This article is written by Naresh Kumar Nagar, pursuing Certificate Course in National Company Law Tribunal Litigation from LawSikho.
The Hon’ble Supreme Court while exercising appellate jurisdiction recently dealt with the issues related to condonation of delay under the Limitation Act 1963, in context of its applicability to the Insolvency Proceedings envisaged under Section 7 of the Insolvency and Bankruptcy Code 2016 (hereinafter referred to as the Code in this article) in the case “Sesh Nath Singh and another v. Baidyabati Sheoraphuli Cooperative Bank and another” (hereinafter referred as ‘Sesh Nath case’) ( LL 2021 SC 177). This article studies and analyses this case in the context of the aforesaid condonation of delay related issues as applicable to insolvency proceedings under the Code while exploring the underlying jurisprudence.
Brief facts of the case
The parties to the ‘Sesh Nath case’ got into a legal tussle as the Appellant (the Corporate Debtor) defaulted in repayment of the loan granted by the Respondent (the Financial Creditor). The loan as a cash credit facility was sanctioned on 15.02.2012 by the Financial Creditor. The account of the Appellant was accordingly declared as a Non-Performing Asset (NPA) on 31.03.2012 for default in repayment. Subsequently, a notice u/s 13(2) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (i.e. SARFAESI Act ) was issued on 18.01.2014 advising the Corporate Debtor to repay the amount of loan in full within sixty days else further action under the Act could be taken up. Thereafter another notice was issued by the Respondent on 13.12.2014 seeking the peaceful possession of the secured assets from the Corporate Debtor under Section 13(4)(a) of the SARFAESI Act as the Corporate Debtor failed to comply with the Notice under an earlier notice under Section 13 (2).
The Corporate Debtor, however, approached the Hon’ble Calcutta High Court on 19.12.2014 against the said notices. The High Court on 24.07. 2017 issued an interim order forbidding the Financial Creditor from proceeding against the Corporate Debtor under SARFAESI Act till further orders.
Meanwhile, on 10.07.2018, the Financial Creditor moved an application for starting of insolvency resolution proceeding u/s 7 of the Code before the Calcutta Bench of the National Company Law Tribunal (hereinafter referred to as “the Tribunal”). The Corporate Debtor resisted the filing of the said application on the pretexts other than that of limitation. The Tribunal, nevertheless, permitted the admission of the application u/s 7 of the Code on 25.04.2019. The Tribunal also appointed an Insolvency Resolution Professional while declaring a moratorium prohibiting all actions or activities as mentioned u/s 14 of the Code in wake of the admission of application u/s 7 of the Code.
The Corporate Debtor, thereafter, moved an appeal against the order of the Tribunal before the National Company Law Appellate Tribunal (hereinafter referred as Appellate Tribunal) u/s 61 of the Code inter alia raising the contention that application was hit by limitation in light of the fact that even though the account of the corporate debtor was declared NPA as early as 31.03.2013, the application u/s 7 of had been filed as late as on 27.08. 2018 after the expiry of more than five years; and as such the limitation period of three years envisaged under Article 137 of the Limitation Act, had lapsed already. The Appellate Tribunal dismissed the appeal making the remark that the ground of limitation was preferred only for the first time in appeal and that there had been no observation recorded thereon of the Tribunal under the Code. Weighing the merits, the application u/s 7 of the Code was considered to be within the Limitation period by the Appellate Tribunal and the decision of the Tribunal was upheld.
Finally, an appeal was filed before the Hon’ble Supreme Court against the order of the Appellate Tribunal by the Corporate Debtor.
The issues of law raised in appeal before the Hon’ble Supreme Court
The issues of law involved in the appeal vide para 57 of the judgment, dated 22nd March 2021, have been as under:
- Could the delay of more than three years in filing an application under Section 7 of the Insolvency and Bankruptcy Code 2016 be forgivable, in absence of a formal application for the same being made by the applicant under Section 5 of the Limitation Act, 1963?
- Could Section 14 of the Limitation Act, 1963 be made applicable to the applications under Section 7 of the Code? If so, could the exclusion of period of time under Section 14 be conceded, only after the termination of the proceedings before the wrong forum?
