SC: CIRP Application Filed Beyond 3 Years From the Date of Default Is Barred by Time

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A Division Bench of the Apex Court rejected an application under Section 7 of the Insolvency and Bankruptcy Code (IBC) seeking initiation of Corporate Insolvency Resolution Process (CIRP), as barred by limitation. It annulled the Orders of NCLAT and NCT for erroneous reasoning applied and reiterated that the limitation for CIRP application is three years from the date of default.

Background

An Appeal filed before the Apex Court was under Section 62 of the IBC, 2016 against the Judgment and Order dated 14.05.2019 passed by the National Company Law Appellate Tribunal. The Appellate Tribunal rejected the contention that the application made by the appellant Shri Babulal Vardhaji Gurjar seeking initiation of CIRP as barred by limitation. The said application filed before the Adjudicating Authority was by the Respondent JM Financial Assets Reconstruction Company Pvt. Ltd. under Section 7 of IBC, 2016 in the capacity of a financial creditor of the Respondent company i.e. Veer Gurjar Aluminium Industries Pvt. Ltd. 

Reasoning adopted by the Appellate Tribunal in Impugned Order

The Appellate Tribunal in its Order dated 14.05.2019 observed that: 

a) The Code has come into force on 01.12.2016, the application made in the year 2018 was within limitation.

b) The mortgage security provided by the corporate debtor, the limitation period of twelve years is available for the claim made by the financial creditor as per Article 61 (b) of the Limitation Act, 1963. Hence, the application was within limitation.

Issue

The basic issue involved the determination of whether the application made by the respondent under Section 7 of the Code is within limitation. Further, whether the reasonings adopted by the Appellate Tribunal was appropriate while interpreting the relevant statutory provisions in the Insolvency and Bankruptcy Code, 2016 and the Limitation Act, 1963. 

Appellant’s Averments

The Appellant made the following contentions: 

a) The 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. In the present case, such date of default was specifically mentioned as 08.07.2011. Therefore, the application filed by the Respondent in March 2018 seems barred by limitation. 

b) The Appellant highlighted various SC judgments that have analyzed the applicability of the Limitation Act to the applications of winding up transferred to NCLT and has held that enforcement of IBC in 2016 will not give a new life to the time-barred debts; and if the filing of the application is beyond three years from the date of default, then the same will be time-barred. 

Respondent’s Averments

The Respondent made the following contentions : 

a) The liability about the debt in question had been consistently acknowledged by the corporate debtor in its balance sheets and annual reports. The debt is shown as the loan amount outstanding to Corporation Bank. Therefore, a fresh period of limitation is available from the date of every such acknowledgement and hence, the application is within time. 

b) The Respondent pointed out the law declared by SC, wherein the provisions of Section 18 of the Limitation Act certainly extend the period of limitation under the Code on any acknowledgement of the debt by the corporate debtor. 

Appellant’s Rebuttal

The Appellant, however, emphasized the following: 

a) Section 18 of the Limitation Act could revive limitation in some cases but not for every remedy which is separate and distinct. 

b) When limitation period of three years under Article 137 of the Limitation Act, about the application under Section 7 of the Code, starts from the date of default, acknowledgement of the debt in the balance sheet will not give any fresh date of default because default occurs only once and cannot be continuing. 

Court’s Decision

The Bench comprising Justices AM Khanwilkar and Dinesh Maheshwari heard the matter. The Court reaffirmed the position that the right to sue under IBC accrues on the date when default occurs. If the default had occurred three years before the date of filing of the application, the same would not amount to the debt due and payable under the Code. The application made by the Respondent under Section 7 of the Code in March 2018 was clearly barred by limitation. The filing was much later than the period of three years from the date of default as stated in the application. The attempt on the part of the Respondents to save the limitation about the principles of acknowledgement was unsustainable. 

Further, the SC observed that NCLAT decided the question of limitation on entirely irrelevant considerations. The Impugned Orders were set aside and the application by the Respondent rejected, as barred by limitation.


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