Decisional Practice adopted by the Tribunals and Constitutional Courts while condoning delay under IBC – By Raunak Sood and Prajjwal Bangani

Decisional Practice adopted by the Tribunals and Constitutional Courts while condoning delay under IBC

Authored By: Raunak Sood and Prajjwal Bangani, Students at Bennett University, Greater Noida

ABSTRACT

The current research article is being made to make a comprehensive analysis on the emerging judicial trends after the insertion of Section 238A in the Code. The article shall primarily focus on the decisional practice of the National Company Law Tribunal (“NCLT”), National Company Law Appellate Tribunal (“NCLAT”), High Court and Supreme Court when it comes to application of condonation of delay and the connected question of law which the tribunals, and appellate court have dealt with.

INTRODUCTION

Earlier before the enactment of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “IBC” for the sake of convenience) there were a lot of problems with the legal structure of corporate insolvency in India. The issues mainly being, existence of multiple judicial fora, parallel proceedings in multiple fora, inability to save the corporate debtor as a going concern and loss of asset value of the corporate debtor. After that in 2016 the IBC was passed by the Parliament of India with the main objectives being time-bound insolvency resolution, preserving maximum value of the assets of the corporate debtor, promote entrepreneurship and increase the availability of credit in the economy. There are certain aspects of the Limitation Act 1963 which have been made applicable to the IBC after 2018 Amendment Act but there is also the question of practice and approach taken by the tribunals and appellate courts for condonation of delay under the IBC.

The current article shall deal with the rights and misconceptions of the equity shareholders by discussing scenarios where they might benefit or may not benefit depending on the outcome of the CIRP which has become extendable because of the application of the Limitation Act where the objective of Code i.e., time bound insolvency, totally hangs in balance because of the decisional practice adopted by the NCLAT, NCLT and Supreme Court in condoning delays.

APPLICABILITY OF LIMITATION ACT, 1963 TO THE IBC: THE QUESTIONS UNANSWERED

The basic jurisprudence behind applicability of Limitation Act is lex loci and a general law which serves to make the legal system temporarily efficient by serving the needs of people by imposing time limit is albeit to discourage a litigant to sit on his “right to sue.” Vigilantibus et non dormeintibus lex succurrit (justice is done by protecting the diligent and not the indolent) as doctrine of laches states that man cannot sleep over his rights for a duration and then be allowed to litigate on them.

The following is the highlights of various case laws surrounding application of Section 238A have been arranged year-wise showing how limitation cases are dealt by various tribunals and constitutional courts: –

