The Supreme Court (“SC”) has in its judgement dated March 22, 2021, in the matter of Sesh Nath Singh & Another v. Baidyabati Sheoraphuli Co-Operative Bank Limited and Another [Civil Appeal No. 9198 of 2019] (“Judgement”) held that provisions of the Limitation Act, 1963 (“Act”) would apply mutatis mutandis to proceedings under the Insolvency and Bankruptcy Code, 2016 (“IBC”) in the National Company Law Tribunal/National Company Law Appellate Tribunal. It further held that there was no bar to exercise by the court or tribunal, of its discretion to condone delay under Section 5 of the Act in the absence of formal application.

Facts

Debi Fabtech Private Limited (“Corporate Debtor”) was, inter alia, engaged in the business of export of textile and garments. In February, 2012, pursuant to the request made by the Corporate Debtor, the financial creditor, that is, Baidyabati Sheoraphuli Co-operative Bank Limited (“Respondent”) granted a cash credit facility of INR 1,00,00,000, after which the Corporate Debtor opened a cash credit account with the Respondent and executed a hypothecation agreement. On default in repayment by the Corporate Debtor, the Respondent declared the account of the Corporate Debtor as a non-performing asset (“NPA”). The Respondent on January 18, 2014, issued a notice to the Corporate Debtor under Section 13(2) (Enforcement of security) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI”), calling upon the Corporate Debtor to discharge in full, its outstanding liability of INR 1,07,88,536 inclusive of interest as on September 28, 2019, to the Respondent, within 60 days from the date of notice, failing which action would be taken under Section 13(4) of the SARFAESI. The Corporate Debtor made a representation to the Respondent under Section 13(3A) of the SARFAESI, objecting to the notice, which the Respondent rejected and issued further notice requesting the Corporate Debtor to clear the outstanding dues and finally a notice under Section 13(4) of the SARFAESI to handover peaceful possession of the secured immovable assets. On December 19, 2014, the Corporate Debtor filed a writ application in the Calcutta High Court (“CHC”) under Article 226 of the Constitution of India challenging the said notices issued by the Respondent under Section 13(2) and 13(4) of the SARFAESI. During the pendency of the writ petition, the Respondent notified the Corporate Debtor, the guarantors and the public, that they had taken possession of the secured assets of the Corporate Debtor under Section 13(4) of the SARFAESI. On July 24, 2017, the CHC passed an interim order restraining the Respondent from taking any action against the secured assets of the Corporate Debtor to await further orders.

On July 10, 2018, the Respondent filed an application in the National Company Law Tribunal, Kolkata (“NCLT”) under Section 7 (Initiation of corporate insolvency resolution process by financial creditor) of the IBC, to initiate Corporate Insolvency Resolution Process (“CIRP”), which was admitted by the NCLT. The Corporate Debtor appeared through Shesh Nath Singh (“Appellant”). Aggrieved, the Corporate Debtor filed an appeal before the National Company Law Appellate Tribunal (“NCLAT”) under Section 61 (Appeals and Appellate Authority) of the IBC, contending that the application filed by the Respondent was barred by limitation. The NCLAT dismissed the appeal, with the observation that the ground of limitation had been taken by the Corporate Debtor for the first time in the appeal and not before the NCLT. It further held that the application of the Respondent under Section 7 of the IBC was well within the limitation period. Hence, aggrieved, the Corporate Debtor under Section 62 (Appeal to Supreme Court) of the IBC filed an appeal before the SC.

Issues
1.  Whether delay beyond three years in filing an application under Section 7 of the IBC can be condoned, in the absence of an application for condonation of delay made by the applicant (in the instant case, the Respondent) under Section 5 (Extension of prescribed period in certain cases) of the Act.
2.  Whether Section 14 (Exclusion of time of proceeding bona fide in court without jurisdiction) of the Act applies to applications under Section 7 of the IBC. If so, is the exclusion of time under Section 14 of the Act available only after the termination of proceedings before the wrong forum.

