Creditors be ‘scruplous’! The ‘trigger of limitation’ is running against in IBC!
A company practically tries to avoid insolvency or winding up proceedings against it, in the present Act Insolvency and Bankruptcy Code, 2016 (“IBC”) or under the earlier Companies Act as relevant from time to time. This fear of a company has been used by its creditors to recover money via the said route though it is settled law that insolvency or winding up proceedings are proceedings ‘in rem’ and cannot be used as a tool for ‘recovery’.
Supreme Court’s interpretation on ‘limitation’
The creditor who due to its own inaction, negligence, or laches, have not taken any action to recover their ‘debt’ against a company have dreamt to see a fresh lease of life when the IBC came into force, and also sailed through in National Company Law Tribunal (NCLT) and/or National Company Law Appellate Tribunal (NCLAT) to some extent. But, the Hon’ble Supreme Court of India (SC) in B.K. Educational Services Private Limited vs Parag Gupta and Associates (2019) 212 CompCas 1 (SC) : AIR 2018 SC 5601, answered the question on applicability of Limitation Act, 1963 (“Limitation Act”) for insolvency proceedings. The Hon’ble SC has held:
“It is thus clear that since the Limitation Act is applicable to applications filed under Sections 7 and 9 of the Code from the inception of the Code, Article 137 of the Limitation Act gets attracted. “The right to sue”, therefore, accrues when a default occurs. If the default has occurred over three years prior to the date of filing of the application, the application would be barred under Article 137 of the Limitation Act, save and except in those cases where, in the facts of the case, Section 5 of the Limitation Act may be applied to condone the delay in filing such application.”
Despite, B.K. Educational (supra) judgment, NCLT and/ or NCLAT in several insolvency proceedings have been moved by wrong notion of law. The Hon’ble SC has further reiterated its position on applicability of ‘limitation’ and the ‘trigger point for running limitation’ in insolvency proceedings in several other judgments viz. Gaurav Hargovindbhai Dave vs Asset Reconstruction Company (India) Ltd. & Anr. (Civil Appeal No. 4952 of 2019 decided on 18.09.2019); Jignesh Shah & Anr. vs Union of India & Anr. (Civil Appeal (Diary No. 16521 of 2019 along with Writ Petition (Civil) No. 455 of 2019 decided on 25.09.2019).
The anguish of the Hon’ble SC has come out in Sagar Sharma & Anr. vs Phoneix Arc Pvt. Ltd. & Anr. (Civil Appeal No. 7673 of 2019 decided on 30.09.2019), wherein the SC held: “3. Article 141 of the Constitution of India mandates that our judgments are followed in letter and spirit. The date of coming into force of the IBC Code does not and cannot form a trigger point of limitation for applications filed under the Code. Equally, since “applications” are petitions which are filed under the Code, it is Article 137 of the Limitation Act which will apply to such applications.”
The Hon’ble SC has further clarified in Sagar Sharma (supra) judgment that an application under Section 7 of the IBC does not purport to be an application to enforce any mortgage liability. It is an application made by a financial creditor stating that a default, as defined under the IBC, has been made, which default amounts to Rs. 1,00,000/- (one lakh) or more which then triggers the application of the IBC on settled principles that have been laid down by several judgments of this court.
All the judgments mentioned ‘supra’ have been made ‘Reportable’, which clearly manifest that the SC has interpreted the intention of the Legislature ‘not to give fresh lease of life’ to ‘the debt’ which is barred due to ‘trigger of limitation’ for ‘want of creditors own inaction, negligence, or laches’. The SC in a way has given notice to ‘creditors be scrupulous!’
This article has been authored by Neeraj Kumar, Advocate-on-Record, Supreme Court of India and Partner at Agarwal Jetley & Co., Advocates & Solicitors. Contact Email: firstname.lastname@example.org or Mob: (+91)- 9650841871