This article is written by Supravo Dey pursuing a Certificate Course in National Company Law Tribunal Litigation from Lawsikho.
Sesh Nath Singh vs Baidyabati Sheoraphuli Co is a leading case of limitation for filing of insolvency application under IBC before the Adjudicating Authority (NCLT) and exclusion of time of proceeding under Section 14 of the Limitation Act.
There was no provision of limitation under IBC 2016 before the enactment of Section of 238A of IBC but after the enactment in its second amendment it stated that Limitation Act will be applicable on proceedings or appeals before the adjudicating authority, NCLT, NCLAT, DRT, DART as the case may be.
After the enactment of Section 238 of IBC 2016, it is clear that the law of limitation Act will now be applicable over proceedings under IBC but there is no provision under Limitation Act, as to how and which provisions of the Limitation Act will be applicable over proceedings under IBC.
This is a continuing conflict that is still unclear but from time to time there were several judgments by the Supreme Court of India and other State High Courts as well as NCLAT which is making it clear day by day.
For Example – In the case of “Asset Reconstruction Company (India) Limited Versus Bishal Jaiswal & Anr” the Supreme Court considered the applicability of Section 18 and held that “Section 18 of the Limitation Act, which extends the period of limitation depending upon an acknowledgement of debt made in writing and signed by the Corporate Debtor, applies to proceedings under the IBC”.
The Supreme Court has further held that entries in the balance sheet would amount to an acknowledgement of debt for the purpose of extension of limitation under Section 18 of the Limitation Act.
In the judgement of “Sesh Nath Singh,” the Supreme Court of India bound the provisions of Section 14 & 15 of the Limitation read with IBC and its applicability over the proceedings before the adjudicating authority (NCLT, NCLAT, DRT and DART) under it in a single string.
In this case, the Supreme Court also held the following things:
- That the limitation for filing Section 7 & section 9 application is three years as per the provision of Article 137 of the Limitation Act.
- The proceedings under SARFAESI Act 2002, are civil proceedings and time invested in those proceedings can be excluded from the computation of time for limitation.
This article is about to give an overview of the decisions of both the NCLAT & Supreme Court of India in Sesh Nath Singh vs Baidyabati Sheoraphuli Co.
Analysis of the case
Facts of the case
That the Appellant (Corporate Debtor) was engaged in export business of textile and garments. On 8th February 2012, the Corporate Debtor requested Respondent No.1 (Financial Creditor) for a cash credit facility of INR 1 Crore which was granted by the Financial Creditor by a letter of sanction on 15th February 2012.
After the sanction, a cash credit account was being no. 482 was opened in the name of the Corporate Debtor and a security interest was created in favour of the Financial Creditor vide a hypothecation agreement dated 17th February 2012.
In the month of May 2012, the Corporate Debtor defaulted in payment of the debt in respect of the cash credit facility and the cash credit account became irregular which later on declared as Non-Performing Asset (NPA) by the Financial Creditor on 31st March 2013.
The Financial Creditor issued a notice to the Corporate Debtor under Section 13(2) of the SARFAESI Act 2002, demanding to clear all the dues of the Financial Creditor along with interest within sixty days from the date of receiving of the notice or else the Financial Creditor will take action under section 13(4) the SARFAESI Act 2002, against the Corporate Debtor.
Against the notice of the Financial Creditor the Corporate Debtor send a notice of representation dated 3rd March 2014 under section 13(3A) of the SARFAESI Act 2002, which was rejected by the Financial Creditor vide a letter dated 15th July 2014 and demanded the Corporate Debtor to clear all its dues within 15 days from the date of receiving of this letter.
That the Financial Creditor sent a notice dated 13.12.2014 under Section 14(4) of the SARFAESI Act 2002, to the Corporate Debtor for taking possession of the secured immovable property failing of which the Financial Creditor will take the assistance of the District Magistrate (DM).
The Corporate Debtor challenged the notices sent by the Financial Creditor under Section 13(2) & 13(4) of the SARFAESI Act 2002, before Calcutta High Court by filing a writ petition under Article 226 of the Indian Constitution on 19.12.2014.
That during the pendency of the writ petition before High Court the authorized officer of the Financial Creditor issued a notice on 24.12.2014 that it has taken possession of the secured asset of the Corporate Debtor. The DM Hoogly had also issued an order dated 11.05.2017 under SARFAESI Act 2002, for taking possession of the secured asset of the Corporate Debtor by the Financial Creditor.
That the High Court vide its order dated 24th July 2017 passed an interim restraining order against the Financial Creditor from taking any step against the Corporate Debtor. The High Court is of the opinion that being a Credit Cooperative Bank the Financial Creditor cannot proceed under the provisions of SARFAESI Act 2002.
Thereafter the Financial Creditor filed an application under Section 7 of IBC 2016, on 10th July 2018 before the NCLT Kolkata Bench for initiation of Corporate Insolvency Resolution Process (CIRP) of the Corporate Debtor.
