Introduction

The case of Corporation Bank v. SJN Energy Infrastructure Pvt. Ltd. Through Its Directors And Others was adjudicated by the National Company Law Appellate Tribunal (NCLAT) on March 5, 2020. This case revolves around the application of the Insolvency and Bankruptcy Code, 2016 (IBC), particularly focusing on the limitation period for initiating insolvency proceedings under Section 7 of the IBC. The litigants involved are Corporation Bank (Appellant) and SJN Energy Infrastructure Pvt. Ltd. (Respondent No. 1), the corporate debtor.

The primary legal issue in this case pertains to whether the Application filed by Corporation Bank under Section 7 of the IBC was time-barred under the Limitation Act, 1963, as incorporated by Section 238A of the IBC.

Summary of the Judgment

Corporation Bank filed an Application under Section 7 of the IBC seeking initiation of the Corporate Insolvency Resolution Process (CIRP) against SJN Energy Infrastructure Pvt. Ltd., alleging default in repayment of term loan and cash credit facilities amounting to Rs. 31,63,29,782.20. The Adjudicating Authority (NCLT, New Delhi) rejected the application on the grounds that it was not filed within the prescribed limitation period. The limitation period began on the date the account was classified as a Non-Performing Asset (NPA) by the bank, which was May 23, 2014. Given that the application was filed on February 5, 2019, it exceeded the three-year limitation period, leading to its dismissal.

Corporation Bank appealed the rejection to NCLAT, contending that the limitation period should start from the date of acknowledgment of debt, September 8, 2015, thereby making the application timely. However, NCLAT upheld the decision of the Adjudicating Authority, agreeing that the application was time-barred as per the Limitation Act, 1963, and the acknowledgment letter did not extend the limitation period beyond three years from the date of default.

Analysis

Precedents Cited

The judgment extensively referenced two pivotal Supreme Court cases:

• B.K. Educational Services Pvt. Ltd. Vs. Parag Gupta & Associates - Civil Appeal No. 23988 of 2017
• Sagar Sharma & Anr. Vs. Phoenix Arc Pvt. Ltd. & Anr. - Civil Appeal No. 7673 of 2019

In B.K. Educational Services Pvt. Ltd. Vs. Parag Gupta & Associates, the Supreme Court held that Article 137 of the Limitation Act, 1963, is applicable to applications filed under Sections 7 and 9 of the IBC, thereby making the limitation provisions enforceable from the inception of the IBC. This case established that if a default occurs more than three years before the filing of the application and no extension is available under Section 5 of the Limitation Act, the application would be time-barred.

In Sagar Sharma & Anr. Vs. Phoenix Arc Pvt. Ltd. & Anr., the Supreme Court reaffirmed that the limitation period for applications under the IBC does not restart from the date the IBC came into force but is governed by the Limitation Act, 1963. The Court emphasized that the IBC is a comprehensive law and Section 238 of the IBC has an overriding effect, negating any pending proceedings in other forums from extending the limitation period.

Legal Reasoning

The crux of the court’s reasoning centered on the applicability of the Limitation Act, 1963, to IBC proceedings. Section 238A of the IBC incorporates the Limitation Act, thereby subjecting applications under Sections 7 and 9 of the IBC to its provisions.

The court analyzed the timeline of events:

• Classification of Respondent as NPA: May 23, 2014
• Date of acknowledgment of debt/letter: September 8, 2015
• Filing of Section 7 application: February 5, 2019

According to Article 137 of the Limitation Act, the limitation period for a creditor to initiate insolvency proceedings accrues from the date of default, i.e., May 23, 2014. Even considering the acknowledgment letter, the extension under Section 5 of the Limitation Act was insufficient to make the application timely, as the three-year period expired on September 8, 2018, preceding the filing date in February 2019.

The court also addressed arguments related to ongoing proceedings in other forums and the nature of the default. It clarified that the existence of pending proceedings does not extend the limitation period under the IBC, as the IBC is an overriding statutory framework per Section 238.

Impact

This judgment reinforces the strict adherence to the limitation period under the IBC, highlighting that delays beyond three years from the date of default are not permissible unless exceptional circumstances warrant an extension under Section 5 of the Limitation Act. It underscores the necessity for creditors to act promptly in initiating insolvency proceedings to avoid their claims being barred.

Furthermore, the decision emphasizes the supremacy of the IBC over other legal proceedings, ensuring that creditors cannot exploit pendency in other forums to evade the limitation constraints under the IBC.

Complex Concepts Simplified

Corporate Insolvency Resolution Process (CIRP)

CIRP is a structured process initiated under the IBC to address the insolvency of a corporate debtor. It involves multiple stakeholders, including creditors, a resolution professional, and potential investors, aiming to revive the company or orderly liquidation of assets.

Section 7 Application

Under Section 7 of the IBC, a financial creditor can initiate CIRP against a corporate debtor by filing an application with the Adjudicating Authority (NCLT). The application must demonstrate that the debtor has defaulted on payment of a debt.

Limitation Act, 1963

The Limitation Act sets the time frame within which legal actions must be initiated. Under Section 238A of the IBC, this Act applies to proceedings under the IBC, meaning that creditors must file their applications within the prescribed limitation period, typically three years from the date of default.

Non-Performing Asset (NPA)

An NPA is a loan or advance for which the principal or interest payment has remained overdue for a period of 90 days. The classification of a loan as an NPA triggers the commencement of various recovery processes under banking regulations.

Conclusion

The judgment in Corporation Bank v. SJN Energy Infrastructure Pvt. Ltd. serves as a critical reminder of the imperative to adhere to the limitation periods prescribed under the IBC. By upholding the applicability of the Limitation Act, 1963, the NCLAT reinforced the necessity for timely action by creditors in insolvency proceedings. This ensures that the IBC functions as an effective and efficient framework for resolving corporate insolvencies, preventing unnecessary delays and safeguarding the interests of all stakeholders involved.

Moving forward, creditors must be vigilant in monitoring defaults and initiating CIRP within the stipulated timeframe to ensure the enforceability of their claims. Additionally, this judgment underscores the judiciary’s commitment to maintaining the structural integrity of the IBC, thereby fostering a predictable and reliable insolvency resolution environment.