Supreme Court Summaries

  February 27, 2022

Supreme Court Summaries

B K Educational Services Pvt. Ltd. v Parag Gupta and Associates (Civil Appeal No.23988/2017 and other appeals)

Supreme Court of India, Decided on – 11 October 2018

This case was concerned with Section 238A of the Code, which was inserted by the Insolvency and Bankruptcy Code (Second Amendment) Act 2018 with effect from 6 June 2018. The issue to be decided by the Court was whether the Limitation Act, 1963 would apply to applications that were made under Section 7 and/or Section 9 of the Code on and from its commencement on 1 December 2016 till 6 June 2018. In other words, the case had considered the question of applicability of the Limitation Act to proceedings under the Code prior to the date on which the Amendment came into effect. Section 238A read as follows – “Limitation – The provisions of the Limitation Act, 1963 (36 of 1963) shall, as far as may be, apply to the proceedings or appeals before the Adjudicating Authority, the National Company Law Appellate Tribunal, the Debt Recovery Tribunal or the Debt Recovery Appellate Tribunal, as the case may be.”

While discussing the relevance of the Companies Act, 2013 in the present issue, the Court observed that through Section 408 of the Companies Act, 2013, NCLT was set up to discharge such powers and functions that are conferred on it not merely under the Companies Act but also under “any other law for the time being in force”. Also, Section 433 of the Companies Act states that the provisions of the Limitation Act shall, as far as may be, apply to proceedings or appeals before the Tribunal or the Appellate Tribunal, as the case may be. With the absence of expressions such as “under this Act” or “subject to the provisions of this Act” in Section 433, the tribunal held that “Section 433 of the Companies Act, 2013 would apply to the Tribunal even when it decides applications under Section 7 and 9 of the Code.”

With regard to the retrospective applicability of the Limitation Act, the Court held that “limitation, being procedural in nature, would ordinarily be applied retrospectively, save and except that the new law of limitation cannot revive a dead remedy.” An application that was filed in 2016 or 2017, after the Code had come into force, cannot suddenly revive a debt which was no longer due as it was time-barred. The Court also held that “the amendment of Section 238A would not serve its object unless it was construed as being retrospective, as otherwise, applications seeking to resurrect time-barred claims would have to be allowed, not being governed by the law of limitation”.

Also, referring to the case of Andhra Pradesh Power Coordination Committee and Ors. v. Lanco Kondapalli Power Ltd. and Ors. and the Insolvency Law Committee Report of March 2018, the Court observed that “the legislature did not contemplate enabling a creditor who had allowed the period of limitation to set in to allow those delayed claims through the mechanism of the Code. The Code cannot be triggered in the year 2017 for a debt which was time-barred as that would lead to the absurd and extreme consequence of the Code being triggered by a scale or dead claim.” Also, the Court held that the expression “debt due” in the definition sections of the Code would obviously only refer to debts that are “due and payable” in law i.e., the debts that were not time-barred.

Moreover, while deliberating on different sections of the Code, the Court noted that when the expression “due” and “due and payable” occur in Sections 3(11) and 3(12) of the Code, they refer to a “default” which is non-payment of a debt that was due in law, i.e., that such debt was not barred by law of limitation. The Court further held that “It is clear that the expression “default” bears the same meaning in Section 7 and 8 of the Code, making it clear that the CIRP against a CD can only be initiated either by a financial or operation creditor in relation to debts which had not become time-barred.”

Concluding the observations, the Court held that since the Limitation Act was applicable to applications filed under Sections 7 and 9 of the Code from the inception of the Code, Article 137 of the Limitation Act would get attracted. “The right to sue”, therefore, would accrue when a default occurs. If the default had occurred over three years prior to the date of filing of the application, the application would be barred under Article 137, save and except in those cases, where Section 5 of the Limitation Act may be applied to condone the delay in filing the application.