Grounds of opposition
After receiving notice of the application Corporate Debtor appeared through Sesh Nath Singh (Appellant No. 1) and opposed the application on the following grounds:-
- That a writ petition challenging the maintainability of proceedings under SARFAESI Act 2002, is still pending before Calcutta High Court.
- Maintainability of the Section 7 application on the ground that the Special Officer appointed as Administrator over the Financial Creditor, only for holding elections it cannot initiate proceedings on behalf of the Financial Creditor.
Apart from the submissions above, The Corporate Debtor did not challenge that the application is barred by limitation before NCLT.
The NCLT admitted the section 7 application vide its order dated 25th April 2019, Mr Animesh Mukhopadhay was appointed as Insolvency Resolution Professional (IRP) and a moratorium was declared as per the provision of section 14 of IBC.
Being aggrieved by the decision of NCLT the Corporate Debtor preferred appeal before the NCLAT.
SARFAESI Act 2002:-
- Section 13(2) – Section 13(2) of the SARFAESI Act 2002, deals with the provision of notice by the secured creditor to the borrower to discharge its liabilities in full within sixty days from the date of receiving of the notice or the creditor will take action under SARFAESI Act.
- Section 13(3A) – Section 13(3A) of the SARFAESI Act 2002, deals with the provision of reply to the notice under Section 13(2), by making a representation or objection which the secured creditor may or may not consider and shall convey the same to the borrower within fifteen days from the date of receiving of representation.
- Section 13(4) – Section 13(4) of the SARFAESI Act 2002, deals with the provision of taking over the possession of the assets or management of the borrower by the creditor in case the borrower fails to discharge its liabilities as per the provisions of Section 13(2).
- Section 7 of IBC 2016, deals with the provisions of initiation of CIRP by the Financial Creditor against the Corporate Debtor.
- Section 14 of IBC 2016 deals with the provisions of a moratorium, which means temporary suspension of activity and after the declaration of moratorium by the Adjudicating Authority under Section 14 all the proceedings against the Corporate Debtor will stay.
Limitation Act, 1963.
- Section 14(2) of the Limitation Act deals with the provision of exclusion of time of limitation invested in a proceeding if such proceeding initiated against a party in good faith but cannot be proceeded further due to the defect of jurisdiction.
The decision of the NCLAT
The Corporate Debtor for the first time raised the point before the NCLAT in its appeal that the application is barred by limitation on the ground that the account of Corporate Debtor declared as NPA on 31st March 2013 and the application is filed after five years five months i.e. on 27th August 2018.
The NCLAT after hearing this submission of the Appellant (Corporate Debtor) dismissed the appeal by stating that:-
- That the issue of limitation is raised before the appellate tribunal for the first time and there was no finding on this issue by the NCLT.
- That the Financial Creditor proceeded under the SARFAESI Act and thus period invested in those proceedings which is three years and six months will be excluded as per the provision of section 14(2) of the Limitation Act.
Issues in the present case
The following were the issues in the present case:-
- Whether a delay beyond a period of 3 years can be condoned by filing a Section 5 application under Limitation Act?
- Whether the exclusion of time under Section 14 of the Limitation Act will be applicable in the case of Section 7 application? If applicable will it only come into force after the suit in the wrong jurisdiction ends?
Submissions by the parties.
Submissions on behalf of Financial Creditor
The counsel for Respondent No.1(Financial Creditor) made the following submissions:-
- In its application under Section 7 of IBC 2016, the Financial Creditor enclosed a list of dates and events and synopsis which chronologically explained the date of sanction of loan, initiation of proceedings and taking possession of the Corporate Debtor’s property.
- The Financial Creditor initiated proceedings under SARFAESI Act 2002, after 9 months 18 days from the time of declaring of Corporate Debtors account NPA. The High Court stayed the proceeding under SARFAESI Act 2002, vide its order dated 24th July 2017 and 11months after that the Financial Creditor initiated proceedings under IBC against the Corporate Debtor before NCLT.
Submissions on behalf of the corporate debtor
The Counsel for the Appellant (Corporate Debtor) made the following submissions:-
- That the Section 7 application of the Financial Creditor is barred by the law of limitation and should be dismissed.
- The counsel stated that in a judgement “Ishrat Ali v. Cosmos Cooperative Bank Limited and Anr” by a larger bench of NCLAT held that Section 7 application will not get benefit under Section 14 of Limitation Act of proceeding made under SARFAESI Act 2002, since proceeding under SARFAESI Act is not a civil proceeding under a Court of law. Hence the decision of NCLAT in “Sesh Nath Singh vs Baidyabati Sheoraphuli Co” cannot be correct.
