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SC rules that section 14 of Limitations Act is applicable to the proceedings u/s 7 or 9 of IBC
A Division Bench of the Hon’ble Supreme Court comprising of Justices Indira Banerjee and Hemant Gupta in the case of Sesh Nath Singh & Another v. Baidyabati Sheoraphuli Co-Operative Bank Ltd and Another, REED 2021 SC 03007 held that in light of Section 238A of Insolvency and Bankruptcy Code, 2016 (IBC) which stipulates the applicability of provisions of Limitation Act, 1963, as far as may be possible, to proceedings under IBC, Section 14 of the Limitation Act would also apply for the purpose of computation of the period of limitation. The brief background in which the present dispute arose, the issues involved and the ruling pronounced by the Supreme Court are discussed below.
A hypothecation agreement was executed between the Financial Creditor and the Corporate Debtor whereby certain cash credit facility (Facility) was granted to the Corporate Debtor. The Corporate Debtor defaulted in repayment of its debt to the Financial Creditor under the said agreement and hence, Corporate Debtor’s account was declared Non-Performing Asset (NPA) on 31 March 2013. Thereafter, on 18 January 2014 the Financial Creditor issued a notice under Section 13(2) and 13(4) (a) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act).
The Corporate Debtor filed a writ petition before Calcutta High Court (Cal HC) challenging the notice issued under SARFAESI Act. On 24 July 2017 the Calcutta High Court passed an interim order restraining the Financial Creditor from taking steps against the Corporate Debtor under the SARFAESI Act until further orders. Subsequently, the Financial Creditor filed an application under Section 7 of IBC before National Company Law Tribunal (‘NCLT’) for initiation of Corporate Insolvency Resolution Process in relation to Corporate Debtor which was admitted.
Thereafter, the Corporate Debtor preferred an appeal before National Company Law Appellate Tribunal (NCLAT), on the ground that Section 7 Application was barred by limitation as the account was declared an NPA on 31 March 2013 whereas Section 7 Application was filed in July/ August 2018. The NCLAT dismissed the Appeal holding that since the Financial Creditor had initiated proceedings under SARFAESI Act within limitation period, it was entitled for exclusion of time under Section 14(2) of the Limitations Act. Aggrieved thereof Corporate Debtor appealed before the Supreme Court.
The issues framed by the Supreme Court for its consideration were as follows:
(i) 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?
(ii) 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?
Section 5 of the Limitation Act gives the Courts the discretion to entertain appeals filed after the prescribed period of limitation on case-by-case basis on the ground of ‘sufficient cause’. The SC has time and again in number of cases, including State of West Bengal v. Administrator, Howrah Municipality, (1972) 1 SCC 366, has held that the expression ‘sufficient cause’ must be construed liberally to advance substantial justice, which being a factual exercise for which there cannot be any straight jacket formula. Further, the acceptance of explanation under Section 5 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. Therefore, there is neither requirement for a formal application to be made for condonation of delay, and nor there is a bar on exercise of judicial mind in absence of any formal application.
On the second issue, the Supreme Court reiterated that Section 238A of the IBC makes the Limitations Act applicable ‘as far as may be’ to proceedings in the NCLT or NCLAT. It signifies that provisions of the Limitations Act will apply to the proceedings before NCLT or NCLAT to the extent feasible and would not apply only if there was any inconsistency in the provision of the Limitations Act read with IBC. However, the Supreme Court concluded that no such inconsistency arises on a harmonium construction of Section 14 or even Section 18 of Limitations Act and Section 238A of IBC, thereby making these provisions applicable to proceedings under Section 7 or 9 of IBC.
It is significant to note that Section 14 of the Limitation Act excludes the time period spent by the petitioner in computing the period of limitation for any application, subject to the certain conditions stipulated therein. Referring to Explanation (a) to Section 14, which reads that “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,” the Corporate Debtor had argued that, since the proceedings initiated by the Financial Creditor under SARFAESI Act were still pending before Calcutta High Court, it was not open to the Financial Creditor to take the benefit of Section 14.
The SC observed that the explanation (a) to Section 14 of the Limitations Act cannot be construed in a narrow pedantic manner to mean that Section 14 can never be invoked unless the earlier proceedings have actually been terminated for want of jurisdiction or any other cause. The Supreme Court added that the explanation (a) to Section 14 is clarificatory in nature and that it only restricts the period of exclusion between the date of initiation and the date of termination.
In the present case, the proceedings under SARFAESI Act were not formally terminated but were stayed by the High Court. The interim order was operative when Section 7 application was filed before the NCLT. Therefore, the SC observed that the entire proceeding period under the SARFAESI Act from 18 January 2014 till filing of Section 7 Application before NCLT can be excluded. Accordingly, the SC concluded that application under Section 7 of IBC was within the limitation period of three years and dismissed the present appeal filed by the Corporate Debtor.