Interplay of IB Code with law on limitation – The consistent “inconsistency” – Part I

Limitation has been one of the hotly and mostly contested issues during the adjudication of an application seeking initiation of corporate insolvency resolution process. The burden of proof falls on the applicant invoking the corporate insolvency resolution process (CIRP), to prima facie show the existence of a legally recoverable debt, which includes the burden to prove that the debt is not barred by limitation.1 The same has proven to be one of the most enduring and persistent legal issues under the Insolvency and Bankruptcy Code, 2016 (IB Code) for the National Company Law Tribunals (NCLT) to address.

 

Initial issues

 

When the IB Code came into force, there were several related issues with regard to the applicability of limitation law to the proceedings under the IB Code, namely:

  1. Whether there is a continuous cause of action in case of default of debt so as to prevent any imposition of limitation period?
  2. Whether the Limitation Act, 1963 is applicable?
  3. If yes, then when does it start operating?
  4. And if no, then whether the doctrine of delay and laches and prescription apply?

Subsequently, the legislature vide amendment inserted Section 238-A to the IB Code and the rulings of the Supreme Court in B.K. Educational Services2 and Vashdeo R.  Bhojwani v. Abhyudaya Cooperative Bank Ltd.3 went on to settle the above-mentioned issues.

In a brief, the position of law is that the provisions of the Limitation Act, 1963 shall apply to the applications filed under the IB Code and an application under Sections 7, 9 or Section 10 of the IB Code has to be filed within a time period of 3 years from the date of default and there is no continuing cause of action once the default takes place.

 

Current quagmire

 

Now the current problem plaguing arising out of the position that since Limitation Act, 1963 applies to the applications under the IB Code, then which are the provisions of the Limitation Act, 1963 that become relevant. The prominent amongst them are the following entailing a lot of judicial discourse already up to the Supreme Court with no conclusive position as of yet:

Section 14 of the Limitation Act, 1963, which states “exclusion of time of proceeding bona fide in court without jurisdiction”.

Section 18 of the Limitation Act, 1963 which provides for the “effect of acknowledgment in writing”.

Section 19 of the Limitation Act, 1963 which stipulates the “effect of payment on account of debt or of interest on legacy”.

 

Present discussion on Section 14

 

For the purposes of present column, I am confining the discussion to the issue of Section 14 of the Limitation Act, 1963 where the recent ruling of the Supreme Court in Sesh Nath Singh v. Baidyabati Sheoraphuli Cooperative Bank Ltd.4 still has left open one crucial component of section 14 undiscussed.

Section 14 stipulates:

 

  1. Exclusion of time of proceeding bona fide in court without jurisdiction.— (1) In computing the period of limitation for any suit the time during which the plaintiff has been prosecuting with due diligence another civil proceeding, whether in a court of first instance or of appeal or revision, against the defendant shall be excluded, where the proceeding relates to the same matter in issue and is prosecuted in good faith in a court which, from defect of jurisdiction or other cause of a like nature, is unable to entertain it.

(2) In computing the period of limitation for any application, the time during which the applicant has 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 a like nature, is unable to entertain it.

 

In Sesh Nath5, the corporate debtor availed cash credit facility from the financial creditor. On default of repayment, the financial creditor declared the account of corporate debtor as non-performing asset (NPA). On failure to discharge the debt, action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 was initiated against the debtor. The debtor in turn challenged the proceedings under the SARFAESI Act by way of a writ petition before the Calcutta High Court. The High Court passed an interim order restraining the financial creditor from proceeding under the SARFAESI Act on prima facie satisfaction that the financial creditor being cooperative bank cannot initiate proceedings under the SARFAESI Act.

 

Due to the interim order of the High Court, financial creditor was unable to proceed further under SARFAESI Act. Hence, the financial creditor resorted to Section 7 of the IB Code. The appellant challenged the order of NCLT before National Company Law Appellate Tribunal (NCLAT) but the challenge was dismissed.

 

Before the NCLAT, it was argued that the account of the corporate debtor had been declared NPA on 31-3-2013, whereas the application under Section 7 of the IB Code had been filed on 27-8-2018 i.e. after almost five years and five months from the date of accrual of the cause of action, and was therefore barred by limitation. The NCLAT examined the issue of limitation and held that the respondent had bona fide, within the period of limitation, initiated proceedings against the corporate debtor under the SARFAESI Act and was thus entitled to exclusion of time under Section 14(2) of the Limitation Act.

 

Resultantly, the NCLAT excluded the period of about three years and six months till the date of the interim order of the High Court, the period during which the financial creditor had been proceeding under the SARFAESI Act. Consequently, it was held that the application of the financial creditor under Section 7 of the IB Code was within limitation.

 

In appeal before the Supreme Court, one of the issues was whether Section 14 of the Limitation Act can be relied upon by the financial creditor while filing an application under Section 7 of the IB Code.

 

The Supreme Court firstly held that the proceeding under the SARFAESI Act qualifies to be a “civil proceedings” for exclusion of time under Section 14 of the Limitation Act. Interpreting Section 14 in liberal and broader manner, the Court held that Section 14 exclusion is available to a creditor filing an application under Section 7 of the IB Code. Resultantly, the order of the NCLAT was upheld.

