Supreme Court Validates Extension of Limitation Period under IBC via Section 18 Acknowledgments

Supreme Court Validates Extension of Limitation Period under IBC via Section 18 Acknowledgments

Introduction

The case of AXIS BANK LIMITED v. NAREN SHETH (2023 INSC 820) adjudicated by the Supreme Court of India on September 12, 2023, represents a pivotal moment in the interpretation of limitation periods within the framework of the Insolvency and Bankruptcy Code (IBC), 2016. The dispute centers around Axis Bank's challenge to the dismissal of its appeal by the National Company Law Appellate Tribunal (NCLAT), which had upheld a decision allowing State Bank of India (SBI) to proceed with insolvency proceedings against a corporate debtor, Shreem Corporation Limited.

The primary issue revolves around whether SBI's Section 7 IBC petition was time-barred under the Limitation Act, 1963, and whether the provisions of Section 18, which allows for the extension of the limitation period in case of acknowledgment of debt, were rightly invoked through acknowledgments made in the corporate debtor's balance sheets and through One-Time Settlement (OTS) proposals.

Summary of the Judgment

The Supreme Court dismissed Axis Bank's appeal, thereby upholding the NCLAT's decision to allow SBI's insolvency petition under Section 7 of the IBC. The Court meticulously examined the sequence of acknowledgments made by the corporate debtor, which included declarations in financial statements and multiple OTS proposals submitted within the stipulated limitation period. By invoking Section 18 of the Limitation Act, these acknowledgments effectively reset the limitation period, allowing SBI to file the IBC petition within the legally permissible timeframe.

Analysis

Precedents Cited

The judgment extensively referenced pivotal cases that shaped the Court's interpretation of the Limitation Act in the context of insolvency proceedings:

Legal Reasoning

The Court delved into the statutory provisions of the Limitation Act, particularly Sections 3, 5, and 18, to ascertain their applicability:

  • Section 3: Establishes a bar of limitation, mandating that any suit filed after the prescribed period is dismissed outright.
  • Section 5: Allows for the extension of the limitation period in cases where the appellant can demonstrate sufficient cause for the delay.
  • Section 18: Provides for the extension of the limitation period upon written acknowledgment of liability, resetting the three-year limitation from the date of acknowledgment.

The Bank's contention was that the IBC petition was filed beyond the limitation period calculated from the declaration of NPA on March 31, 2013, with an initial delay of 1392 days. However, SBI presented evidence of multiple acknowledgments of debt made by the corporate debtor within this period:

  • Acknowledgment in the financial year ending March 31, 2015.
  • First OTS proposal dated March 16, 2017.
  • Second OTS proposal dated January 1, 2018.
  • Third OTS proposal dated May 16, 2019.

These acknowledgments, according to Section 18, reset the limitation period each time, thereby justifying the timely filing of the Section 7 IBC petition on January 22, 2020.

The Supreme Court found merit in SBI's application of Section 18, noting that the balance sheet acknowledgment and the subsequent OTS proposals were valid and occurred within the limitation period. The Court also addressed the admissibility of the additional OTS proposals introduced at the appellate stage, citing the precedent set in Dena Bank, thereby accepting their inclusion without prejudice.

Impact

This landmark judgment reaffirms the judiciary's commitment to a purposive interpretation of the Limitation Act, particularly in complex financial insolvency cases. By validating the use of Section 18 acknowledgments and OTS proposals to extend limitation periods, the Supreme Court has:

  • Strengthened the position of financial creditors in initiating timely insolvency proceedings.
  • Provided clarity on the admissibility of acknowledgments at various judicial stages.
  • Set a precedent for future cases involving multiple acknowledgments to reset limitation periods.
  • Enhanced the efficacy of the IBC in ensuring that valid insolvency petitions are not unduly dismissed on technical grounds.

Complex Concepts Simplified

  • Insolvency and Bankruptcy Code (IBC), Section 7: Allows financial creditors to initiate insolvency proceedings against a defaulting corporate debtor.
  • Section 18 of the Limitation Act: Extends the limitation period for filing legal suits or applications if there's a written acknowledgment of debt by the debtor within the original limitation period.
  • One-Time Settlement (OTS) Proposals: Offers from the debtor to settle outstanding debts, which can serve as acknowledgments of liability under Section 18.
  • National Company Law Appellate Tribunal (NCLAT): The appellate authority for decisions made by the National Company Law Tribunal (NCLT) concerning corporate insolvency.

Conclusion

The Supreme Court's decision in AXIS BANK LIMITED v. NAREN SHETH underscores the vital role of acknowledgment mechanisms in extending limitation periods under the Limitation Act, thereby enabling timely and effective insolvency proceedings under the IBC. By accepting the validity of acknowledgments through balance sheet disclosures and OTS proposals, the Court has fortified the legal framework that supports financial institutions in recovering dues, ultimately contributing to the stability and reliability of India's corporate insolvency landscape. This judgment not only resolves the immediate contention between Axis Bank and SBI but also sets a significant legal precedent for future insolvency cases, ensuring that financial creditors can pursue their claims without being impeded by procedural technicalities.

Case Details

Year: 2023
Court: Supreme Court Of India

Judge(s)

HON'BLE MR. JUSTICE VIKRAM NATH HON'BLE MR. JUSTICE AHSANUDDIN AMANULLAH

Advocates

UJJAL BANERJEE

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