A. Supreme Court- The Hon’ble Court has interpreted the applicability of Limitation Act, as follows:

  1. B. K. Educational Services Pvt. Ltd. Vs. Parag Gupta and Associates[1] (2018)– In this case the Court held that the default which happened 3 years before the date of filing of application is barred under Limitation Act whereas the cases whose facts and circumstances are independently different there a Section 5 application can be entertained for condoning delay as Section 238A of the IBC is clarificatory in nature and is retrospective in nature.
  2. Gammon India Ltd. Vs. Neelkanth Mansions and Infrastructure Pvt. Ltd.[2] (2019)– Section 62 of the Code gives a 45-day limit to appeal against the order of NCLAT wherein on showing sufficient cause the supreme court can further condone the 15 days after a delay of 30 days. In this case the Hon’ble Supreme Court refused to condone a 51-day delay.
  3. Gaurav Hargovindbhai Dave Vs. Asset Reconstruction Company (India) Ltd. & Anr.[3] (2019)- An application filed by the Financial Creditor shall fall under Art 137 of Limitation Act instead of Article 62 of Limitation Act.
  4. Sagar Sharma & Anr. Vs. Phoenix ARC Pvt. Ltd. & Anr.[4] (2019)- The date on the IBC being notified and enforced cannot be point where the clock of limitation starts ticking for the applications filed under IBC provisions.
  5. Rajendra Narottamdas Sheth & Anr. v. Chandra Prakash Jain & Anr.[5] (2020)– The burden of proof that the Section 7 application moved by the Financial Creditor (“FC”) lies within the limitation period is on the FC itself.
  6. Babulal Vardharji Gurjar Vs. Veer Gurjar Aluminium Industries Pvt. Ltd. & Anr. [6] (2020)- A condonation of delay application which has been filed 3 years before the date of default is barred as per the Limitation Act. The Court while setting aside the CIRP observed the following:
    1. IBC is a beneficial legislation whose aim to put the CD (“Corporate Debtor”) back into business can save the CD if possible.
    2. CIRP should be protective to the interests of the CD.
    3. Legislative intent behind the IBC is not to revive the time-barred debts.
    4. As far as application seeking to initiate CIRP under Section 7 of IBC shall be subjected to provision of Article 137 of Limitation Act i.e., 3 years from the date on which the right to file under Section 7 application accrues in the favour of FC. The right to apply for CIRP occurs only when there occurs a default on part of the CD.
    5. The delay in filing an application under Section 7 if exceeds 3 years then an application for condonation of delay maybe filed with the AA (“Adjudicating Authority”) which may do the same after finding sufficient cause within the application for condonation of delay.
    6. Application under Section 7 of IBC is not for enforcement of mortgage and Article 62 of Limitation Act does not apply to an application which in pending before the AA for consideration.
  7. (Covid-19)- In Re: Cognizance for Extension of Limitation [Suo Moto Writ (Civil) No. 3 of 2020] SC order dt. 23.03.2020– The Hon’ble Court using its powers under Article 141 and 142 ordered that all limitation occurring under all statues shall be extended from 15.03.2020 to the time till the Supreme Court issues any further order.
  8. Sesh Nath Singh & Anr. Vs. Baidyabati Sheoraphuli Cooperative Bank Ltd. and Anr.[7] (2021)- The legislative intent behind Section 238A IBC is not to make the whole of Limitation Act applicable and but only selective provisions of Limitation Act that is why the language used by the legislature is “as far as maybe” hence Limitation Act has to be read harmoniously with the IBC. Section 14 of Limitation Act excludes the time spent choosing the wrong forum hence proceedings cannot be entertained for want of proper jurisdiction.
  9. In Re: Cognizance for extension of limitation [Suo Motu Writ Petition (Civil) No. 3 of 2020] SC order dated 08.03.2021– The limitation till 15.03.2020 had end, limitation period from 15.03.2020 till 14.03.2021 was to be excluded and the remaining should start from 15.03.2021.
  10. In Re: Cognizance for Extension of Limitation [MA No. 665 of 2021 in SMW (C) No. 3 of 2020] SC order dt. 23.09.2021– The period of limitation from 15.03.2020 till 02.10.2021 was to be excluded.
  11. Asset Reconstruction Company (India) Ltd. Vs. Bishal Jaiswal & Anr.[8] (2021)- Section of Limitation Act becomes applicable after the debt has been acknowledged in the balance sheet vide an entry being made in the favour of creditor. This means that the liability has been acknowledged hence a fresh period of limitation shall start. The Supreme Court in this judgement further clarified that acknowledgement of liability has to be checked on a case-by-case basis by reading the balance sheet with the auditors report and the notes annexed thereto.
  12. Dena Bank (now Bank of Baroda) Vs. C. Shivakumar Reddy and Anr.[9] (2021)- An application made under Section 7 of IBC will not stand barred by limitation just because it has been filed after 3 years have elapsed from the date on which the loan account of CD was declared to be a Non-Performing Asset (“NPA”), if there is an acknowledgement of debt by the corporate debtor then the 3 year limitation will get a further extension of 3years.
  13. Ishita Halder Vs. Siba Kumar Mohapatra & Anr.[10] (2021)- When construing “acknowledgement of debt” the offer of a one-time settlement can be relied upon for triggering Section 18 of Limitation Act.