Arguments

Contentions raised by the Appellant:

The Appellant submitted that the application under Section 7 of the IBC by the Respondent was barred by limitation and ought to be dismissed. Reliance was placed on Ishrat Ali v. Cosmos Cooperative Bank Limited and Another [Company Appeal (AT) (Insolvency) No. 1121 of 2019] (“Ishrat Ali”), where it was held by the NCLAT that in an application under Section 7 of the IBC, the applicant is not entitled to the benefit of Section 14 of the Act in respect of proceedings under the SARFAESI. It was submitted that the account of the Corporate Debtor with the Respondent had been declared as NPA on March 31, 2013, on which date the cause of action accrued. Thus, the three-year period expired on March 31, 2016, due to which the application under Section 7 of the IBC, filed after five years and three months from the date of declaration of the account as NPA, was fatally time-barred. Further, the Respondent had not filed any application before the NCLT under Section 5 of the Act. The delay in filing the application under Section 7 of the IBC, could not, therefore, have been condoned. It was submitted that since the NCLT/NCLAT was not a forum for recovery of debt, Section 14 of the Act would not apply, as held in Ishrat Ali. Placing reliance on the Explanation to Section 14 of the Act, it was further contended that Section 14 of the Act could apply if any earlier proceedings initiated by the applicant were dismissed for want of jurisdiction or any other like reason, but since the proceedings initiated by the Respondent under SARFAESI were pending, the Respondent could not take benefit of Section 14(2) of the Act.

Contentions raised by the Respondent:

It was submitted that the Respondent had in its application filed in the NCLT under Section 7 of the IBC, enclosed a synopsis of relevant facts and significant dates, with supporting documents. The relevant dates revealed that the cash credit account of the Corporate Debtor was declared an NPA with effect from March 31, 2013. Proceedings under the SARFAESI commenced on January 18, 2014, when a demand notice was issued under Section 13(2) of SARFAESI, approximately 9 months and 18 days after the date of accrual of the right to issue. The proceedings under the SARFAESI were stayed by the CHC, in July 2017, on the ground of want of jurisdiction. About 11 months thereafter, while the writ petition filed by the Corporate Debtor was still pending in the CHC, and the interim stay of proceedings under SARFAESI still continuing, the Respondent initiated the application under Section 7 of the IBC.

Observations of the Supreme Court

The SC observed that the Insolvency Committee of the Ministry of Corporate Affairs, India, in a report published in March, 2018, stated that the intent of the IBC could not have been to give a new lease of life to debts which were already time barred. Thereafter, Section 238A (Limitation) was incorporated in the IBC by the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018, with effect from June 6, 2018. Section 238A of the IBC states that, “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.” There is no specific period of limitation prescribed in the Act for an application under the IBC before the NCLT. Hence, it is governed by Article 137 of the Schedule to the Act., where the period of limitation prescribed for such an application is 3 years from the date of accrual of the right to apply. Thus, applications under Sections 7 and 9 of the IBC have a limitation period of 3 years from the date of default.

As observed by the SC in B.K. Educational Services Private Limited v. Parag Gupta Associates and Others. [(2019) 11 SCC 633], the NCLT/NCLAT has the discretion to entertain an application/appeal after the prescribed period of limitation. The condition precedent for exercise of such discretion is the existence of sufficient cause for not preferring the appeal or the application within the period prescribed by limitation. The SC relied upon various precedents which held that “sufficient cause” must be construed liberally to advance substantial justice. The SC clarified that whether the explanation furnished for the delay would constitute ‘sufficient cause’ or not would depend on facts of each case and there is no straight jacket formula for accepting or rejecting the explanation furnished by the applicant/appellant for the delay in taking steps. Acceptance of explanation furnished ought to be the rule and refusal an exception, when no negligence or inaction or want of bona fides can be imputed to the defaulting party. The courts must strike a balance between the legitimate rights and interests of the respective parties.