Babulal Vardharji Gurjar v Veer Gurjar Aluminium Industries Pvt. Ltd. & Anr. [Civil Appeal No. 6347 of 2019]

Supreme Court of India, Date of Order – 14 August 2020

In this case, the FC filed an application under Section 7 of the Code before NCLT for initiation of CIRP in respect of the CD. It is pertinent to note that the date of default was mentioned as 8 July 2011, when the bank classified the CD’s account as NPA. NCLT admitted the application and appointed an IRP for the same. The appeal was filed before NCLAT with the contention that the claim of the FC was barred by limitation since the default was committed in 2011, whereas the application was filed in 2018. NCLAT rejected the argument, holding that the right to apply under Section 7 of the Code would accrue on 1 December 2016 (when the Code came into force) and therefore, the application filed in 2018 would not be barred by limitation. Also, the tribunal assigned another reason that mortgage security had been provided by the CD, thus the limitation period of twelve years was available for the claim made by the FC as per Article 61(b) of the Limitation Act and hence, the application was within limitation.

The order was challenged before the Supreme Court in the present case. The Appellant contended that the imitation period for an application under Section 7 of the Code was three years as per Article 137 of the Limitation Act, where the date of default was the starting point of limitation. In the present case, the date of default being in 2011, the application filed by the FC in 2018 was barred by limitation. On the other hand, the respondents contended that the liability in relation to the debt in question had been consistently acknowledged by the CD in its balance sheet and annual reports. Thus, as per Section 18 of the limitation Act, fresh period of limitation was available from the date of every such acknowledgment and hence, the application was within time. The issue to be decided by the Court was whether the application under Section 7 filed by the respondent was within Limitation or not.

The Appellant argued that the debt shown in the balance sheet did not revive the limitation period of three years as applicable to the Code under Article 137 of the Limitation Act for the reasons that the debt as shown in the balance sheet was not covered by Section 18 of the Limitation Act; and even otherwise, Section 18 cannot revive the “default” relevant for the Code and could only revive limitation with respect to the cause of action.

After due deliberation, the Court referred to several judgments such as Innoventive Industries, B.K. Educational Services, Swiss Ribbons, K. Sashidhar, Jignesh Shah etc. and observed the following basics – the Code is a beneficial legislation intended to put the CD back on its feet and was not a mere money recovery legislation; CIRP was not intended to be adversarial to the CD but was aimed at protecting the interests of the CD.

Furthermore, with regard to the applicability of the Limitation period, the Court held the following – “that the intention of the Code was not to give a new lease of life to debts which were time-barred; the period of limitation for an application seeking initiation pf CIRP under Section 7 of the Code was governed by Article 137 of the Limitation Act and was, therefore, three years from the date when right to apply accrues.” Also, the right to apply under the Code would accrue on the date when default occurs, which was the actual non-payment by the CD when a debt had become due and payable. If the default had occurred over three years prior to the date of filing of the application, the application would be time-barred save and except in those cases where the delay may be condoned. Moreover, the Court held that “an application under Section 7 of the Code was not for enforcement of mortgage liability and Article 62 of the Limitation Act did not apply to the application.”

Furthermore, relying on the case of B.K. Educational Services v. Paras Gupta & Associates, the Court observed that the three-year period of limitation from the date of default for an application for under Section 7 was only extendable under Section 5 of the Limitation Act, if an appropriate case for condonation of delay was made out.

With regard to the applicability of Section 18 of the Limitation Act, the Court observed that while date of acknowledgement of debt may extend the limitation as per Section 18, the same would only be relevant for recover suits and was not applicable for initiation of CIRP under the Code. Also, the Court said that Section 18 would not be applicable as only the date of default had been stated in the application, however not even a foundation was laid in the application for suggesting any acknowledgment or any other date of default.

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.” The application filed by the FC was 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. Thus, the orders passed by NCLAT and NCLT were set aside and the application was rejected for being barred by limitation.