- That the cause of action of the suit aroused on 13th march 2013 then the account of the corporate debtor classified as NPA and 3 years limitation should be expired on 31st March 2016. The Financial Creditor filed Section 7 application on 10th July 2018 which is 5 years 3 months after the cause of action arose hence the suit is hopelessly barred by limitation.
- That the Financial Creditor did not file an application under section 5 of Limitation Act for condonation of delay before the NCLT.
- That the Financial Creditor initiated proceedings in two different forums for the same claim. The counsel provided reference to “Mobilox Innovations Private Limited v. Kirusa Software Private Limited (2018) 1 SCC 353” where the Supreme Court held that IBC is not a recovery forum and in case of real dispute, provisions of IBC cannot be Invoked.
- The counsel finally argued that to attract the provisions of Section 14 of the Limitation Act, the proceeding must be dismissed for initiation in the wrong jurisdiction but in this case, the proceeding is still pending while the Financial Creditor filed the application under Section 7.
After hearing both the side the Supreme Court of India passed its decision in favour of the Respondents by affirming the order of the NCLAT.
Observations of the Supreme court
The Apex court made the following observations:
- That after the incorporation of Section 238A of IBC, the law of limitation will apply over NCLT, NCLAT, DRT, DART.
- There is no specific time limit prescribed in the Limitation Act for IBC hence Article 137 of the Limitation Act will apply. Hence limitation period for making an application under Section 7 & 9 (Note – Section 9 contains the provision for initiation of insolvency proceedings by the operational creditor) of IBC is three years. (Note – Article 137 states that the limitation of which is not prescribed in the Act the limitation period for those will be 3 years)
- With reference to “Babulal Vardharji Gurjar v. Veer Gurjar Aluminium In- dustries Pvt. Ltd. and another (2020) 15 SCC 1” the Supreme Court held that the limitation period under Article 137 can be extended under the provision of Section 5 of Limitation Act.
- The Supreme Court with reference to “B.K. Educational Services Private Limited v. Parag GuptaAssociates and Ors” held that a proceeding beyond the period of limitation can be entertained by the NCLT/NCLAT if the proper cause of delay can be shown by the party and it is totally upon the discretion of the NCLT/NCLAT to entertain such.
- That Section 5 of the Limitation Act doesn’t state any application but it is general practice to file a formal application under Section 5 but it is totally upon the discretion of the NCLT or NCLAT to condone delay without any application under Section 5 of the Act.
- That Section 14 of the Limitation Act should be read as a whole and complete reading of Sub – Section 1,2 & 3 of Section 14 gives a clear overview that a party will get benefit under Section 14 of the Act who proceeded a civil proceeding in good faith but wasn’t able to proceed it further due to jurisdictional error or any other alike cause. Section 14 of the Act doesn’t state that Section 14 will only come into force after the earlier proceeding ends.
- The Supreme Court held that since the proceeding before the High Court is pending on the date of filing of Section 7 application the entire period of proceedings under SARFAESI Act 2002, could be excluded and after the exclusion, the application is well within time. Even after the exclusion of time from the date of issue of notice under Section 13(2) of the SARFAESI Act 2002, till the stay of proceeding by the High Court, the application under Section 7 will still be well within time.
- The Supreme Court with reference to “S.A.L.Narayan Rao and Anr. v. Ishwarlal Bhagwandas and Anr.(AIR 1965 SC 1818) ” held that the proceedings under SARFAESI Act 2002, are civil proceedings.
In the judgement referred above by the Constitution Bench of the Supreme Court, it was held that “The expression civil proceeding is not defined in the Constitution, nor in the General Clauses Act. The expression in our judgment covers all proceedings in which a party asserts the existence of a civil right conferred by the civil law or by statute, and claims relief for breach thereof.”
Hence as argued by the counsel for the appellant with reference to the “Ishrat Ali’s” case that proceedings under SARFAESI Act are not civil proceeding is unsustainable.
- The Supreme Court further stated that the Chief Metropolitan Magistrate or Judicial Magistrate while acting under Section 14 of the SARFAESI Act 2002, will be considered as civil courts.
- The Supreme Court finally stated that Section 5 & 14 of the Limitation Act are not mutually exclusive. In the case where Section 14 cannot be directly applied the principle of the Section can be applied to give relief under Section 5 of the Act.
From the analysis of the above case following Conclusions can be drawn:-
- That Law of limitation will be applicable in the proceedings before NCLT, NCLAT, DRT, DRAT after the incorporation of Section 238A of IBC.
- That the limitation for filing sections 7 & 9 applications under IBC is 3 years.
- That the condonation of delay can be granted without Section 5 Application it is totally upon the discretion of the Adjudicating authority whether to grant it or not.
- That the Proceedings under SARFAESI Act are Civil Proceedings and thus will get the benefit of exclusion of time under Section 14 of the Limitation Act where applicable.
- That Magistrate Courts will be considered as civil courts while exercising its power under SARFAESI Act.
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