Supreme Court settles limitation for IBC applications: Gaurav Hargovindbhai Dave vs. Asset Reconstruction Company (2019)

LEGAL ISSUE: Applicability of the Limitation Act to applications under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC).
CASE TYPE: Insolvency Law
Case Name: Gaurav Hargovindbhai Dave vs. Asset Reconstruction Company (India) Ltd.
[Judgment Date]: 18 September 2019

Date of the Judgment: 18 September 2019
Citation: [Not Available in Source]
Judges: R.F. Nariman, J., R. Subhash Reddy, J., Surya Kant, J.
Can a creditor initiate insolvency proceedings under the Insolvency and Bankruptcy Code (IBC) for a debt that has become time-barred under the Limitation Act? The Supreme Court of India addressed this critical question, clarifying the limitation period for applications filed under Section 7 of the IBC. This judgment settles a key debate on whether the limitation period starts from the date of default or the date when the IBC came into force. The three-judge bench, consisting of Justices R.F. Nariman, R. Subhash Reddy, and Surya Kant, delivered the unanimous judgment.

Case Background

The case revolves around a debt owed by Respondent No. 2, which was declared a Non-Performing Asset (NPA) on 21 July 2011. The State Bank of India (SBI) initiated recovery proceedings before the Debt Recovery Tribunal (DRT) in 2012 to recover approximately ₹50 crores. Subsequently, on 28 March 2014, SBI assigned this debt to Respondent No. 1, Asset Reconstruction Company (India) Ltd. The DRT ruled on 10 June 2016, that the recovery applications were not maintainable. Following this, the Gujarat High Court remanded the matter after a Special Leave Petition was dismissed on 25 March 2017.

On 3 October 2017, Respondent No. 1 initiated an independent proceeding under Section 7 of the IBC to recover the original debt, which had increased to approximately ₹124 crores with interest. In the application, the date of default was listed as 21 July 2011, the date the account was declared an NPA. The National Company Law Tribunal (NCLT) applied Article 62 of the Limitation Act, which provides a 12-year limitation period for enforcing payment of money secured by a mortgage, and concluded that the application was within the limitation period. The National Company Law Appellate Tribunal (NCLAT) upheld this view, stating that the limitation period began on 1 December 2016, when the IBC came into force.

Timeline

Course of Proceedings

The State Bank of India (SBI) initially filed recovery applications before the Debt Recovery Tribunal (DRT) in 2012. The DRT dismissed these applications on 10 June 2016, deeming them not maintainable. Subsequently, the Gujarat High Court remanded the matter after a Special Leave Petition was dismissed on 25 March 2017. Following this, Respondent No. 1 initiated proceedings under Section 7 of the IBC on 3 October 2017. The NCLT admitted the application, applying Article 62 of the Limitation Act. The NCLAT upheld this decision, stating that the limitation period began on 1 December 2016, when the IBC came into force.

Legal Framework

The primary legal issue revolves around the interpretation of the Limitation Act, 1963, specifically its applicability to proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016. The relevant provision of the Limitation Act is Article 62, which provides a 12-year limitation period for suits to enforce payment of money secured by a mortgage or charge on immovable property, and Article 137, which is a residuary article with a 3-year limitation period for applications where no specific period is provided.

Article 62 of the Limitation Act states:

“To enforce payment of money secured by a mortgage or otherwise charged upon immovable property – Twelve years – When the money sued for becomes due.”

The court also considered the Insolvency and Bankruptcy Code, 2016, specifically Section 7, which deals with the initiation of corporate insolvency resolution process by a financial creditor.

Arguments

Appellant’s Arguments:

• The appellant argued that Article 137 of the Limitation Act, being a residuary article, should apply to Section 7 applications under the IBC, as no specific limitation period is prescribed for such applications.
• The right to sue accrued on 21 July 2011, when the account was declared an NPA. Therefore, the three-year limitation period under Article 137 expired in 2014, making the Section 7 application filed in 2017 time-barred.
• The appellant relied on the Supreme Court’s judgment in B.K. Educational Services Private Limited vs. Parag Gupta and Associates, 2018 SCC OnLine SC 1921, to support the argument that Article 137 applies to IBC applications.

