[IBC] Limitation Period For CIRP Application Is Three Years From The Date Of Default: SC [Read Judgment]

The Supreme Court has reiterated that the limitation period for application under Section 7 of the Insolvency and Bankruptcy Code is three years as provided by Article 137 of the Limitation Act, which commences from the date of default and is extendable only by application of Section 5 of Limitation Act if any case for condonation of delay is made out.

The issue considered by the bench comprising Justices AM Khanwilkar and Dinesh Maheshwari was whether the provisions of Section 18 of the Limitation Act certainly extend the period of limitation under the Code on any acknowledgment of debt by the corporate debtor. The Court allowed an appeal against National Company Law Appellate Tribunal which held that the right to apply under Section 7 of the Code accrued to the financial creditor only on 01.12.2016 when the Code came into force; and that the period of limitation for recovery of possession of the mortgaged property is twelve years.

In this case, the Adjudicating authority, admitted the application filed by JM Financial Assets Reconstruction Company Pvt. Ltd. under Section 7 of the Code, seeking initiation of Corporate Insolvency Resolution Process in respect of the Veer Gurjar Aluminium Industries Pvt. Ltd. In appeal before the NCLAT, the director of the company contended that limitation period for an application under Section 7 of the Code is three years as per Article 137 of the Limitation Act, where the date of alleged "default" is the starting point of limitation; and in the present case, such date of default being specifically mentioned as 08.07.2011, the application filed by the financial crediter in the month of March 2018 is barred by limitation.His appeal was dismissed by NCLAT on the above stated grounds

Operation of law of limitation over IBC proceedings 

The bench initially summarized the principles laid down in earlier judgments which dealt with the operation of law of limitation over IBC proceedings as follows:

(a) that the Code is a beneficial legislation intended to put the corporate debtor back on its feet and is not a mere money recovery legislation;

(b) that CIRP is not intended to be adversarial to the corporate debtor but is aimed at protecting the interests of the corporate debtor;

(c) that intention of the Code is not to give a new lease of life to debts which are time-barred;

(d) that the period of limitation for an application seeking initiation of CIRP under Section 7 of the Code is governed by Article 137 of the Limitation Act and is, therefore, three years from the date when right to apply accrues;

(e) that the trigger for initiation of CIRP by a financial creditor is default on the part of the corporate debtor, that is to say, that the right to apply under the Code accrues on the date when default occurs;

(f) that default referred to in the Code is that of actual non-payment by the corporate debtor when a debt has become due and payable; and

(g) that if 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, on facts, the delay in filing may be condoned; and

(h) an application under Section 7 of the Code is not for enforcement of mortgage liability and Article 62 of the Limitation Act does not apply to this application.

Winding up petition filed beyond three years from the date of default was barred by time

In Jignesh Shah and Anr. v. Union of India, it was held that an acknowledgment of liability under Section 18 of the Limitation Act would certainly extend the limitation period, but a suit for recovery, which is a separate and independent proceeding distinct from the remedy of winding up would, in no manner, impact the limitation within which the winding-up proceeding is to be filed, by somehow keeping the debt alive for the purpose of the winding-up proceeding.Relying on this, the contention raised was that  as per the law declared by this judgment, the provisions of Section 18 of the Limitation Act certainly extend the period of limitation under the Code on any acknowledgment of debt by the corporate debtor. The court, in this regard, observed:

"Prima facie, it appears that illustrative reference to Section 18 of the Limitation Act, in paragraph 21 of the decision in Jignesh Shah, had only been in relation to the suit or other proceedings, wherever it could apply and where the period of limitation could get extended because of acknowledgment of liability. Noticeably, in contradistinction to the proceeding of a suit, this Court observed that a suit for recovery, which is a separate and independent proceeding distinct from the remedy of winding up would, in no manner, impact the limitation within which the winding up proceeding is to be filed . It is difficult to read the observations in the aforesaid paragraph 21 of Jignesh Shah to mean that the ratio of B.K. Educational Services has, in any manner, been altered by this Court. As noticed, in B.K. Educational Services, it has clearly been held that the limitation period for application under Section 7 of the Code is three years as provided by Article 137 of the Limitation Act, which commences from the date of default and is extendable only by application of Section 5 of Limitation Act, if any case for condonation of delay is made out. The findings in paragraph 12 in Jignesh Shah makes it clear that the Court indeed applied the principles so stated in B.K. Educational Services, and held that the winding up petition filed beyond three years from the date of default was barred by time."

The court also added that, in the instant case, even if Section 18 of the Limitation Act and principles thereof were applicable, the same would not apply to the application under consideration in the present case, looking to the very averment regarding default therein and for want of any other averment in regard to acknowledgement.

On findings of NCLAT

On the findings of NCLAT that the right to apply under Section 7 of the Code accrued to the financial creditor on 01.12.2016 when the Code came into force..

" There is nothing in the Code to even remotely indicate if the period of limitation for the purpose of an application under Section 7 is to commence from the date of commencement of the Code itself. Similarly, nothing provided in the Limitation Act could be taken as the basis to support the proposition so stated by the Appellate Tribunal. In fact, such observations had been in the teeth of law declared by this Court in the case of B. K. Educational Services (supra)"

The court also disapproved with the reasoning of the NCLAT which observed that the period of limitation for recovery of possession of the mortgaged property is twelve years :

"When Article 137, being the residuary provision on the period of limitation for "other applications" is held applicable by this Court for the purpose of reckoning the period of limitation for an application under Section 7 of the Code, it remains rather inexplicable as to how the Appellate Tribunal could have applied any other Article of Limitation Act (and that too relating to suits) for the purpose of such an application? " 

Holding thus, bench set aside the orders of NCLT and NCLAT and rejected the application seeking initiation of Corporate Insolvency Resolution Process for being barred by limitation.

Case details

Case no.: CIVIL APPEAL NO. 6347 OF 2019

Case name: BABULAL VARDHARJI GURJAR  vs. VEER GURJAR ALUMINIUM INDUSTRIES PVT. LTD. & ANR.

Coram: Justices AM Khanwilkar and Dinesh Maheshwari

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