The grounds raised by the parties to the case
(A). The grounds relied on by the Financial Creditor (the Respondent):
The Financial Creditor relied on the following legal provisions in support of maintainability of the Application:
- That Section 7 of the Code allows the filing of an application for initiation of insolvency resolution proceedings as soon as there occurs a default in payment of the debt which has become due;
- That the proceedings for the realization of the debt had been initiated well within the limitation period insofar as the requisite proceedings were set into motion on 03.03.2013, when the notice u/s 13 (2) of SARFAESI Act was issued to the Financial Debtor, almost within a year of the debt being declared as NPA as against the prescribed limitation period of three years vide Art 137 of the Limitation Act 1963 as applicable in this case.
(B). The grounds adhered to by the Corporate Debtor (the Appellant):
The main contentions raised by the Corporate Debtor ( the Appellant) have been:
- That delay of more than three years could not be waived in filing application u/s 7 of the Code without moving a formal application by u/s 5 of the Limitation Act, 1963 by the Financial Creditor.
- That an application under Section 7 of the Code cannot be allowed the benefit of Section 14 of the Limitation Act,1963 vis a vis the ‘explanation’ to the Section 14 of the Limitation Act 1963, insofar as:
Analysis of the disposal of the Issues of law by the Hon’ble Supreme Court
Regarding contention raised by the Corporate Debtor ( the Appellant) at point B(1) above, the Hon’ble Supreme Court held that Section 5 nowhere talks about any application and it enables the Court to admit an application or appeal if the applicant could convince the court that he had a just and adequate cause for not making the application/preferring the appeal, within the limitation period. Despite it being a common practice to obtain a formal application under Section 5 of the Limitation Act 1963, in order to gauge the adequateness of the cause preferred in support of the inability to approach the Court or Tribunal within the allowed limitation period; nothing bars the Court or Tribunal in exercising its discretion to condone delay without insisting a formal application if there has been enough material on records disclosing an adequate cause for delay. The Hon’ble court has thus sagaciously precluded the necessity of insisting on a formal application u/s 5 of the Limitation Act 1963 if there happens to be enough matter on records as to justify the adequateness or otherwise of the cause to allow condonation of delay. This really would result in avoidance of superfluous paperwork and thereby help in saving valuable time of the court.
The contention at point B(2) above, has been addressed by stating that Section 14 has to be read in totality; and that the substantive provisions of Section 14 nowhere enjoin that Section 14 is to be invoked only after the conclusion of the former proceeding. The implication has been that the recourse to the explanation to Section 14 of the Limitation Act 1963 is to be had for dispelling any confusion or doubts in the main section and not to expand it. Hence, Section 14 allows the time exhausted in proceedings before a wrong forum to be excluded, in case the said forum could not entertain the proceedings due to some technical defect. Where such former proceedings already stand concluded, the closing limit to claim exclusion would be the date on which the proceedings came to be terminated. Since, in this case, proceedings under SARFAESI Act had still been continuing in the High Court as on the date of filing of the application under Section 7 of the Code in the Tribunal, the full period after initiation of proceedings under SARFAESI Act had to be amenable to exclusion. The Hon’ble Court has laid down the correct interpretation insofar as the pendency of the proceeding before the wrong forum or otherwise tends to keep the outer limit of the prescribed limitation period as open-ended. Plausibly, therefore, the entire period till the date of the filing of the application u/s 7 of the code, in this case, would qualify to be excluded for the purpose of reckoning the limitation period.
The Court held that the “Court”, in Sub Section 2 of Section 14 of the Limitation Act, would imply any forum for a civil proceeding including any Tribunal or any forum under the SARFAESI Act in view of the whole range and gamut of proceedings under the Code before the National Company Law Tribunal or National Company Law Appellate Tribunal. Since a subsequent civil proceeding whether pursued in due course in a Court in the first instance or appeal or in revision, vis a vis any party, for the same relief, is liable to be considered as a civil proceeding in a forum, be it in the first instance or Appellate or in revision, against the very same party for the very identical relief. That is to say, if proceedings before Debt Recovery Tribunal (DRT) or National Company Law Tribunal (NCLT) amount to be civil proceedings then the earlier proceedings undertaken before any forum against the very same party for the very similar relief would mean to be the civil proceedings. Accordingly, as the Chief Metropolitan Magistrate or the Judicial Magistrate exercising powers under Section 14 of the SARFAESI Act, acts as the civil court/ executing court, proceedings under SARFAESI Act would have to be counted as civil proceedings before a court. Here also, the Hon’ble Supreme Court correctly and logically have held in plain words that if the later proceedings in any matter for any relief before any forum happen to be civil proceedings then the earlier proceedings pursued in the same matter for the similar relief before any forum earlier would naturally have to be deemed as civil proceedings. This indeed has been a fine piece of jurisprudence.
