‘Withdrawal of suit cannot be considered as failure of prior proceeding’; NCLAT rejects Section 9 application as being time-barred

national company law appellate tribunal

National Company Law Appellate Tribunal, New Delhi: In an appeal against the dismissal of the application preferred under Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC) on being time-barred, a 3-member bench comprising of Ashok Bhushan,* J., Barun Mitra (Technical Member) and Arun Baroka (Technical Member), held that the benefit of Section 14 of the Limitation Act, 1963 could not be extended to the appellant due to the absence of an essential condition. The NCLAT further opined that the withdrawal of the suit and the appellant’s claimed reason for withdrawal did not establish a sufficient cause for extending the limitation period.

Factual Matrix

In the instant matter, the appellant-operational creditor filed the present appeal against the impugned order dated 22-05-2023, issued by the Adjudicating Authority dismissing Section 9 application submitted by the appellant.

The operational creditor is engaged in the trade and service of providing equipment and manpower. The operational creditor alleged that the corporate debtor issued three Purchase Orders, dated 23-02-2013, 23-10-2013, and 28-0-2017.

In response to Purchase Orders 1 and 2, the operational creditor issued 65 invoices on various dates between 31-10-2013 and 29-03-2014, in total for the amount Rs. 3,61,40,025/-. A payment of Rs. 2,88,84,623 was made, leaving an unpaid amount of Rs. 72,55,402 as of 03-06-2014. In response to the 3rd Purchase Order, the operational creditor issued three invoices totaling Rs. 21,91,122.

The operational creditor filed a suit on 03-10-2017, seeking recovery of money under the 1st two Purchase Orders (Stage 1). This suit was withdrawn by the operational creditor on 18-07-2022. Subsequently, on 27-07-2022, the operational creditor issued a demand notice claiming a total amount of Rs. 1,78,78,390, which included the principal amount for both Stage 1 and Stage 2, as well as interest. The default date for Stage 1 was 30-04-2015, and for Stage 2, it was 23-10-2018.

The operational creditor filed the Section 9 Application on 05-12-2022, seeking initiation of insolvency proceedings against the corporate debtor. The Adjudicating Authority, in the impugned order, dismissed the Section 9 Application, citing that it was time-barred due to limitations and lacked an agreement for interest that would meet the threshold of Rs. 1 Crore.

Key Legal Principles

  • Section 5 of the Limitation Act, 1963 allows for the condonation of delay on showing sufficient cause.

  • Section 14 of the Limitation Act, 1963 provides for the exclusion of time during which a prior proceeding is diligently prosecuted in good faith in a court without jurisdiction.

  • To invoke Section 14, certain conditions must be met, including that both the prior and subsequent proceedings must be civil proceedings prosecuted by the same party, and the earlier proceeding must fail due to defect of jurisdiction or a similar cause.

Parties’ Contentions

The appellant contended that the Adjudicating Authority erred in dismissing the application as time barred. The appellant withdrew the civil suit on 18.07.2022, and this period should be excluded, invoking Section 14 of the Limitation Act, 1963. The appellant argued that there is an arbitration clause in the agreement, and thus, the suit could not have been decided on its merits, therefore, the benefit of Section 14 of the Limitation Act, 1963 should be extended to the appellant. It was also submitted that the Adjudicating Authority could have also applied Section 5 of the Limitation Act to condone the delay.

Moot Point

Whether the application under Section 9 of the IBC was filed within the statutory limitation period, given the withdrawal of the suit and the absence of certain essential conditions for applying Section 14 of the Limitation Act, 1963?

NCLAT’s Assessment

The NCLAT observed that the appellant voluntarily withdrew the suit filed on its own application and the withdrawal was subject to payment of costs, and no liberty was granted to institute a fresh suit. The NCLAT observed that the Adjudicating Authority had reviewed the order passed by the Civil Court and determined that the appellant’s withdrawal of the suit does not meet the conditions for the application of Section 14 of the Limitation Act, 1963, as it does not involve a defect of jurisdiction or a similar cause. Furthermore, the appellant’s reliance on the judgment in Sabarmati Gas Ltd. v. Shah Alloys Ltd., (2023) 3 SCC 229, is not applicable to the current case, as it pertained to the suspension of legal proceedings under a different legal framework.

The NCLAT emphasized that the question of condoning the delay under Section 5 of the Limitation Act, 1963 should be assessed considering the specific facts of this case. It was emphasised that showing “sufficient cause” is the only criterion for extending the benefit of Section 5 of the Limitation Act to an applicant.

The NCLAT cited Sesh Nath Singh v. Baidyabati Sheoraphuli Co-Operative Bank Ltd., (2021) 7 SCC 313, where the Supreme Court discussed the delay in filing applications under Section 7 of the IBC with reference to Section 14 of the Limitation Act, 1963 and the delay was allowed due to the absence of jurisdiction in the SARFAESI Act proceedings.

The NCLAT emphasised that the policy of Section 14 of the Limitation Act, 1963 was to protect litigants against the bar of limitation when they filed proceedings that could not be decided on their merits due to technical defects. It should be interpreted to advance the cause of justice rather than to abort proceedings.

Rejecting appellant’s contention that the suit was withdrawn due to the presence of an arbitration clause in the contract between the parties, the NCLAT observed that the appellant did not initiate any arbitration proceedings. The NCLAT emphasized that the mere availability of arbitration or other proceedings could not preclude the operational creditor from initiating proceedings under Section 9 of the IBC.

The NCLAT also pointed out that the appellant had filed the application for recovery of contractual dues arising from a contract between the parties, which was already the subject of a withdrawn lawsuit. The NCLAT further highlighted that the proceedings under the IBC are not for the recovery of contractual dues, unlike the present case where the operational creditor was seeking recovery.

NCLAT’s Decision

The NCLAT upheld the Adjudicating Authority’s decision to reject the Section 9 application as barred by time and dismissed the appeal.

[GRI Towers India (P) Ltd. v. Inox Wind Ltd., 2023 SCC OnLine NCLAT 756, order dated 20-10-2023]

*Judgment by Justice Ashok Bhushan

Advocates who appeared in this case :

Mr. D. Rishabh Gupta, Counsel for the Appellant

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