2020 (8) TMI 345 - SC - Insolvency and Bankruptcy

Maintainability of application - initiation of CIRP - Corporate Debtor failed to make repayment of its dues - existence of debt and dispute or not - time limitation - three years from the date of the alleged default - whether the application made by respondent No. 2 before NCLAT under Section 7 of the Code is within limitation? - HELD THAT - The Insolvency and Bankruptcy Code 2016 has been enacted to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons and other entrepreneurs in a time bound manner so as to ensure maximisation of value of assets of such persons and to balance the interest of all the stakeholders. As regards corporate debtor the primary focus of the Code is to ensure its revival and continuation by protecting it from its own management and as far as feasible to save it from liquidation - When the Corporate Insolvency Resolution Process is understood on the anvil of the aforementioned fundamentals on the spirit and intent of IBC it is also evident that such a process is not intended to be adversarial to the corporate debtor but is essentially to protect its interests. In relation to a financial creditor the trigger for CIRP is default by the corporate debtor of rupees one lakh or more against the debt/s. When seeking initiation of CIRP qua a corporate debtor the financial creditor is required to make the application in conformity with the requirements of Section 7 of the Code while divulging the necessary information and evidence as required by the Rules of 2016. After completion of all other requirements for admitting such an application of the financial creditor the Adjudicating Authority has to be satisfied as per sub-section (5) of Section 7 of the Code that default has occurred and in this process of consideration by the Adjudicating Authority the corporate debtor is entitled to point out that default has not occurred in the sense that the debt which may also include a disputed claim is not due. A debt may not be due if it is not payable in law or in fact. As observed by this Court the legislative policy now is to move away from the concept of inability to pay debts to determination of default . Operation of law of limitation over IBC proceedings - HELD THAT - The following basics come to the fore (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. Whether Section 18 Limitation Act could be applied to the present case - HELD THAT - Indisputably in the present case the respondent No. 2 never came out with any pleading other than stating the date of default as 08.07.2011 in the application. That being the position no case for extension of period of limitation is available to be examined. In other words 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. In this view of the matter reliance on the decision in Mahaveer Cold Storage Pvt. Ltd. does not advance the cause of the respondent No. 2. There remains nothing to doubt that the Appellate Tribunal had been in error in applying the period of limitation provided for mortgage liability for the purpose of limitation applicable to the application in question. The discussion foregoing leads to the inescapable conclusion that the application made by the respondent No. 2 under Section 7 of the Code in the month of March 2018 seeking initiation of CIRP in respect of the corporate debtor with specific assertion of the date of default as 08.07.2011 is clearly barred by limitation for having been filed much later than the period of three years from the date of default as stated in the application - the impugned orders deserve to be set aside and the application filed by the respondent No. 2 deserves to be rejected as being barred by limitation. Appeal allowed.

Summary

Issues Involved:
1. Limitation Period for Filing Application under Section 7 of the Insolvency and Bankruptcy Code (IBC).
2. Applicability of Section 18 of the Limitation Act, 1963.
3. Date of Default and its Impact on Limitation.
4. Effect of Mortgage on Limitation Period.
5. Relevance of Other Proceedings and Acknowledgments.

Detailed Analysis:

1. Limitation Period for Filing Application under Section 7 of the Insolvency and Bankruptcy Code (IBC):
The primary issue in this case is whether the application made by the financial creditor under Section 7 of the IBC is barred by limitation. The Supreme Court reiterated that the period of limitation for such applications is governed by Article 137 of the Limitation Act, 1963, which prescribes a limitation period of three years from the date when the right to apply accrues. The Court emphasized that the right to apply under the IBC accrues on the date when default occurs. Therefore, if the default occurred more than three years before the filing of the application, the application would be time-barred unless there is a basis for condonation of delay.

2. Applicability of Section 18 of the Limitation Act, 1963:
The respondents contended that the acknowledgment of debt in the balance sheets and annual reports of the corporate debtor extended the period of limitation under Section 18 of the Limitation Act. However, the Court noted that the application filed by the financial creditor specifically mentioned the date of default as 08.07.2011, without any reference to acknowledgment or any other date of default. The Court held that the question of limitation is a mixed question of law and facts, and relevant facts must be pleaded and evidence adduced. Since the financial creditor did not plead acknowledgment in the application, the benefit of Section 18 could not be availed.

3. Date of Default and its Impact on Limitation:
The financial creditor stated the date of default as 08.07.2011 in the application under Section 7 of the IBC. The Court held that the limitation period of three years began to run from this date. Since the application was filed in March 2018, it was beyond the prescribed limitation period and therefore barred by limitation. The Court emphasized that the date of default is crucial in determining the limitation period, and the financial creditor failed to provide any other date of default or acknowledgment to extend the limitation period.

4. Effect of Mortgage on Limitation Period:
The National Company Law Appellate Tribunal (NCLAT) had held that the period of limitation for recovery of possession of mortgaged property is twelve years, and therefore, the claim was not barred by limitation. The Supreme Court disapproved this reasoning, stating that an application under Section 7 of the IBC is not for enforcement of mortgage liability and Article 62 of the Limitation Act, which provides a twelve-year limitation period for suits relating to mortgages, does not apply. The Court reiterated that the limitation period for an application under Section 7 is governed by Article 137 of the Limitation Act, which prescribes a three-year limitation period.

5. Relevance of Other Proceedings and Acknowledgments:
The Court noted that at the time of filing the application under Section 7 of the IBC, a petition under Section 19 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, was pending before the Debt Recovery Tribunal (DRT). The Court clarified that the pendency of other proceedings does not affect the limitation period for filing an application under the IBC. The Court also observed that the acknowledgment of debt in the balance sheets and the request for one-time settlement (OTS) made by the corporate debtor in July 2018 were not pleaded in the application under Section 7 and therefore could not be considered for extending the limitation period.

Conclusion:
The Supreme Court allowed the appeal, set aside the orders of the NCLAT and the National Company Law Tribunal (NCLT), and rejected the application filed by the financial creditor under Section 7 of the IBC as being barred by limitation. The Court emphasized that the limitation period for such applications is three years from the date of default, and in this case, the application was filed beyond the prescribed period. Consequently, all proceedings undertaken in the said application, including the appointment of the Interim Resolution Professional (IRP), were annulled.