Limitation period is 3 years even if default fall before enactment of IBC 2016

Babulal Vardharji Gurjar-Vs- Veer Gurjar Aluminium Industries Pvt. Ltd. and Ors.

• Case number: Civil Appeal No. 6347 of 2019
• Order dated: 14^th August, 2020

The Apex Court held that

Limitation period for initiation of CIRP is 3 years from the date of default even if a default took place prior to the enactment of IBC,2016.

FACTS OF THE CASE

1. On 22.12.2007, the lender banks viz., Corporation Bank, Indian Overseas Bank and Bank of India sanctioned and extended various loans, advances and facilities to the corporate debtor viz., Veer Gurjar Aluminium Industries Pvt. Ltd., who was engaged in manufacturing of aluminium ingots from aluminium scrap.
2. The corporate debtor executed various security documents in favour of the lender banks in the years 2008 and 2009, including those of equitable mortgage against the facilities so obtained.
3. The Corporation Bank proceeded to rephase/enhance the facilities to the corporate debtor from time to time and lastly on 27.08.2010 wherefore, various additional security documents were executed by the corporate debtor.
4. It has been asserted by the Respondent No. 2 that the Corporation Bank had assigned to it the rights in relations to debts of the corporate debtor by way of Assignment Agreement dated 30.03.2013; and a deed of modification of charge over the assets of the corporate debtor was also executed on 26.04.2013.
5. The corporate debtor having defaulted in payment of the amount due against such loans, advances and facilities, its account with Corporation Bank was classified as Non-Performing Asset on 08.07.2011 and that with Indian Overseas Bank was classified as NPA on 05.08.2011.
6. Then, on 15.11.2011, demand notice Under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 was issued by Indian Overseas Bank to the corporate debtor and its guarantors.
7. These steps were followed up with recovery proceedings against the corporate debtor by the consortium of lenders and Respondent No. 2 in OA No. 172/2013 before the Debts Recovery Tribunal, Aurangabad Under Section 19 of the Recovery of Debts Due to the Banks and Financial Institution Act, 1993.
8. When the proceedings were pending before the DRT, the JM Financial Assets Reconstruction Company Pvt. Ltd as a financial Creditor moved an application before the Adjudicating Authority Under Section 7 of the Code.

The NCLT admitted the application for consideration; passed the necessary order of moratorium; and appointed the interim resolution professional.

Issue

Whether the application is made under section 7 of Insolvency & Bankruptcy Code seeking initiation of the Corporate Insolvency Resolution Process in respect of the debtor company is barred by limitation or not?

NCLAT held that the application Under Section 7 is not barred by limitation nor the claim of Respondent No. 2 is barred by limitation.

Then the appeal preferred to supreme court.

SUPREME COURT HELD

1. The Supreme Court observed the objective of the Insolveny and Bankruptcy Code and hold that the Code came to be enacted to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, other entrepreneurs and even of partnership firms and individuals in a time bound manner; the objectives, inter alia, being maximisation of value of assets of such persons and to balance the interest of all the stakeholders.
2. As regards CD(Corporate Debtor), the primary focus of the Code is to ensure its revival and continuation by protecting it from its own management and, as far as feasible, to save it from liquidation.
3. CIRP is not intended to be adversarial to the CD but is essentially to protect its interests.
4. It observed that the intention of the Code is not to give a new lease of life to debts that are time-barred.
5. The period of limitation for an application seeking initiation of CIRP under Section 7 of the Code is governed by Article 137 of the Limitation Act and is, therefore, three years from the date when right to apply accrues. The trigger for initiation of CIRP by a financial creditor is default on the part of the corporate debtor, that is to say, that the right to apply under the Code accrues on the date when default occurs and an application under Section 7 of the Code is not for enforcement of mortgage liability and Article 62 of the Limitation Act does not apply to this application.
6. It further hold that the limitation period for application under Section 7 of the Code is three years as provided by Article 137 of the Limitation Act, which commences from the date of default and is extendable only by application of Section 5 of Limitation Act, if any case for condonation of delay is made out.
7. There is nothing in the Code to even remotely indicate if the period of limitation for the purpose of an application under Section 7 is to commence from the date of commencement of the Code itself. Similarly, nothing provided in the Limitation Act could be taken as the basis to support the proposition.
8. Therefore the Court held that NCLAT had been in error in applying the period of limitation provided for mortgage liability for the purpose of limitation applicable to the application in question.
9. The application made by Respondent No. 2 Under Section 7 of the Code in the month of March 2018, seeking initiation of CIRP in respect of the corporate debtor with specific assertion of the date of default as 08.07.2011, is clearly barred by limitation for having been filed much later than the period of three years from the date of default as stated in the application.
10. The impugned orders of NCLAT deserve to be set aside and the application filed by the Respondent No. 2(JM Financial Assets Reconstruction Company) deserves to be rejected as being barred by limitation.