B. HIGH COURT: The Calcutta has checked jurisdiction of AA under Article 227 of Constitution of India, 1950 to entertain applications under Limitation Act.

Calcutta High Court in the case of Gouri Shankar Chatterjee Vs. State Bank of India[11] (2020) ordered that AA jurisdiction to admit application under Section 7 of IBC above and beyond 3-year time limit as given in Article 137 of the Limitation Act.

C. NCLAT: The decisions of the NCLAT are arranged year-wise in ascending order, all these decisions are to show how the decisions of NCLAT has changed after the coming in Section 238A in IBC.

  1. Yogeshkumar Jashwantlal Thakkar Vs. Indian Overseas Bank and Anr.[12](2020)- When a debt is acknowledged it means that no new right has been created but merely the period of limitation has been extended.
  2. Jagdish Prasad Sarada Vs. Allahabad Bank[13] (2020) – The provisions of Limitation Act have been made applicable to NPA’s (Non-Performing Assets) after the insertion of Section 238A of IBC in accordance with Article 137 of Limitation Act provided that an application for condonation of delay has been filed under Section 5 of Limitation Act.
  3. Invent Assets Securitization and Reconstruction Pvt. Ltd. Vs. Xylon Electrotechnic Pvt. Ltd.[14] (2020)- Article 137 of Limitation Act is applicable to an application under Section 7 of IBC and any application filed by the FC on the ground that the asset of the CD is a NPA (“Non-Performing Asset”) for not adhering to the 3-year time limit is barred by limitation.
  4. Jayprakash Vyas Vs. Prabhat Steel Traders Pvt. Ltd. and Anr.[15] (2020)- On acknowledgement of liability after 5 years’ time period does not mean that a fresh 3-year lease of time will start ticking but since acknowledgement was made after 5 years hence the benefit of Section 18 of Limitation Act cannot be claimed.
  5. Suo Moto [CA (AT) (Ins.) No. 01 of 2020] NCLAT order dt. 30.03.2020- The suo motu NCLAT order stated that due to lockdown in several parts of the country the limitation period stands extended wherever the registered office of the CD is located, the same shall be excluded for the purpose of CIRP under Section 12 of IBC in all cases where CIRP is pending before any AA or in appeal before NCLAT.
  6. Rupesh Kumar Gupta Vs. Punjab National Bank & Anr.[16](2020)- Debt can be acknowledged by the minutes of meeting of Board of Directors of the Corporate Debtor hence application initiating CIRP is not time barred.
  7. Ishrat Ali Vs. Cosmos Cooperative Bank Ltd. & Anr.[17](2020)- If the FC takes action under SARFAESI against the CD then the same period cannot be excluded for the calculation of limitation period because it is not a civil proceeding or appeal or case of revision.
  8. Digamber Bhondwe Vs. JM Financial Asset Reconstruction Company Ltd.[18](2020)- The relevant date is the date of default and Article 137 of Limitation Act is applicable Section 7 or 9 application, but it is important to note that though “decree holder” is a creditor under the IBC but since he is not an FC hence a decree holder cannot initiate CIRP under Section 7 or 9 as FC and Operational Creditor (“OC”) does not include ‘decree-holder’.
  9. State Bank of India Vs. Krishidhan Seeds Pvt. Ltd.[19] (2020)- The date of default cannot be extended when a one-time settlement has been filed between the Parties.
  10. Balakrishnan Vs. Kotak Mahindra Bank Ltd. & Anr.[20] (2020)- The limitation under Section 7 of the IBC starts running on the date NPA is declared. Any decree issued by the civil court or recovery certificate will not restart the clock of limitation.
  11. Bishal Jaiswal Vs. Asset Reconstruction Company (India) Ltd. & Anr.[21] (2020)- The date of default can be extended under Section 18 of Limitation Act provided that the CD has given an acknowledgement in writing before the expiry of limitation.
  12. Vinod Singh Negi Vs. Kiran Shah, Liquidator of ORG Informatics Ltd.[22](2021)- The legislature was conscious of the fact that time barred debts can be claimed before the Resolution Professional (“RP”) or Interim Resolution Professional (“IRP”), hence the employee should show that a claim during the liquidation stage without proving that the said claim is within limitation, the said claim is liable to be rejected as barred by limitation.

