Introduction

The case of Mazda Agencies (Partnership Firm) Ghantiada Through Its Partner Mr. Rashesh Desai v. Hemant Plastics & Chemicals Ltd. is a significant appellate decision rendered by the National Company Law Appellate Tribunal (NCLAT) on March 5, 2021. This case addresses the intricate interplay between the Insolvency and Bankruptcy Code, 2016 (I&B Code) and the erstwhile Sick Industrial Companies Act, 1985 (SICA), particularly focusing on the computation of the limitation period for initiating insolvency proceedings.

The appellant, Mazda Agencies, sought to challenge the rejection of their application under Section 9 of the I&B Code by the Adjudicating Authority (National Company Law Tribunal, Ahmedabad Bench) on the grounds of limitation. The crux of the dispute revolved around whether periods spent in SICA proceedings could be excluded from the limitation period as prescribed under Section 18 of the Limitation Act, 1963, thereby making the I&B Code application timely.

Summary of the Judgment

Mazda Agencies filed an appeal under Section 61 of the I&B Code against the NCLT Ahmedabad Bench's order dated July 7, 2020, which dismissed their application under Section 9 of the I&B Code as time-barred. The operational creditor had supplied goods to Hemant Plastics & Chemicals Ltd., the corporate debtor, and sought to recover outstanding dues acknowledged in 2005. However, due to financial distress, the debtor was referred to BIFR under SICA, and subsequent rehabilitation efforts failed.

The appellant contended that the period spent in SICA proceedings should be excluded from the limitation period, invoking Section 22(5) of SICA. The NCLAT, after careful deliberation, upheld the dismissal, holding that Section 22(5) of SICA pertains to suits and not to insolvency proceedings under the I&B Code. Consequently, Mazda Agencies' application under Section 9 was deemed to have been filed beyond the permissible period.

Analysis

Precedents Cited

The appellant referenced the precedent set by Gouri Prasad Goenka Vs. Punjab National Bank & Anr. (CA (AT) (Ins) No. 28 of 2019), wherein the bench had considered the exclusion of limitation periods under SICA in similar contexts. Additionally, the High Court of Bombay in Zenith Ltd. Vs. Grand Foundry Ltd. emphasized the compatibility between SICA and the I&B Code, suggesting that the sanctioning of rehabilitation schemes under SICA could be deemed equivalent to the approval of Resolution Plans under the I&B Code.

However, the NCLAT distinguished the present case from these precedents, emphasizing factual differences, notably the appellant's exclusion from the rehabilitation scheme and their initiation of independent legal proceedings during the pendency of BIFR processes.

Legal Reasoning

The tribunal meticulously dissected the applicability of Section 22(5) of SICA, which allows for the exclusion of periods spent in specified legal proceedings when calculating limitation periods. It was underscored that SICA's provisions were explicitly tailored for suits and proceedings under its own framework, not for applications under the I&B Code.

Furthermore, since Mazda Agencies were not parties to the rehabilitation scheme approved by BIFR and had concurrently initiated their own legal actions, the tribunal found that the suspension of remedies as per Section 22(1) of SICA did not ensue for them. As a result, the time spent in SICA proceedings was not excludable, and the limitation period had indeed lapsed by the time the I&B Code application was filed.

Impact

This judgment delineates clear boundaries between the scopes of SICA and the I&B Code, particularly regarding limitation periods. By affirming that Section 22(5) of SICA does not extend protection to proceedings under the I&B Code, the tribunal has clarified that operational creditors must independently adhere to limitation timelines when pursuing insolvency remedies, irrespective of prior or concurrent SICA proceedings.

This decision serves as a pivotal reference for operational creditors navigating insolvency frameworks, emphasizing the necessity for timely action under the I&B Code without relying on exclusions stemming from past SICA engagements.

Complex Concepts Simplified

Sick Industrial Companies Act, 1985 (SICA)

SICA was an earlier legislative framework aimed at rehabilitating financially distressed industrial companies. It empowered the Board for Industrial and Financial Reconstruction (BIFR) to oversee the rehabilitation process. However, SICA was repealed on December 1, 2016, with the introduction of the I&B Code, which provided a more streamlined and comprehensive insolvency resolution framework.

Insolvency and Bankruptcy Code, 2016 (I&B Code)

The I&B Code is a modern insolvency framework that consolidates and amends laws related to the reorganization and insolvency resolution of corporate entities and individuals. It provides mechanisms for creditors and debtors to negotiate repayments and, if necessary, liquidate assets to satisfy debts.

Board for Industrial and Financial Reconstruction (BIFR)

BIFR was a statutory body under SICA responsible for the revival and rehabilitation of sick companies. With the repeal of SICA, the functions of BIFR have been subsumed under committees formed under the I&B Code.

Section 22(5) of SICA

This provision allowed for the exclusion of periods spent in certain legal proceedings when calculating limitation periods for initiating new legal actions. Its applicability was confined to SICA-related suits and proceedings.

Section 9 of the I&B Code

Section 9 empowers operational creditors to initiate insolvency proceedings against a defaulting corporate debtor. Timeliness is critical, as applications filed beyond the limitation period under the Limitation Act, 1963 are typically dismissed.

Conclusion

The NCLAT's decision in Mazda Agencies v. Hemant Plastics & Chemicals Ltd. reinforces the distinct separation between SICA and the I&B Code, particularly concerning limitation periods for insolvency actions. By ruling that Section 22(5) of SICA does not extend to proceedings under the I&B Code, the tribunal has provided clarity to operational creditors regarding the necessity of timely filings within the I&B Code's prescribed limitation timelines.

This judgment underscores the imperative for creditors to promptly initiate insolvency proceedings under the I&B Code without relying on past SICA processes to extend their limitation periods. Consequently, it contributes to the evolving jurisprudence on insolvency law in India, promoting a more disciplined and time-sensitive approach to debt recovery in the corporate landscape.