Moreover, it has also been correctly held that the final objective, of moving an application under Section 7 of the Code, is the realization of debt by invocation of Insolvency Resolution Process; and it is the default on the part of the Corporate Debtor which prompts the cause of action for initiating an application under Section 7 of the Code. Realization of debt as such being the object of application u/s 7 of the Code, the benefit u/s 14 of the Limitation Act is plausibly amenable to be invoked while reckoning of the period of Limitation with effect from the date on which default occurred.
The crux of the Hon’ble Supreme Court’s decision
The judgment, in the nutshell, can be depicted in simple words as under:
- That a condonation of the delay could be conceded by the Court in under Section 5 of the Limitation Act 1963 even without filing a formal application, if there be enough materials on record in the case disclosing adequacy of the cause for delay;
- That the Section 14 of the Limitation Act can be attracted or resorted to for the purpose of reckoning of a period of limitation in filing an application under Section 7 of the Code;
- That proceedings undertaken in pursuance of the SARFAESI Act are to be taken as civil proceedings in a court;
- That even in circumstances where Section 14 does not exactly apply, the grounds enunciated in Section 14 can, nevertheless, be called into service to allow relief to an applicant under the provisions of Section 5 of the Limitation Act.
This judgment may be seen to be founded on the principle of purposive interpretation of statutes whereby the Court could fill in the apparent gaps in the legislation for the sake of clarity or dispel ambiguities by taking into consideration the context in which the legislation was enacted. Since words do not always carry plain meanings, recourse is to be had to a purposive or contextual approach, in place of simple literalism, which requires that any statute should be read as a whole in order to ascertain the context of the words in question. The purposive interpretation as such lays emphasis on the context to grasp the purpose of the statute. Where the meaning of the statute is literally ambiguous, either Legislature has to correct the defect or the courts will have to do their utmost with the imperfect text if it occurs before them.
The insolvency resolution process envisaged under the Code is an attempt to bring the corporate person, partnership firms and individuals back from the brink of insolvency by timely exploring ways to make the businesses viable enough to pay back its debts in default failing which to take steps for liquidation in a time-bound order to prevent the erosion of the worth of assets of such persons to facilitate the cause of entrepreneurship, avoiding risk to credit facilities and to safeguard the equitable interests of all stakeholders. Such being the stated objects and reasons for the enactment of the Code, the Hon’ble Supreme Court taking an overall contextual view sought to clarify that the ultimate objective, of the Code or for that matter Insolvency Resolution Process, is to realize the debt in default due to the creditors. This clarification implies that the insolvency resolution process under the Code is not merely for rehabilitation or revival but is ultimately a means to salvage the debts due to the creditors. This as a logical sequel leads to an extension of the benefit under Section 14 of the Limitation Act to the proceedings undertaken under the SARFAESI Act and thereby to the application for initiation of insolvency resolution process under the Code.
Thus, the context succinctly laid clarification about the applicability of the provisions of the Limitations Act 1963 under Section 5 and Section 14 in respect of an application filed under Section 7 of Code goes a long way to mark the underpinnings of purposive interpretation in the judgment of the Hon’ble Supreme Court in the Sesh Nath Case. The Hon’ble Supreme Court has finally dispelled all the doubts and ambiguities that have been there or have been raised about the applicability of Section 5 and Section 14 of the Limitation Act 1963 generally and with respect to Section 7 of the Code as well; and as such the decision may rightly be deemed as a definitive word on the aforesaid specific provisions of the Limitation Act as they now stand correctly and explicitly expounded by the Hon’ble Supreme Court.
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