, 1963, to proceedings under the Insolvency and Bankruptcy Code, 2016. The Court firmly established that a time-barred winding-up petition under the Companies Act, 1956, cannot be revived as a Section 7 application under the Code. The judgment emphasizes that the Insolvency and Bankruptcy Code, 2016, is not intended to be a mechanism for reviving time-barred debts. The decision reinforces the principle that the limitation period is a crucial aspect of legal proceedings and cannot be circumvented by transferring a case to a new legal framework. The judgment provides clarity on the interplay between the Companies Act, 1956, the Insolvency and Bankruptcy Code, 2016, and the Limitation Act, 1963, and serves as a crucial precedent for future insolvency proceedings.