Section 5 of the Act does not speak of any application. Section 5 of the Act enables the court to admit an application or appeal if the applicant satisfies the court that he had sufficient cause for not making the application and/or preferring the appeal, within the time prescribed. Although, it is the general practice to make a formal application under Section 5 of the Act in order to enable the court or tribunal to weigh the sufficiency of the cause for the inability of the applicant to approach the court/tribunal within the time prescribed by limitation, there is no bar to exercise by the court/tribunal of its discretion to condone delay, in the absence of a formal application. The SC was of the opinion that it is not mandatory to file an application in writing before relief can be granted under Section 5 of the Act. However, the SC clarified that no applicant or appellant can claim condonation of delay under Section 5 of the Act as of right, without making an application.

Section 238A of the IBC makes the provisions of the Act, as far as may be, applicable to proceedings before the NCLT and the NCLAT. The IBC does not exclude the application of Sections 6 or 14 or 18 or any other provision of the Act to proceedings under the IBC in the NCLT/NCLAT. All the provisions of the Act are applicable to the proceedings in the NCLT/NCLAT, to the extent feasible. The SC observed that there was no reason as to why Sections 14 or 18 of the Act should not apply to the proceedings under Section 7 or Section 9 of the IBC. Section 14 (2) of the Act provides that in computing the period of limitation for any application, the time during which the petitioner had been prosecuting, with due diligence, another civil proceeding, whether in a court of first instance, or of appeal or revision, against the same party, for the same relief, shall be excluded, where such proceeding is prosecuted in good faith in a court which, from defect of jurisdiction or other cause of like nature, is unable to entertain it. The conditions for exclusion are that the earlier proceedings should have been for the same relief, the proceedings should have been prosecuted diligently and in good faith and the proceedings should have been prosecuted in a forum which, from defect of jurisdiction or other cause of a like nature, was unable to entertain it. The SC relied on the judgement pronounced in Commissioner, M.P. Housing Board and Others. v. Mohanlal & Co. [(2016) 14 SCC 199], that Section 14 of the Act has to be interpreted liberally to advance the cause of justice. Section 14 of the Act would be applicable in cases of mistaken remedy or selection of a wrong forum.

The SC then addressed the argument that prior proceedings under the SARFAESI do not qualify for the exclusion of time under Section 14 of the Act, as they were not civil proceedings in a court. It further considered the question of availability of Section 14 of the Act under the IBC, that whether for proceedings initiated bona fide and prosecuted with due diligence under the SARFAESI, the exclusion of time under Section 14 of the Act, would only be available if the proceedings, which could not be entertained for defect of jurisdiction, or other cause of a like nature, had ended. The SC observed that Section 14 of the Act needed to be read as a whole. A conjoint and careful reading of Sections 14 (1), 14(2) and 14(3) of the Act makes it clear that an applicant who has prosecuted another civil proceeding with due diligence, before a forum which is unable to entertain the same on account of defect of jurisdiction or any other cause of like nature, is entitled to exclusion of the time during which the applicant had been prosecuting such proceeding, in computing the period of limitation. The substantive provisions of sub-sections (1), (2) and (3) of Section 14 of the Act do not state that Section 14 of the Act could only be invoked on termination of the earlier proceedings, prosecuted in good faith. The SC placed reliance on Bihta Co-operative Development Cane Marketing Union Limited. and Another. v. Bank of Bihar and Others [AIR 1967 SC 389], which held that the explanation must be read so as to harmonize with and clear up any ambiguity in the main section. It should not be so construed as to widen the ambit of the section. The SC opined that explanation (a) of Section 14 of the Act could not be construed in a narrow manner to mean that Section 14 of the Act can never be invoked until and unless the earlier proceedings have been terminated. The intent behind explanation (a) of Section 14 of the Act is clarificatory, to restrict the period of exclusion to the period between the date of initiation and the date of termination, and not any further. In the instant case, though the proceedings under the SARFAESI may not have formally been terminated, the proceedings have been stayed by the CHC by an interim order, on the prima facie satisfaction that the proceedings initiated by the Respondent, a co-operative bank, was without jurisdiction. The writ petition filed by the Corporate Debtor was not disposed of even after almost four years. The carriage of proceedings was with the Corporate Debtor. The interim order was still in force, when proceedings under Section 7 of the IBC were initiated, as a result of which the Respondent was unable to proceed further under the SARFAESI. The SC was of the view that since the proceedings in the CHC were still pending on the date of filing of the application under Section 7 of the IBC in the NCLT, the entire period after the initiation of proceedings under the SARFAESI could be excluded and hence the application in the NCLT was well within the limitation of three years.