K. Kishan v Vijay Nirman Company Pvt. Ltd. (Civil Appeal Nos. 21824 & 21825- 2017)

Supreme Court of India, Date of Order – 14 August 2018

In the present case, there were certain disputes that arose between the parties, which were later referred to Arbitration. The Arbitral Tribunal delivered an award in favour of VNCP (“OC”) and rejected the claims made by KCPL (“CD”). OC sent a notice under Section 8 of the Code to the CD asking them to pay a certain amount, to which CD responded that the invoice was disputed and the said amount was the subject-matter of an arbitration proceedings. Subsequently, CD filed its objections under Section 34 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) challenging the Arbitral Award. OC filed an application under Section 9 of the Code, stating that as the amount claimed by it formed part of the award, it had become an operational debt. To this, CD contended that the operational debt was disputed and it had raised counter-claims for much higher amounts. Also, the objections against the award were pending and if they were allowed and counter claims awarded, CD would be eligible for recoveries from the OC.

NCLT admitted the application holding that the fact that a Section 34 petition was pending was irrelevant for the reason that the claim stood admitted and there was no stay of the award. NCLAT dismissed the appeal holding that the non-obstante clause contained in Section 234 of the Code would override the Arbitration Act. Also, since Form V of Part 5 of the Insolvency & Bankruptcy (Application to Adjudicating Authority) Rules, 2016 required particulars of an order of an arbitral panel adjudicating on the default, that would have to be treated as “a record of an operational debt”.

The issue to be decided by the Apex Court was “whether the Code can be invoked in respect of an operational debt where an Arbitral Award had been passed against the operational debtor, which had not been finally adjudicated upon.” 

Referring to the case of Mobilox Innovations Private Limited v. Kirusa Software Private Limited, the Appellant argued that the object of the Code was not to replace debt adjudication and enforcement under other Acts including the Arbitration Act. Also, the fact that a Section 34 petition was pending was reflective of a real dispute between the parties. Moreover, the Appellants argued that the cross-claims that were rejected by the Arbitral Tribunal far exceeded the amounts awarded against them, and if any one of them were to be held to be wrongly dismissed, then they would not owe any sum of money to the OC.

On the other hand, the respondents relied on the Insolvency practices of UK and Singapore, stating that an Insolvency process does not get stultified because an application to set aside the order was pending in an appeal. Also, they contended that the tribunal was correct in applying Section 238 of the Code, as there would be a direct inconsistency between the application of the Code and a Section 34 proceeding which was pending.

After due deliberation, the Court, relying on the decision of Mobilox Innovations, held that the OC cannot use the Code either prematurely or for extraneous procedures. Also, “the company would be well within rights to state that it was challenging the Arbitral Award passed against it, and the mere factum of challenge would be sufficient to state that it disputes the award” and that it was a case of pre-existing ongoing dispute between the parties. The Court also observed that “the insolvency process, particularly in relation to operational creditors, cannot be used to bypass the adjudicatory and enforcement process of a debt contained in other statutes.”

Furthermore, the Court re-iterated that under the Code, insofar as an operational debt was concerned, all that had to be seen was whether the debt could be said to be disputed, and filing of Section 34 petition showed that a pre-existing dispute, which culminated at the first stage of the proceedings in an Award, continued even after the Award, at least till the final adjudicatory process under Section 34 & 37 had taken place.

Also, the Court observed that Section 238 would not apply as “Section 238 of the Code would apply in case there was an inconsistency between the Code and the Arbitration Act.” However, there was no inconsistency in the present case. The award passed under the Arbitration Act together with the steps taken for its challenge made it clear that the operational debt happened to be a disputed one.

Therefore, the Court held that a CIRP cannot be initiated in respect of an operational debt where an Arbitral Award had been issued against the OC, which had not yet been finally adjudicated upon, and accordingly set aside the judgment of the Appellate tribunal.       

 

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