CONCLUSION

From above decision of the Supreme Court, it is clear that the CIRP may be initiated in a case in which cause of action falls prior to the enactment of IBC, 2016. But please note that the application for CIRP must falls within a period of 3 years from the date of default according to the provisions of Section 137 of Limitation Act, read with the provisions of Section 7 of IBC,2016.

DISCLAIMER: The above case law is only for the information and knowledge of readers. The views expressed here are the personal views of the author and same should not be considered as professional advice. In case of necessity do consult with professionals.

Footnotes

SECTION 7 OF IBC,2016

1) A financial creditor either by itself or jointly with ¹[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.

Provided that for the financial creditors, referred to in clauses (a) and (b) of sub-section (6A) of section 21, an application for initiating corporate insolvency resolution process against the corporate debtor shall be filed jointly by not less than one hundred of such creditors in the same class or not less than ten per cent. of the total number of such creditors in the same class, whichever is less:

Provided further that for financial creditors who are allottees under a real estate project, an application for initiating corporate insolvency resolution process against the corporate debtor shall be filed jointly by not less than one hundred of such allottees under the same real estate project or not less than ten per cent. of the total number of such allottees under the same real estate project, whichever is less:

Provided also that where an application for initiating the corporate insolvency resolution process against a corporate debtor has been filed by a financial creditor referred to in the first and second provisos and has not been admitted by the Adjudicating Authority before the commencement of the Insolvency and Bankruptcy Code (Amendment) Act, 2020, such application shall be modified to comply with the requirements of the first or second proviso within thirty days of the commencement of the said Act, failing which the application shall be deemed to be withdrawn before its admission.]

Explanation.- For the purposes of this sub-section, a default includes a default in respect of a financial debt owed not only to the applicant financial creditor but to any other financial creditor of the corporate debtor.

(2) The financial creditor shall make an application under sub-section (1) in such form and manner and accompanied with such fee as may be prescribed.

(3) The financial creditor shall, along with the application furnish--

(a) record of the default recorded with the information utility or such other record or evidence of default as may be specified;

(b) the name of the resolution professional proposed to act as an interim resolution professional; and

(c) any other information as may be specified by the Board.

(4) The Adjudicating Authority shall, within fourteen days of the receipt of the application under sub-section (2), ascertain the existence of a default from the records of an information utility or on the basis of other evidence furnished by the financial creditor under sub-section (3).

Provided that if the Adjudicating Authority has not ascertained the existence of default and passed an order under sub-section (5) within such time, it shall record its reasons in writing for the same.

(5) Where the Adjudicating Authority is satisfied that--

(a) a default has occurred and the application under sub-section (2) is complete, and there is no disciplinary proceedings pending against the proposed resolution professional, it may, by order, admit such application; or

(b) default has not occurred or the application under sub-section (2) is incomplete or any disciplinary proceeding is pending against the proposed resolution professional, it may, by order, reject such application:

Provided that the Adjudicating Authority shall, before rejecting the application under clause (b) of sub-section (5), give a notice to the applicant to rectify the defect in his application within seven days of receipt of such notice from the Adjudicating Authority.

(6) The corporate insolvency resolution process shall commence from the date of admission of the application under sub-section (5).

(7) The Adjudicating Authority shall communicate-

(a) the order under clause (a) of sub-section (5) to the financial creditor and the corporate debtor;

(b) the order under clause (b) of sub-section (5) to the financial creditor, within seven days of admission or rejection of such application, as the case may be.

SECTION 5 OF THE LIMITATION ACT,1963

Extension of prescribed period in certain cases

Any appeal or any application, other than an application under any of the provisions of Order XXI of the Code of Civil Procedure, 1908 (5 of 1908), may be admitted after the prescribed period if the appellant or the applicant satisfies the court that he had sufficient cause for not preferring the appeal or making the application within such period.

Explanation. The fact that the appellant or the applicant was missed by any order, practice or judgment of the High Court in ascertaining or computing the prescribed period may be sufficient cause within the meaning of this section.

SECTION 137 OF THE LIMITATION ACT,1963

Any other application for which no period of limitation is provided ease where in this Act. The period of limitation will be three years from the date on which default occurs or the date when right application arise.