Unlike the Arbitration and Conciliation Act, 1996, which expressly makes the provisions of the Act, as they apply to court proceedings, also applicable to arbitration proceedings, Section 238A of the IBC makes the Act applicable to proceedings in NCLT/NCLAT ‘as far as may be’ that is, to the extent they may be applied. The SC explained that the use of the words ‘as far as may be’, occurring in Section 238A of the IBC tones down the rigour of the words ‘shall’ in Section 238A of the IBC which is normally considered as mandatory. The expression ‘as far as may be’ is indicative of the fact that all or any of the provisions of the Act may not apply to proceedings before the NCLT or the NCLAT if they were patently inconsistent with some provisions of the IBC. At the same time, the words ‘as far as may be’ could not be construed as a total exclusion of the requirements of the basic principles of Section 14 of the Act, but permits a wider, more liberal, contextual and purposive interpretation by necessary modification, which is in harmony with the principles of Section 14 of the Act. The SC observed that if in the proceedings under Sections 7 and 9 of the IBC, Section 14 of Act were interpreted in a rigid and literal fashion, to hold that only civil proceedings in the court would enjoy exclusion, it would result in the applicant not even being entitled to exclusion of the time spent bona fide invoking and diligently pursuing earlier application under the same provision of the IBC for the same relief before an adjudicating authority, lacking territorial jurisdiction, which would not have been the legislative intent. Thus, the SC dissented from the NCLAT judgement of Ishrat Ali and emphatically laid down that proceedings under the SARFAESI were civil proceedings. The SC did not find any rationale behind excluding proceedings initiated by a secured creditor against the borrower under SARFAESI for taking possession of secured assets, from the category of civil proceedings. Thus, it could not be said that merely because the proceedings were not conducted in a civil court, they would be excluded from the ambit of Section 14 of the Act.

Decision of the Supreme Court

The SC affirmed the stance taken by the NCLAT. The SC ruled that, had Section 5 of the Act required the mandatory prerequisite of a written application, it would have expressly provided for the same. Thus, it held that the court is not precluded from condoning delay in the absence of a formal application. It held that Section 14 of the Act excludes the time spent in proceeding in a wrong forum, which is unable to entertain the proceedings for want of jurisdiction, or other such cause. Where such proceedings have ended, the outer limit to claim exclusion under Section 14 of the Act would be the date on which the proceedings ended. The Chief Metropolitan Magistrate or the Judicial Magistrate, as the case may be, exercising powers under Section 14 of the SARFAESI, functions as a civil court or executing court. Proceedings under the SARFAESI would, therefore, be deemed to be civil proceedings in a court. The expression ‘court’ in Section 14(2) of the Act would be deemed to be any forum for a civil proceeding including any tribunal or any forum under the SARFAESI. It was further held that the provisions of the Act would apply mutatis mutandis to proceedings under the IBC in the NCLT or NCLAT.

VA View:

The Judgement laid down by the SC throws light on the interplay between the IBC and the Act. The SC has categorically ruled that Section 14 of the Act applies to applications under Section 7 of the IBC. All the provisions of the Act are applicable to the proceedings carried out in the NCLT or NCLAT. Through this Judgement, the SC has furnished purposive interpretation to Section 238A of the IBC, by clarifying that the words “as far as may be” must be construed in a manner to further the legislative intent instead of curtailing it. Deeming SARFAESI proceedings to fall within the ambit of civil proceedings, the SC pronounced the Judgement in tandem with the legislative intent behind Section 14 of the Act which was to discount the calculation of the time period exhausted in bona fide prosecution.

For more information please write to Mr. Bomi Daruwala at [email protected]

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