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Sesh Nath Singh, Dir... v. Baidyabati Sheoraphu...
Factual and Procedural Background
The appellants, Mr. Sesh Nath Singh and Mr. Akshay Kumar Singh, are directors of M/s Debi Fabtech Pvt Ltd, the corporate debtor against whom the Corporate Insolvency Resolution Process (CIRP) was initiated by the National Company Law Tribunal (NCLT), Kolkata Bench, through an order dated 25.04.2019. The financial creditor granted a cash credit facility of Rs. 1 crore to the corporate debtor in 2012, secured by hypothecation of book debts. The corporate debtor defaulted on repayment, resulting in the account being declared a Non-Performing Asset (NPA) on 31.03.2013. Subsequently, notices under Sections 13(2) and 13(4) of the SARFEASI Act, 2002 were issued. The corporate debtor challenged the SARFEASI notice before the Kolkata High Court, which restrained the financial creditor from proceeding under the SARFEASI Act. The financial creditor filed an application under Section 7 of the Insolvency and Bankruptcy Code (I&B Code), 2016 before the NCLT on 27.08.2018, which was admitted, and CIRP was initiated against the corporate debtor.
Legal Issues Presented
- Whether the application under Section 7 of the I&B Code filed by the financial creditor is barred by limitation under Article 137 of the Limitation Act, considering the default occurred on 31.03.2013 and the application was filed on 27.08.2018.
- Whether the period during which the financial creditor prosecuted proceedings under the SARFEASI Act should be excluded from the limitation period under Section 14(2) of the Limitation Act.
- Whether the NCLT correctly admitted the application under Section 7 of the I&B Code despite the limitation challenge raised for the first time in the appeal.
Arguments of the Parties
Appellants' Arguments
- The application under Section 7 of the I&B Code is time barred as it was filed more than five years after the default date (31.03.2013), exceeding the three-year limitation period prescribed under Article 137 of the Limitation Act.
- The Supreme Court's decision in B.K. Educational Services Pvt Ltd v. Parag Gupta and Associates establishes that limitation applies to Section 7 applications, and the right to sue accrues at the date of default.
- The application filed on 27.08.2018 is therefore barred by limitation and the impugned order admitting the CIRP should be set aside.
Respondent's Arguments
- Though the account was declared NPA on 31.03.2013, the financial creditor exercised remedies under the SARFEASI Act within the limitation period by issuing notices and obtaining possession orders.
- The corporate debtor filed a writ petition restraining the financial creditor's SARFEASI proceedings, which delayed further action.
- According to Section 14(2) of the Limitation Act, the period during which the financial creditor was prosecuting another civil proceeding with due diligence (i.e., from issuance of SARFEASI notice on 18.01.2014 to the High Court order on 24.07.2017) must be excluded from the limitation period.
- Excluding this period, the Section 7 application filed on 27.08.2018 is within the prescribed limitation period and was rightly admitted by the Adjudicating Authority.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| B.K. Educational Services Pvt Ltd v. Parag Gupta and Associates (2018 SCC OnLine SC 1921) | Application of Limitation Act, Article 137, to Section 7 and 9 of I&B Code; right to sue accrues on default | The Court acknowledged this precedent to confirm that limitation applies to Section 7 applications and the cause of action accrues on default date. |
| Vashdeo R Bhojwani v. Abhyudaya Cooperative Bank Ltd & Anr (Civil Appeal No.11020 of 2018) | Application of Article 137 of Limitation Act to Section 7 of I&B Code | Referenced to support that I&B Code does not revive time-barred debts. |
| Gaurav Hargovindbhai Dave v. Asset Reconstruction Company (India) Ltd & Anr (Civil Appeal No.4952 of 2019) | Application of Article 137 of Limitation Act to Section 7 of I&B Code | Used to reinforce the applicability of limitation period to insolvency applications. |
Court's Reasoning and Analysis
The Court considered the limitation issue raised by the appellants, noting that the default occurred on 31.03.2013 and the Section 7 application was filed on 27.08.2018, which prima facie appears time barred under Article 137 of the Limitation Act. However, the Court examined the respondent's submission that the financial creditor had prosecuted its rights diligently under the SARFEASI Act by issuing notices and obtaining possession orders within the limitation period. The corporate debtor's writ petition restrained the creditor's SARFEASI proceedings for a period, which the Court found justifies exclusion of that period from the limitation computation under Section 14(2) of the Limitation Act. After excluding the period from 18.01.2014 to 24.07.2017, the Court held that the Section 7 application was filed within the limitation period. The Court also noted that the limitation objection was not raised before the Adjudicating Authority, resulting in no findings on the issue at that stage. Considering these factors, the Court found no merit in the appellants' contention that the application was time barred and declined to interfere with the impugned order admitting the CIRP.
