Date Of Default Alone Is Relevant For Triggering Limitation For Winding Up Petition: SC Dismisses IL&FS Petition Against La-Fin [Read Judgment]

The Supreme Court has held that the the date of default alone is relevant for the limitation of filing of a winding up petition against a company. It cannot be said that the limitation period will start only after the company has gone into commercial insolvency or has lost the substratum of its business, added the Court.

On this ground, the bench comprising Justices R F Nariman, Subhash Reddy and Surya Kant quashed the insolvency proceedings initiated by Infrastructure Leasing & Finance Services Ltd (IL&FS) against La-Fin Financial Services run by Jignesh Shah and Pushpa Shah as time-barred.

Factual Background

IL&FS had filed winding up petition against La-Fin in the Bombay High Court on October 21, 2016 under Section 433(e) of the Companies Act 1956. After the Insolvency and Bankruptcy Code came into force from December 2016, the proceedings were transferred to National Company Law Tribunal, Mumbai bench to be treated as a petition under Section 7 of the Code.

The petition pertained to an alleged default by La-Fin to comply with its undertaking to buy back 442 lakh equity shares of MCX-SX (a group company of La-Fin) from IL&FS. IL&FS had purchased those shares in 2009. The cut-off date for the undertaking of La-Fin was August 2012.

So the issue was whether the winding up petition filed in October 2016 with respect to the alleged default which had occurred in August 2012 was time-barred.

The NCLT admitted the Section 7 petition, holding that there was financial debt. This was challenged by Jignesh Shah and Pushpa Shah before the National Company Law Appellate Tribunal (NCLAT).  The NCLAT held the petition to be maintainable on the reasoning that the bar of limitation would not be attracted as the Winding up Petition was filed within three years of the date on which the Code came into force, viz., 1st December,2016.

IBC will not given new lease of life to winding up petitions already time barred

Dr. Abhishek Manu Singhvi, Senior Advocate appearing for appellants, did not go into the merits of the case, but has raised only the statutory bar of limitation against IL&FS. 

The judgment authored by Justice Nariman noted that limitation was applicable to IBC proceedings as per Section 238A.

"Winding up petitions filed before the Code came into force are now converted into petitions filed under the Code. What has, therefore, to be decided is whether the Winding up Petition, on the date that it was filed, is barred by lapse of time. If such petition is found to be time-barred, then Section 238A of the Code will not give a new lease of life to such a time-barred petition"

Trigger for winding up petition is the default by company

A Winding Up petition can be filed when the "company is unable to pay its debt" as per Section 433(e) of the Companies Act 1956. The circumstances when a company will be deemed as unable to pay its debt are mentioned in Section 434. When any of such circumstance is present, the cause of action for winding up petition arises, triggering limitation.

"The trigger for limitation is the inability of a company to pay its debts. Undoubtedly, this trigger occurs when a default takes place, after which the debt remains outstanding and is not paid. It is this date alone that is relevant for the purpose of triggering limitation for the filing of a winding up petition."

Senior Advocate Neeraj Kishan Kaul, appearing for IL&FS, argued that insolvency proceedings can be started only when the company is in commercial insolvency. Because, insolvency petition is a proceeding in 'rem' and not for recovery of debt, the senior counsel submitted. In 2013, the assets of La-Fin were worth over Rs 1000 crores. The winding up petition was filed when the assets' worth sank to Rs 200 Crores, IL&FS submitted. IL&FS had also filed a suit for specific performance of the undertaking in the meantime, it was pointed out.

Rejecting the argument that the insolvency petition can be triggered only when the substratum of the company is lost, the Court observed :

"Though it is clear that a winding up proceeding is a proceeding 'in rem' and not a recovery proceeding, the trigger of limitation, so far as the winding up petition is concerned, would be the date of default. Questions as to commercial solvency arise in cases covered by Sections 434(1) (c) of the Companies Act, 1956, where the debt has first to be proved, after which the Court will then look to the wishes of the other creditors and commercial solvency of the company as a whole. The stage at which the Court, therefore, examines whether the company is commercially insolvent is once it begins to hear the winding up petition for admission on merits. Limitation attaches insofar as petitions filed under Section 433(e) are concerned at the stage that default occurs for, it is at this stage that the debt becomes payable. For this reason, it is difficult to accept Shri Kaul's submission that the cause of action for the purposes of limitation would include the commercial insolvency or the loss of substratum of the company." 

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