24 May 2021
The Supreme Court’s pro-insolvency stance continues. With three recent rulings in a period of one month, the Supreme Court has clearly indicated that, so far as possible within the contours of the Limitation Act, a debt will continue to be alive and an action basis such debt will be maintainable under the Insolvency and Bankruptcy Code, 2016 (“Insolvency Code”) against a defaulting borrower.
One of these three rulings is in a case titled Laxmi Pat Surana vs. Union Bank of India & Anr.[1] (Laxmi Pat). In Laxmi Pat, the Supreme Court provided a breather to the creditors by holding that Section 18 of the Limitation Act is applicable to the Insolvency Code (viz. Section 238) such that if a written acknowledgement of liability is given prior to the expiry of the prescribed period of limitation, i.e., a period of three-years from the date of default (Section 137 of the Limitation Act), a fresh period of limitation will be computed from the time of signing of such acknowledgement, provided the acknowledgment is before expiration of the prescribed period of limitation. In other words, applicability of Section 18 would extend the existing period of limitation for a debt, provided it is not already time barred.
Moving ahead and following the Laxmi Pat ruling, a larger bench of the Supreme Court in Asset Reconstruction Company (India) Limited vs. Bishal Jaiswal[2] (Bishal Jaiswal) observed that not only Section 18 of the Limitation Act is applicable to the proceedings under the Insolvency Code, but also held that entries in books of accounts, including in the balance sheets of the debtor, will amount to acknowledgment of debt under Section 18 of the Limitation Act.
Although independently the aforesaid two rulings are significant vis-à-vis the proceedings under the Insolvency Code, in our view, what particularly paved the way for these significant rulings is the earliest of the three decisions, i.e., the two-judge bench’s decision in the case of Sesh Nath Singh & Anr vs. Baidyabati Sheoraphuli Co-Operative Bank & Anr[3] (Sesh Nath).
In Sesh Nath, the Supreme Court positively interpreted the terminology of Section 238 of the Insolvency Code, i.e., Limitation Act being applicable “as far as may be” possible to the Insolvency Code and extended the applicability of a lot more provisions (namely Section 5, 6, 14 and 18) of the Limitation Act to the Insolvency Code. Following is the crux of the important findings in the Sesh Nath case:
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The Limitation Act must be read harmoniously “as far as may be” possible with the Insolvency Code.
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An application for condonation of delay is not mandatory to seek condonation under the provisions of the Limitation Act.
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Proceedings under the SARFAESI Act should be deemed to be civil proceedings under the contours of Section 14 of the Limitation Act and be allowed to be excluded while computing limitation under Insolvency Code.
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Section 5 and Section 14 of the Limitation Act are not mutually exclusive, and principles of Section 14 may be used to construe “sufficient cause” under Section 5.
In order to appreciate the aforesaid findings of the Supreme Court better, we will hereinbelow deal with the Sesh Nath judgment in detail.
Factual Background
In 2012, the Corporate Debtor defaulted in repayment of its debt to the Financial Creditor, in terms of cash credit facility granted by the Financial Creditor. Consequently, the Financial Creditor declared the account of the Corporate Debtor a Non-Performing Asset (NPA) on March 31, 2013. Thereafter, the Financial Creditor issued notice under Section 13(2) of the SARFAESI Act calling upon the Corporate Debtor to discharge in full its outstanding liability. However, the Corporate Debtor vide its representation denied such liability. Subsequently, the Financial Creditor issued a notice under Section 13(4)(a) of the SARFAESI Act, calling upon the Corporate Debtor to handover possession of the secured immovable assets.
In response to the notice, the Corporate Debtor filed a writ petition before the Calcutta High Court under Article 226. In 2017, the High Court through its Interim Order restrained the Financial Creditor from taking steps against the Corporate Debtor under the SARFAESI Act until further orders. The High Court was of the prima facie view that the Financial Creditor being a Cooperative Bank could not invoke the provisions of the SARFAESI Act.