Holding and Implications
The Court dismissed the appeal, upholding the order of the NCLT admitting the Section 7 application and initiating the Corporate Insolvency Resolution Process against the corporate debtor.
The decision confirms that where a financial creditor diligently prosecutes its rights under alternate legal remedies within the limitation period, the time spent in such prosecution may be excluded under Section 14(2) of the Limitation Act when computing limitation for filing an application under Section 7 of the I&B Code. The ruling clarifies that limitation objections must be raised before the Adjudicating Authority for consideration at the initial stage. No new precedent was established beyond the application of existing principles concerning limitation and exclusion of time in insolvency proceedings.
( 22nd NOVEMBER, 2019) JUSTICE JARAT KUMAR JAIN, MEMBER(JUDICIAL) The Appellants, in the present Company Appeal (AT) (Insolvency) No.672 of 2019 are the Directors of M/s Debi Fabtech Pvt Ltd, the Corporate Company Appeal (AT)(Insolvency) No.672 of 2019 Debtor against whom the Corporate Insolvency Resolution Process (for short CIRP) has been initiated and moratorium has been imposed from the date of the admission till the completion of CIRP by the impugned order passed by National Company Law Tribunal, Kolkata Bench vide their order dated 25.4.2019. The Appellants are Mr.Sesh Nath Singh and Mr. Akshay Kumar Singh, Directors of the Corporate Debtor i.e. M/s Debi Fabtech Pvt Ltd in the said appeal filed under Section 61 of the Insolvency & Bankruptcy Code (for short I&BC) 2016 r/w Section 7 of I&BC, 2016. The appellants have sought the following relief:-
a) To set aside the order dated 25.4.2019 passed by National Company Law Tribunal, Kolkata Bench initiating CIRP against the Corporate Debtor.
b) To stay the aforementioned order till disposal of the present Appeal and all further proceedings in the CIRP of the Corporate Debtor that has commenced in terms of the impugned order dated 25.4.2019.
2. The Financial Creditor (Respondent No.1 herein) granted cash credit facility of Rs. 1 crore to the corporate debtor vide sanction letter dated 12.2.2012. The Corporate Debtor execute agreement of hypothecation of book debts. The Corporate Debtor availed cash credit from time to time.
3. According to financial creditor, the corporate debtor committed default in paying financial debt. The account was declared NPA on 31.03.2013 on account of irregularities in payment by the corporate debtor. Demand Notice under Section 13(2) of SARFEASI Act, 2002 was issued on 18.01.2014. Thereafter on 13.2.2014 notice under Section 13(4) of SARFEASI Act, 2002 was issued to corporate debtor. On 19.12.2014 the Corporate Debtor filed a Company Appeal (AT)(Insolvency) No.672 of 2019 writ petition bearing No.33799(W) of 2014 against the financial creditor challenging the notice under Section 13(2) of SARFEASI Act, 2002. Honble Kolkata High Court by order dated 24.7.2017 restrained financial creditor from taking any steps against the corporate debtor under the SARFEASI Act, 2002 till further orders. Before that on 24.12.2014 possession notice under Section 13(4) of SARFEASI Act, 2002 alongwith Rule 9 of Security Interest (Enforcement) Rules 2002 has been issued against the corporate debtor and the possession order was issued on 11.5.2017 by the District Magistrate, Hooghly. On 27.8.2018, financial creditor has filed application under Section
7 of I&B Code before the Adjudicating Authority, NCLT, Kolkata Bench, Kolkata.
4. Learned Adjudicating Authority by its impugned order found that the corporate debtor did not dispute two facts that it has received loan from financial creditor and there is default in paying loan amount. Hence the application under Section 7 of I&B Code has been admitted and Corporate Insolvency Resolution Process against the corporate debtor has been ordered.
