2020 (8) TMI 345 - SC - Insolvency and Bankruptcy

Supreme Court rules time-barred application under Insolvency Code, emphasizes limitation period

The Supreme Court ruled that the application filed by the financial creditor under Section 7 of the Insolvency and Bankruptcy Code was time-barred as it ... Applicability of the Limitation Act to applications under Section 7 of the IBC - Article 137 of the Limitation Act (residuary period for applications) - date of accrual of right to apply - date of default - Section 18 Limitation Act - acknowledgment in writing - irrelevance of date of commencement of the IBC as trigger for limitation - inapplicability of Articles relating to suits for immovable property to Section 7 applicationsApplicability of the Limitation Act to applications under Section 7 of the IBC - Article 137 of the Limitation Act (residuary period for applications) - date of accrual of right to apply - date of default - Whether the Section 7 application is within limitation - HELD THAT: - The Court held that the Limitation Act applies to Section 7 applications and that Article 137 (Part II of Third Division - residuary 'other applications') governs limitation for such applications. The right to apply accrues on the date of default; where default occurred more than three years prior to filing, the Section 7 application is time barred unless delay is condoned under the Limitation Act. Applying these principles to the admitted averment in the Section 7 application that the date of default was 08.07.2011 and the application was filed in March 2018, the Court found the application barred by limitation and liable to be rejected. [Paras 23, 24, 30, 31, 38]The Section 7 application is barred by limitation and is rejected.Section 18 Limitation Act - acknowledgment in writing - effect of pleaded acknowledgments on limitation - Whether Section 18 (acknowledgment) operated to extend limitation in this case - HELD THAT: - The Court observed that Section 18 can extend limitation where an acknowledgment in writing is pleaded and proved, but emphasised that such facts must be pleaded in the application and supported by evidence. In this case the Section 7 application expressly stated the date of default as 08.07.2011 and contained no pleading or evidence of any written acknowledgment or fresh date of default. Consequently the respondents could not invoke Section 18 to revive or extend limitation and the Court declined to permit after the fact reliance on acknowledgment not pleaded in the application. [Paras 32, 33, 34]Section 18 does not assist the respondent because no acknowledgement was pleaded or relied upon in the Section 7 application.Irrelevance of date of commencement of the IBC as trigger for limitation - inapplicability of Articles relating to suits for immovable property to Section 7 applications - Validity of NCLAT's alternate reasons that the right to apply accrued on 01.12.2016 or that mortgage limitation (12 years) applies - HELD THAT: - The Court disapproved NCLAT's reasoning that the right to apply arose only on commencement of the Code (01.12.2016) and that Articles applicable to suits on immovable property (e.g., Article 61/62) govern a Section 7 application. The Court reiterated that neither the Code nor the Limitation Act supports treating the date of the Code's commencement as the trigger, and that applications under Section 7 are not applications to enforce mortgage rights; Article 137, not mortgage related Articles, applies. The Appellate Tribunal's reliance on those alternate grounds was held to be legally unsound. [Paras 10, 35, 36, 37]NCLAT's reasons that limitation began on 01.12.2016 or that mortgage suit limitation applies are rejected as contrary to law.Final Conclusion: The appeal is allowed. The orders admitting the Section 7 application are set aside and the Section 7 application is rejected as barred by limitation; all proceedings flowing from its admission, including appointment of IRP and the moratorium, are annulled. Nothing decided herein affects other pending proceedings on their merits. Issues Involved:1. Limitation Period for Filing Application under Section 7 of the Insolvency and Bankruptcy Code (IBC).2. Applicability of Section 18 of the Limitation Act, 1963.3. Date of Default and its Impact on Limitation.4. Effect of Mortgage on Limitation Period.5. Relevance of Other Proceedings and Acknowledgments.Detailed Analysis:1. Limitation Period for Filing Application under Section 7 of the Insolvency and Bankruptcy Code (IBC):The primary issue in this case is whether the application made by the financial creditor under Section 7 of the IBC is barred by limitation. The Supreme Court reiterated that the period of limitation for such applications is governed by Article 137 of the Limitation Act, 1963, which prescribes a limitation period of three years from the date when the right to apply accrues. The Court emphasized that the right to apply under the IBC accrues on the date when default occurs. Therefore, if the default occurred more than three years before the filing of the application, the application would be time-barred unless there is a basis for condonation of delay.2. Applicability of Section 18 of the Limitation Act, 1963:The respondents contended that the acknowledgment of debt in the balance sheets and annual reports of the corporate debtor extended the period of limitation under Section 18 of the Limitation Act. However, the Court noted that the application filed by the financial creditor specifically mentioned the date of default as 08.07.2011, without any reference to acknowledgment or any other date of default. The Court held that the question of limitation is a mixed question of law and facts, and relevant facts must be pleaded and evidence adduced. Since the financial creditor did not plead acknowledgment in the application, the benefit of Section 18 could not be availed.3. Date of Default and its Impact on Limitation:The financial creditor stated the date of default as 08.07.2011 in the application under Section 7 of the IBC. The Court held that the limitation period of three years began to run from this date. Since the application was filed in March 2018, it was beyond the prescribed limitation period and therefore barred by limitation. The Court emphasized that the date of default is crucial in determining the limitation period, and the financial creditor failed to provide any other date of default or acknowledgment to extend the limitation period.4. Effect of Mortgage on Limitation Period:The National Company Law Appellate Tribunal (NCLAT) had held that the period of limitation for recovery of possession of mortgaged property is twelve years, and therefore, the claim was not barred by limitation. The Supreme Court disapproved this reasoning, stating that an application under Section 7 of the IBC is not for enforcement of mortgage liability and Article 62 of the Limitation Act, which provides a twelve-year limitation period for suits relating to mortgages, does not apply. The Court reiterated that the limitation period for an application under Section 7 is governed by Article 137 of the Limitation Act, which prescribes a three-year limitation period.5. Relevance of Other Proceedings and Acknowledgments:The Court noted that at the time of filing the application under Section 7 of the IBC, a petition under Section 19 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, was pending before the Debt Recovery Tribunal (DRT). The Court clarified that the pendency of other proceedings does not affect the limitation period for filing an application under the IBC. The Court also observed that the acknowledgment of debt in the balance sheets and the request for one-time settlement (OTS) made by the corporate debtor in July 2018 were not pleaded in the application under Section 7 and therefore could not be considered for extending the limitation period.Conclusion:The Supreme Court allowed the appeal, set aside the orders of the NCLAT and the National Company Law Tribunal (NCLT), and rejected the application filed by the financial creditor under Section 7 of the IBC as being barred by limitation. The Court emphasized that the limitation period for such applications is three years from the date of default, and in this case, the application was filed beyond the prescribed period. Consequently, all proceedings undertaken in the said application, including the appointment of the Interim Resolution Professional (IRP), were annulled.