Subsequently in 2018, the Financial Creditor filed an application before the Kolkata Bench of National Company Law Tribunal (NCLT) for initiation of the Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor under Section 7 of the Insolvency Code. The Corporate Debtor objected to the same and contended that the Writ Petition filed, challenging the maintainability of the proceedings under the SARFAESI Act, is pending adjudication before the High Court.
However, NCLT, Kolkata, on April 25, 2019, admitted the Section 7 Application and initiated the CIRP against the Corporate Debtor. Being aggrieved by the order of the NCLT, the Corporate Debtor filed an appeal before National Company Law Appellate Tribunal (NCLAT), and contended that the account of the Corporate Debtor had been declared NPA in 2013, whereas the application under Section 7 of Insolvency Code had been filed in 2018, i.e., after more than five years from the date of accrual of the cause of action, and is therefore barred by limitation. It is pertinent to note that no argument on limitation was raised by the Corporate Debtor before the NCLT.
Nevertheless, NCLAT examined the limitation issue and held that the Financial Creditor had in bona fide, within the period of limitation, initiated proceedings against the Corporate Debtor under the SARFAESI Act, and is thus entitled to exclusion of time under Section 14(2) of the Limitation Act.[4] Consequently, the NCLAT excluded the time till the interim order of the High Court, as during this time Financial Creditor was proceeding under the SARFAESI Act. On exclusion of the period, NCLAT found that the application of the Financial Creditor, under Section 7 of the Insolvency Code, was within limitation. The appeal was accordingly dismissed.
Being aggrieved by the order of the NCLAT, the Corporate Debtor filed an Appeal before the Supreme Court.
Issues before the Supreme Court
The Supreme Court while hearing the Appeal framed the following issues:
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Whether delay beyond three years in filing an application under Section 7 of Insolvency Code can be condoned, in the absence of an application for condonation of delay under Section 5 of the Limitation Act, 1963?
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Whether exclusion under Section 14 of the Limitation Act for proceedings under SARFAESI Act is available in an Application under Section 7 of the Insolvency Code, particularly in light of a contrary larger bench NCLAT decision in Ishrat Ali Cosmos Cooperative Bank Limited?[5] If so, will such exclusion be available even in case the proceedings before the wrong forum have not terminated?
Findings by the Court
A. No strict requirement of an application under Section 5 for condonation of delay
The Supreme Court observed that while dealing with instances of condonation of delay under Section 5 of the Limitation Act, the courts must have a balanced view of the legitimate rights and interest of the respective parties. It observed that there cannot be any straitjacket formula for accepting or rejecting the explanation furnished by any applicant/appellant for the delay in taking steps. Acceptance of explanation furnished should be the rule and refusal an exception, when no negligence or inaction or want of bona fides can be imputed to the defaulting party.
The court further observed that the provision does not stipulate a mandatory requirement for filing an application for condonation of delay. It was held that there is no bar on the Court/Tribunal to exercise its discretion to condone delay in the absence of a formal application, particularly when stakes are high, by taking a pedantic and hyper technical view of the matter, thereby causing irreparable loss and injury to the party. However, the Court can always insist that an application or an affidavit showing cause for the delay be filed and that no applicant or appellant can claim condonation of delay under Section 5 of the Limitation Act as of right, without making an application.
B. Section 14 is applicable to proceedings under Insolvency Code
The Supreme Court observed that Section 238A of Insolvency Code make the provisions of the Limitation Act, as far as may be, applicable to the proceedings under the Insolvency Code. The Insolvency Code does not exclude the application of Section 6 or 14 or 18 or any other provision of the Limitation Act from the proceedings under it, and thus, all the provisions are applicable to the extent possible.