D. NCLT: The approach adopted by NCLT is an important piece of law because NCLT is the main AA which is approached by every FC on the ground level.

  1. NCLT Mumbai stated in the case of Syndicate Bank Vs. Bothra Metals and Alloys Ltd.[23] (2019)- Section 18 of Limitation Act gets satisfied when the debt is acknowledged on balance sheet of the company hence a fresh limitation period starts thereof.
  2. NCLT Kolkata stated in the case of Bango Industries Vs. U T Ltd.[24](2018) that even if the CD acknowledges a debt in a letter sent to the Operational Creditor, the said application will be within the limitation period.

On comprehensive analysis of the aforesaid judgements, it can be observed that Limitation Act is completely applicable after the 2018 Amendment Act and as limitation act being lex loci is applicable in all the insolvency matters whereof various courts and tribunals have favoured giving a strict interpretation to Section 238A which is in accordance with the legislative intent of the IBC i.e., time bound resolution of insolvency. It is important to take note and applaud the various courts and tribunals for taking a stricter tone when applying limitation act to accrued debts since limitation act helps in avoiding procedural injustice within the strict timelines laid down in IBC. A finding can be construed after going through the various judgements of the Supreme Court that the Hon’ble Court has majorly leaned in the favour of making Limitation Act as something which advances procedural justice whereas the NCLAT has deviated from the decisional practice of the Supreme Court by being a bit stricter in a catena of aforesaid cases but mainly seen in Jayprakash Vyas Case, Krishidhan Pvt. Ltd., and Vinod Singh Negi Case (Supra). To the contrary High Courts have not delved much into issue of condonation of delay but the High Court’s line of reasoning and decisional practice reflects the same as that of Supreme Court whereas the High Court has not itself condoned any delay, but its interpretation of law is a mirror image of the Supreme Court. The NCLT on the contrary to the NCLAT is a bit liberal in construing and applying limitation act in line with the decisional practice of the Supreme Court. Hence, we can observe that the NCLAT is stricter and more restrictive which is actually deviating from the practice adopted by the Apex Court but since condonation of delay is mainly a procedural law where a liberal approach should be taken therefore it can be concluded that the deviation of NCLAT is something which should be reigned in by the Apex Court. Furthermore, there are more factors which could not be discussed in the aforesaid judgements hence are discussed as follows:

  1. Factors to be considered for Balance Sheet entries that can be amount to acknowledgement of debt– Since Section 18 of the Limitation Act is applicable to the IBC vide Section 238A, it important to note as follows; firstly, Intention while acknowledging the debt is not relevant as long as the jural relationship of debtor and creditor is created.[25]Secondly, Under law filing up a balance sheet is compulsory but acknowledging debt is not mandatory because under Section 134(7) of Companies Act, 2013 notes of auditors relating to acknowledgement of debt on the balance sheet are necessary to be read harmoniously with the balance sheet to point out that the entry regarding a creditor is made unconditionally or not all for the sake of acknowledging a debt. Thirdly, for a balance sheet to be relevant for acknowledgement of debt it is important to note that such a balance sheet must be passed by the shareholders and accompanied with a report from the directors for it to be considered as valid. [26] Lastly, while considering acknowledgement of debt courts shall lean in favour of liberal construction.[27] Hence all the aforementioned three factors have to be considered for entry on balance sheet to amount to acknowledgement of debt.
  2. The Supreme Court in Laxmi Pat Surana Case[28] the ambiguity around extension of limitation period and regarding the application of Section 18 of Limitation Act to applications under Section 7 of IBC herein Section 18 is only applicable if there is an acknowledgement in written form where there is no revival of debt but a mere 3 year extension in the limitation period furthermore Section 238A was held to be retrospective in nature with effect from 6th day of June 2018 where time barred debts cannot be revived by the Section 238A as it is merely clarificatory in nature.[29] Firstly, in its earlier decisions the Hon’ble held that Article 137 of Limitation Act is applicable to applications for initiation of insolvency arising 3 years from the date of default.[30] Secondly, it clarified that if the main borrower/ corporate guarantor, admits and acknowledges its own liability then the limitation period accruing because of the contract of guarantee shall stand extended. Lastly, all provisions of Limitation Act have been extended to IBC including application of Article 137 of Limitation Act and in case of continuing guarantees hence because of the reasoning given by default the Supreme Court has made even Section 19 of Limitation Act to the proceedings taking place under IBC.[31]

CRITICAL OPINIONS OF THE AUTHORS

Firstly, the court failed to take into account that mere entry in balance sheet should be counted as an acknowledgement of debt because the same is an acknowledgement of subsisting liability for the continuation of debtor-creditor relationship, and this should be interpreted liberally but in the factors of acknowledgement of debt in the balance sheet the same has been given a strict interpretation by way to director approval, shareholder approval and auditor report instead the mere intention to stay is debtor-creditor relationship should be the important factor. According to the opinion of the authors the factors for acknowledgment of debt in a balance sheet has been too strictly defined and described hence a wider scope could be given wherein a mere intention to acknowledge the debt should not be limited to balance sheet and even via e-mails or any from of electronic communication expressing acknowledgment of debt should be enough to give a three year extension to the limitation period.

CONCLUSION AND RECCOMENDATIONS

Limitation Act is applicable to the provisions of IBC as prescribed under Section 238A, but it is applicable retrospectively whereas there is a legal grey area left regarding the interpretation of “acknowledgement” and overruling of previous judgements of the Apex Court. It is recommended that there needs to be legislative action regarding applicability of “as far as may be” or a clarificatory note from the legislature. It is further recommended that whole of limitation act should be made applicable not only relevant sections of the Limitation Act and filing of an application of condonation of delay should be made mandatory and not directory in nature.

 

Reference:

[1] B.K. Educational Services Pvt. Ltd. Vs. Parag Gupta and Associates [2018] ibclaw.in 32 SC order dt. 11.10.2018

[2] Gammon India Ltd. Vs. Neelkanth Mansions and Infrastructure Pvt. Ltd. (2020) ibclaw.in 71 SC order dt. 20.11.2020

[3] Gaurav Hargovindbhai Dave Vs. Asset Reconstruction Company (India) Ltd. & Anr. [2019] ibclaw.in 16 SC order dt. 18.09.2019

[4] Sagar Sharma & Anr. Vs. Phoenix ARC Pvt. Ltd. & Anr. [2019] ibclaw.in 17 SC order dt. 30.09.2019

[5] Rajendra Narottamdas Sheth & Anr. Vs. Chandra Prakash Jain & Anr. (2021) ibclaw.in 155 SC order dt. 30.09.2021

[6] Babulal Vardharji Gurjar Vs. Veer Gurjar Aluminium Industries Pvt. Ltd. & Anr. [2020] ibclaw.in 16 SC order dt. 14.08.2020

[7] Sesh Nath Singh & Anr. Vs. Baidyabati Sheoraphuli Cooperative Bank Ltd. and Anr. (2021) ibclaw.in 49 SC order dt. 22.03.2021

[8] Asset Reconstruction Company (India) Ltd. Vs. Bishal Jaiswal & Anr. (2021) ibclaw.in 55 SC dt. 15.04.2021

[9] Dena Bank (now Bank of Baroda) Vs. C. Shivakumar Reddy and Anr. (2021) ibclaw.in 69 SC Order dt. 04.08.2021

[10] Ishita Halder Vs. Siba Kumar Mohapatra & Anr. (2021) ibclaw.in 398 NCLAT order dt. 18.08.2021

[11] Gouri Shankar Chatterjee Vs. State Bank of India (2020) ibclaw.in 55 HC, Calcutta Order dt. 15.10.2020 .