Respondent’s Arguments:

• The respondent contended that Article 62 of the Limitation Act should apply, as it deals with the enforcement of payment of money secured by a mortgage.
• The respondent referred to paragraph 7 of the B.K. Educational Services Private Limited (supra) judgment to support the view that Article 62 is applicable.
• The respondent argued for a commercial interpretation of the IBC to ensure its workability.
• The respondent argued that the time of limitation would begin running for the purposes of limitation only on and from 01.12.2016 which is the date on which the Insolvency and Bankruptcy Code was brought into force.

Submissions of the Parties

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the core issue addressed by the Court was:

• Whether Article 62 or Article 137 of the Limitation Act applies to applications filed under Section 7 of the Insolvency and Bankruptcy Code, 2016?

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

The court also considered the following legal provisions:

Judgment

How each authority was viewed by the Court?

• The Supreme Court referred to B.K. Educational Services Private Limited vs. Parag Gupta and Associates, 2018 SCC OnLine SC 1921* and stated that it supported the application of Article 137 of the Limitation Act to the facts of the present case.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the plain language of the Limitation Act and the nature of the proceedings under Section 7 of the IBC. The Court emphasized that Article 62 of the Limitation Act is specifically applicable to suits, while Section 7 proceedings are initiated through an “application.” Consequently, the residuary Article 137, which applies to applications where no specific limitation period is prescribed, was deemed applicable. The Court also highlighted that the intent of the IBC was not to revive time-barred debts, which further solidified the decision to apply Article 137. The Court rejected the argument for a commercial interpretation of the Limitation Act, stating that the law must be applied as it is written.

The Court reasoned that Article 62 of the Limitation Act applies to suits, and not to applications under Section 7 of the IBC. The Court stated that,
“Having heard the learned counsel for both sides, what is apparent is that Article 62 is out of the way on the ground that it would only apply to suits. The present case being “an application” which is filed under Section 7, would fall only within the residuary article 137.”

The Court further clarified that the time begins to run on 21.07.2011, the date of NPA, and not the date when the IBC came into force. The Court stated that,
“As rightly pointed out by learned counsel appearing on behalf of the appellant, time, therefore, begins to run on 21.07.2011, as a result of which the application filed under Section 7 would clearly be time-barred.”

The Court also rejected the argument that the IBC should be interpreted commercially, stating that the articles of the Limitation Act should be interpreted as they are written. The Court stated that,
“Further, it is not for us to interpret, commercially or otherwise, articles of the Limitation Act when it is clear that a particular article gets attracted. It is well settled that there is no equity about limitation – judgments have stated that often time periods provided by the Limitation Act can be arbitrary in nature.”

The Court rejected the respondent’s reliance on para 7 of B.K. Educational Services Private Limited (supra), stating that the intent of the IBC was not to give a new lease of life to debts that are already time-barred.

Key Takeaways

• The limitation period for applications under Section 7 of the IBC is governed by Article 137 of the Limitation Act, which provides a 3-year limitation period.
• The limitation period begins from the date of default (date of NPA) and not from the date when the IBC came into force.
• Article 62 of the Limitation Act, which provides a 12-year limitation period, applies only to suits and not to applications under Section 7 of the IBC.
• The IBC does not revive time-barred debts.

Directions

No specific directions were given by the Supreme Court.

Development of Law

The ratio decidendi of this case is that Article 137 of the Limitation Act applies to applications under Section 7 of the Insolvency and Bankruptcy Code, 2016 and the limitation period begins from the date of default. This decision clarifies the position of law and settles the ambiguity regarding the applicability of the Limitation Act to IBC applications. The Supreme Court has overruled the view taken by the NCLAT that the limitation period would begin from the date of commencement of the IBC.

Conclusion

The Supreme Court’s judgment in Gaurav Hargovindbhai Dave vs. Asset Reconstruction Company (India) Ltd. clarifies that the limitation period for applications under Section 7 of the IBC is three years from the date of default, as per Article 137 of the Limitation Act. This decision ensures that the IBC is not used to revive time-barred debts and provides clarity on the applicable limitation period for insolvency proceedings. The Court rejected the argument that the limitation period should begin from the date of commencement of the IBC and emphasized that the Limitation Act must be interpreted strictly as written.