5. Learned counsel for the appellant submits that the account of Corporate Debtor was declared NPA on 31.03.2013 whereas the application under Section 7 of I&B Code has been filed on 27.08.2018 i.e. after about 5 years and 5 months from the date of accrual of cause of action. Honble Supreme Court in the case of B.K. Educational Services Pvt Ltd Vs Parag Gupta and Associates 2018 SCC OnLine SC 1921 held that the Limitation Act is applicable to applications filed under Section 7 and 9 of the Code from the inception of the Code, Article 137 of the Limitation Act gets attracted. The right to sue, therefore, accrues when a default occurs. If the default Company Appeal (AT)(Insolvency) No.672 of 2019 has occurred over three years prior to the date of filing of the application, the application would be barred under Article 137 of the Limitation Act.
6. It is also submitted that Honble Supreme Court in the recent judgement Vashdeo R Bhojwani Vs Abhyudaya Cooperative Bank Ltd ^ Anr, Civil Appeal No.11020 of 2018 decided on 2nd September, 2019 and Gaurav Hargovindbhai Dave Vs Asset Reconstruction Company (India) Ltd & Anr, Civil Appeal No.4952 of 2019 decided on 13th September, 2019 again held that Article 137 of the Limitation Act is applicable to Section
7 of the I&B Code and the intent of the I&B Code is not to give a new lease of life to debts which are already time barred. In this case the Respondent has filed the application under Section 7 of I&B Code on 27.08.2018 after about
5 years and 5 months from the date of accrual of cause of action i.e. 31.03.2013 whereas as per Article 137 of Limitation Act the application may be filed within three years from the date of accrual of cause of action i.e. till 30.03.2016. Thus the application filed under Section 7 of I&B Code is apparently time barred, therefore, the Adjudicating Authority has wrongly admitted the application. Hence the impugned order is liable to be set aside.
7. Learned counsel for the Respondent vehemently opposed the arguments and submitted that it is true that the account was declared NPA on 31.03.2013. Thereafter, the Respondent exercised his remedy under the existing law within the prescribed limit i.e. on 18.1.2014 demand notice under Section 13(2) of SARFEASI Act was issued to the corporate debtor and thereafter the respondent bonafidely prosecuted the application under the SARFEASI Act and ultimately he has got the possession order on 11.5.2017 Company Appeal (AT)(Insolvency) No.672 of 2019 issued by the District Magistrate, Hooghly. In the meanwhile the appellant/corporate debtor has filed the Writ Petition under Article 226 before the Honble Kolkata High Court on 19.12.2014 and on 24.7.2017 the Honble High Court of Kolkata ordered not to proceed under SARFEASI Act. Thereafter, the Respondent has filed the application under Section 7 of I&B Code on 27.08.2018. It is true that in the light of judgement of Honble Supreme Court in the case of B.K. Educational Services Pvt Ltd Vs Parag Gupta and Associates 2018 SCC OnLine SC 1921 that the application under Section 7 of the I&B Code be governed by Article 137 of the Limitation Act and within three years the Financial Creditor/respondent can file application. The respondent was quite vigilant in his rights and cannot be said that the respondent was negligent. He has bonafidely prosecuted his application under SARFEASI Act. Therefore, as per Section 14(2) of Limitation Act in computing the period of limitation the time during which the respondent has been prosecuting with due diligence another civil proceedings against the corporate debtor for the same relief shall be excluded. The period from 18.01.2014 (date of notice under Section 13(2) of SARFEASI Act) to 24.07.2017 (when the Kolkata High Court has passed the order against the Respondent), this period will be excluded and if this period of 3 years and 6 months is excluded then the application filed under Section 7 of the I&B Code is within limitation period.
8. We have considered the submissions of the learned counsel for the parties. Company Appeal (AT)(Insolvency) No.672 of 2019
9. The corporate debtor has taken a ground that the application under Section 7 of I&B Code is time barred in the appeal itself. Such ground is not agitated before the Adjudicating Authority. Therefore, there is no finding of Adjudicating Authority on this issue.
10. We have carefully examined the issue of limitation. The Respondent has bonafidely prosecuted within limitation period under SARFEASI Act. Therefore, the Respondent is entitled for the exclusion of time period under Section 14(2) of Limitation Act i.e. the period of 3 years and 6 months. After exclusion of this period the application filed under Section 7 of I&B Code is within limitation period.
11. In such circumstances we find that the application under Section 7 is within limitation and there is no force in the argument of Learned counsel for the Appellant that the application is time barred. No interference is called for. Hence the appeal is dismissed. No order as to costs. (Justice Jarat Kumar Jain) Member (Judicial) (Mr. Balvinder Singh) Member (Technical) (Dr. Ashok Kumar Mishra) Member (Technical) New Delhi
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