[12] Yogeshkumar Jashwantlal Thakkar Vs. Indian Overseas Bank and Anr. [2020] ibclaw.in 78 NCLAT order dt. 14.09.2020

[13] Jagdish Prasad Sarada Vs. Allahabad Bank [2020] ibclaw.in 85 NCLAT order dt. 28.08.2020

[14] Invent Assets Securitization and Reconstruction Pvt. Ltd. Vs. Xylon Electrotechnic Pvt. Ltd. [2020] ibclaw.in 46 NCLAT order dt. 11.08.2020

[15] Jayprakash Vyas Vs. Prabhat Steel Traders Pvt. Ltd. and Anr. [2020] ibclaw.in 25 NCLAT order dt. 24.07.2020

[16] Rupesh Kumar Gupta Vs. Punjab National Bank & Anr. (2020) ibclaw.in 387 NCLAT order dt. 28.02.2020

[17] Ishrat Ali Vs. Cosmos Cooperative Bank Ltd. & Anr. [2020] ibclaw.in 253 NCLAT order dt. 12.03.2020

[18] Digamber Bhondwe Vs. JM Financial Asset Reconstruction Company Ltd. [2020] ibclaw.in 178 NCLAT order dt. 05.03.2020

[19]State Bank of India Vs. Krishidhan Seeds Pvt. Ltd. (2020) ibclaw.in 336 NCLAT order dt. 17.11.2020

[20] A. Balakrishnan Vs. Kotak Mahindra Bank Ltd. & Anr. (2020) ibclaw.in 341 NCLAT order dt. 24.11.2020

[21] Bishal Jaiswal Vs. Asset Reconstruction Company (India) Ltd. & Anr. [Reference made by Three Member Bench in (2020) ibclaw.in 414 NCLAT order dt. 22.12.2020

[22] Vinod Singh Negi Vs. Kiran Shah, Liquidator of ORG Informatics Ltd. (2021) ibclaw.in 31 NCLAT order dt. 19.01.2021

[23] Syndicate Bank Vs. Bothra Metals and Alloys Ltd. [2020] ibclaw.in 94 NCLT, Mumbai order dt. 06.07.2020

[24] Bango Industries Vs. U T Ltd. (2018) ibclaw.in 39 NCLT, Kolkata order dt. 19.04.2018

[25] Khan Bahadur Shapoor Freedom Mazda v. Durga Prasad, (1962) 1 SCR 140.

[26] Pandam Tea Co. Ltd., In re, (1973 SCC Online Cal 93).

[27] Khan Bahadur Shapoor Freedom Mazda v. Durga Prasad Chamaria & Ors., AIR 1961 SC 1236.

[28] Laxmi Pat Surana v. Union Bank of India & Anr., (2021) ibclaw.in 53 SC.

[29] B.K. Educational Services (P) Ltd. vs Parag Gupta & Associates, [2018] ibclaw.in 32 SC.

[30] B.K. Educational Services (P) Ltd. v. Parag Gupta & Associates, [2018] ibclaw.in 32 SC; Gaurav Hargovindbhai Dave v. Asset Reconstruction Company (India) Ltd. and Anr., [2019] ibclaw.in 16 SC; Babulal Vardarji Gurjar v. Gujjar Aluminium, [2020] ibclaw.in 16 SC.

[31] Subhash Chand v. State bank of India, AIR 2014 Del 82.

 

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