IBC Simplified – Babulal Gurjar v Veer Gurjar

  June 23, 2021

A summary of the Supreme Court judgment in the matter of Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries Pvt. Ltd. ~ By Sara Jain

Ratio: The period of limitation for an application being filed under Section 7 of the IBC is three years from the date of default (not from the date of enforcement of IBC).

Relevant Facts:

  • Shri Babulal (appellant) served as the director of Veer Gurjar Alum. Industries (respondent no. 1).
  • As respondent no. 1 failed to pay its loans, recovery proceedings were filed against it in Debts Recovery Tribunal Aurangabad, on November 15, 2011. 
  • During the pendency of these proceedings, on March 21, 2018, financial creditor of the respondent company, JM Financial ARC Ltd. (respondent no. 2) filed an application under Section 7 for seeking initiation of corporate insolvency resolution. The application was admitted by the NCLT.
  • Thereafter, the appellant filed an appeal before NCLAT alleging that the debt is time-barred because the date of default was July 8, 2011.
  • The NCLAT dismissed the appeal stating that (a) The right to initiate an application under Section 7 accrued only on December 1, 2016, i.e. when the IBC came into force; and (b) the period of limitation for recovery of mortgaged property is twelve years.
  • Aggrieved by the said order, the appellant filed an appeal before the Supreme Court.

Issues for Consideration:

  • Whether the triggering point for initiating application under the IBC would be (a) only the date of default or (b) the date the Code came into force or date of default, whichever is later?
  • What is the time period of limitation for application filed under the Code in case property had been mortgaged by the debtor?
  • Whether Section 18 of the Limitation Act, 1963 (extension due to acknowledgement of debt) could be used in the instant case to extend the limitation period?

Issue 1:

  • The argument made by the respondents was that as the right to file an application under the IBC accrued only on December 1, 2016, the limitation period should be taken as three years from that date. As the application was filed in March 2018, three years since the enforcement of the Code had not elapsed. Thus, the application was not time-barred.
  • The Supreme Court relied on the landmark judgment of B.K. Educational Services Private Limited v. Parag Gupta (AIR 2018 SC 5601) and Insolvency Committee Report (2018) to highlight that the intent of the Code could not have been to give a “new lease of life” to time-barred debts. An interpretation favouring the limitation period to commence from enforcement date of IBC would be erroneous owing to three reasons:
  • It would provide a fresh opportunity to creditors who did not exercise their rights under existing laws within the prescribed limitation period to file under the Code.
  • The objective of the law of limitation to “prevent disturbance…arising out of a party’s negligence” would be completely defeated.
  • It would re-open rights of claimants to file time-barred debts, which might constitute a part of a resolution plan.
  • This position has also been taken by the Supreme Court in previous cases such as Sagar Sharma v. Phoenix Arc Pvt. Ltd. (2019 10 SCC 353) and Gaurav Hargovindbhai Dave v. Asset Reconstruction Company (India) Ltd. (2019 10 SCC 158).

Issue 2:

  • The respondents contended that according to Article 62 of the Limitation Act, 1963, the limitation period in the case would be twelve years because the insolvency application was filed for enforcing payment of money secured by mortgage.
  • Relying on Sagar Sharma v. Phoenix Arc Pvt. Ltd. (2019 10 SCC 353), the Supreme Court observed that an application to initiate insolvency cannot be equated to a suit filed for enforcing payment of money secured by mortgage.
  • The Apex Court also highlighted that Article 62 was applicable to ‘suits’ and not ‘applications.’ In any case, proceedings under the Code are not recovery proceedings.
  • Therefore, an application under Section 7 falls in the ambit of residuary applications for which a limitation period of three years has been provided in Article 137.

Issue 3:

  • Section 18 of the Limitation Act states that a fresh limitation period starts where the debtor acknowledges the existence of liability in writing. The respondents, inter alia argued that the application filed before DRT within the limitation period served as an acknowledgement of debt and thus, kept the debt alive.
  • This contention was rejected by the Supreme Court, stating that a separate and independent recovery proceeding under DRT cannot impact the limitation period of the current insolvency application. Strong reliance was placed on Jignesh Shah v. Union of India (2019 SCC Online 254) and B.K. Educational Services Private Limited v. Parag Gupta.

Conclusion:

  • The triggering point for filing an application under Section 7 is the date of default, irrespective of whether it is before or after the enforcement of the Code.
  • The period of limitation for applications filed for initiation of corporate insolvency resolution process is three years.
  • Extension of limitation period can only be done in accordance with the provisions of the Limitation Act, 1963. A separate and independent proceeding cannot keep the debt alive.

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