For instance, Section 14 allows for exclusion of the period during which the petitioner had 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, where such proceeding is prosecuted in good faith in a Court which, from defect of jurisdiction or other causes of like nature, is unable to entertain it. The Supreme Court held that there is no reason why the application of Section 14 is to be excluded from the proceedings under the Insolvency Code. Further, the reliance on NCLAT’s Ishrat Ali’s case is misplaced. There the NCLAT had wrongly observed that proceedings under SARFAESI Act are not civil proceedings. The Supreme Court held that proceedings under SARFEASI are “undoubtedly civil proceedings”[6] in as much as the Magistrate, while exercising powers under Section 14 of SARFAESI, functions as a Civil Court/ Executing Court. Further, proceedings under Section 13(4) of SARFAESI are appealable under Section 18 before DRT. Therefore, this argument does not hold ground, and the Section 14 exclusion is available under Insolvency Code.
The Corporate Debtor, however, raised another pertinent objection to the applicability of Section 14 by claiming that, exclusion of time under Section 14 of the Limitation Act, would only be available if the proceedings that could not be entertained for defect of jurisdiction or other similar causes, had ended, in view of the Explanation to Section 14[7], which says that for the purposes of the said Section, the day on which the earlier proceeding was instituted and the day on which it ended shall be counted for exclusion.
To this, the Apex Court, however, observed that Section 14 needs to be read as a whole for computation of the limitation period. The substantive provisions of Sub-sections (1), (2) and (3) of Section 14 does not say that Section 14 can only be invoked on termination of the earlier proceedings. The Explanation (a), which is merely clarificatory, must not be construed in a manner to mean that Section 14 can never be invoked until and unless the earlier proceedings have actually been terminated for want of jurisdiction or other cause of such nature. Explanation is meant to only restrict the period of exclusion between the date of initiation and the date of termination, and nothing beyond.
C. Section 5 and 14 of the Limitation Act are not mutually exclusive
To top the aforesaid findings, the Supreme Court in Sesh Nath further observed that the provisions of Section 5 and 14 are not mutually exclusive. Thus, in a situation where Section 14 may not be directly applicable, the Courts are free and capable to apply the principles of Section 14 and purposively construe the same as “sufficient cause” under Section 5 and provide the adequate relief to the litigant.
This, in our view, expands the applicability of the Limitation Act manifold. Using this as precedent, Courts can be argued to have enough discretion to exclude any delay under Section 5 read with any other provision of the Limitation Act, and construe the same towards “sufficient cause.”
The way forward
The judgment in Sesh Nath indicates a clear positive outlook of the Supreme Court on the applicability of the Limitation Act “as far as may be possible” to the proceedings under the Insolvency Code. The specific observation in this regard strengthens the view that the Courts, in the times ahead, will continue to read as many provisions as possible of the Limitation Act to the Insolvency Code.
“… The expression ‘as far as may be’ is indicative of the fact that all or any of the provisions of the Limitation Act may not apply to proceedings before the Adjudicating Authority (NCLT) or the Appellate authority (NCLAT) if they are patently inconsistent with some provisions of the IBC. At the same time, the words ‘as far as may be’ cannot be construed as a total exclusion of the requirements of the basic principles of Section 14 of the Limitation Act, but permits a wider, more liberal, contextual and purposive interpretation by necessary modification, which is in harmony with the principles of the said Section.”
For further information, please contact:
Bishwajit Dubey, Partner, Cyril Amarchand Mangaldas
bishwajit.dubey@cyrilshroff.com
[1] Civil Appeal No. 2734 of 2020. Also see “IBC and Limitation: The Dust Settles”, India Corporate Law, Cyril Amarchand Mangaldas Blog, available at https://corporate.cyrilamarchandblogs.com/2021/04/ibc-and-limitation-the-dust-settles/.
[2] Civil Appeal No. 323 of 2021.
[3] 2021 SCC OnLine SC 244.
[4] 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.
[5] Company Appeal (AT) (Insolvency) No. 1121 of 2019.
[6] Ref. S.A.L. Narayan Rao and Anr. v. Ishwarlal Bhagwandas and Anr., AIR 1965 SC 1818; United Bank of India v. Satyawati Tandon and Ors., (2010) 8 SCC 110.
[7] Section 14: … Explanation: for the purposes of this section,-
(a) in excluding the time during which a former civil proceeding was pending, the day on which that proceeding was instituted and the day on which it ended shall both be counted.