 

Penumbral issue still unresolved

 

The most important aspect of Section 14(2) and its interplay with the applications under the IB Code is whether Section 14 can be pressed into if the proceedings by a bank under the SARFAESI Act were within the proper jurisdiction.

 

As noted earlier, the High Court passed an interim order restraining the financial creditor from proceeding under the SARFAESI Act on prima facie satisfaction that the financial creditor being cooperative bank cannot initiate proceedings under the SARFAESI Act. Due to the interim order of the High Court, financial creditor was unable to proceed further under SARFAESI Act. Hence, the financial creditor resorted to Section 7 of the IB Code.

 

Interestingly, prior to  Sesh Nath6 ruling, the Supreme Court in a Constitutional Bench ruling (comprising also of Banerjee, J. who authored the present Sesh Nath ruling) Pandurang Ganpati Chaugule v. Vishwasrao Patil Murgud Sahakari Bank Ltd.7 addressed the question of applicability of the SARFAESI Act to the cooperative banks. The Court applying the “doctrine of pith and substance” observed that Entry 45 of List I (banking) is of widest amplitude and includes cooperative banks recovering their loans by invoking the provisions of SARFAESI Act.

 

While in Sesh Nath8, the Supreme Court does not refer to the ruling in Pandurang Ganpati9, however the issue of whether Section 14 can be used by banks to contend that the time spent in the prior SARFAESI proceedings should be allowed to be excluded while calculating the period of limitation remains open.

 

The same will not be unprecedented. Whether pendency of a prior litigation reset the limitation was answered by the NCLAT in Basab Biraja Paul v. Edelweiss Asset Reconstruction Co. Ltd.10 The appellants herein had claimed that the debt is time barred and proceedings before the Debts Recovery Tribunal (DRT) would not save the limitation. In this case, a loan was given in 2012 and the account of the appellant was classified as a non-performing asset in March 2013. The appellant argued that Section 14, Limitation Act, 1963 (given above) only saves the period of limitation when former proceedings suffer from some defect, for instance defect of jurisdiction. The same allows exclusion of time lapsed when proceedings in a wrong jurisdiction are undertaken. The appellant submitted that the provision under Section 14, Limitation Act, 1963 does not apply when the law contemplates two proceedings on the same cause of action and both are proper. In such a case, it was argued that the proceeding before the Debts Recovery Tribunal being valid could not be excluded from the purview of calculating limitation for filing cases under the IB Code.

 

It is to be noted that while the proceedings before the Debts Recovery Tribunal were pending, the creditor issued a notice in August 2016 under Section 13(2), SARFAESI Act for the alleged default and called for repayments. The appellant in March 2018 had even offered a one-time settlement to the creditor.

 

The NCLAT repelled the arguments of the appellant and in categorical terms held:

  1. The financial creditor had moved DRT in 2014 which was a relief available at that time. We do not agree with the argument of the appellants that Section 14 of the Limitation Act permits exclusion of time of proceedings bona fide in a court when the court was without jurisdiction, and so pursuing relief in proper court will not be helpful. It would be strange to say that if you prosecute relief in wrong court, it would save limitation but if you prosecute relief in right court, you cannot resort to additional relief which becomes available later. In our view, when the financial creditor was pursuing its remedies in proper forum, there was continuous cause of action existing and it cannot be said that the debt became time barred. The IBC was enforced in 2016 and the additional remedy became available. Financial creditor resorted additionally to it and the application was filed under Section 7. It could not be said to be time barred.11

(emphasis added)

 

Conclusion

 

The court upheld the decision of NCLAT. The ruling of the court certainly succeeded in ensuring that right of creditor does not get affected by interpreting the provisions of the Limitation Act in hypertechnical or pedantic view and ensured that spirit of a statute prevails over the letter of law especially when no negligence or inaction can be attributed to the creditor.

Judgment of the court is welcomed but the court is now required to clear that since the SARFAESI Act is applicable to cooperative banks, can cooperative banks still claim benefit of Section 14 of the Limitation Act on the ground of “defect of jurisdiction” and exclude the time spent under the SARFAESI Act for computation of limitation period or whether Section 14 can still come to the rescue of the creditors even when rightly pursuing remedy in another court or tribunal before coming to the NCLT in an application under Section 7 or Section 9 or Section 10 of the IB Code.

 

† Akaant Kumar Mittal is an advocate at the Constitutional Courts, and National Company Law Tribunal, Delhi and Chandigarh. He is also a visiting lecturer at the NUJS, Kolkata and the author of the commentary Insolvency and Bankruptcy Code – Law and Practice.
 The author gratefully acknowledges the research and assistance of Sh. Yash Borana, 4th Year, B.A.LLB. (Hons.), Student at National Law University, Nagpur, in writing this article.

 

1 Radha Exports (India) (P) Ltd. v. K.P. Jayaram, (2020) 10 SCC 538, para 36.

2 B.K. Educational Services (P) Ltd. v. Parag Gupta and Associates, (2019) 11 SCC 633 : (2018) 5 SCC (Civ) 528.

3 (2019) 9 SCC 158 : (2019) 4 SCC (Civ) 308.

4 2021 SCC OnLine SC 244.

5 Id.

6 Id.

7 (2020) 9 SCC 215.

8 2021 SCC OnLine SC 244.

9 (2020) 9 SCC 215.

10 2019 SCC OnLine NCLAT 472.

11 Id., para 12.

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