2021 (3) TMI 1183 - SC - Insolvency and Bankruptcy

Supreme Court Confirms IBC Application Timely Filed, Limitation Act Applies

The Supreme Court upheld the NCLAT's decision, dismissing the appeal and confirming that the application under Section 7 of the IBC was filed within the ... Initiation of corporate insolvency resolution process by financial creditor under Section 7 of the Insolvency and Bankruptcy Code - Application of the Limitation Act to IBC proceedings by virtue of Section 238A - Condonation of delay under Section 5 of the Limitation Act - Exclusion of time for proceedings bona fide in a forum without jurisdiction under Section 14 of the Limitation Act - Proceedings under the SARFAESI Act as civil proceedings qualifying for exclusion under Section 14 - Scope of exclusion when earlier proceedings are stayed or pending - Rejection of contrary NCLAT precedent (Ishrat Ali) on non-application of Section 14 to SARFAESI proceedingsCondonation of delay under Section 5 of the Limitation Act - Application of the Limitation Act to IBC proceedings by virtue of Section 238A - Whether delay beyond three years in filing an application under Section 7 of the IBC can be condoned in the absence of a formal application under Section 5 of the Limitation Act. - HELD THAT: - Section 238A makes the Limitation Act applicable to proceedings under the IBC 'as far as may be', and Article 137 prescribes a three year period from the date of default. The Court held that Section 5 confers a discretionary power to condone delay where sufficient cause is shown and that filing a separate formal application under Section 5 is not a mandatory pre-condition to the exercise of that discretion. While courts may require an affidavit or materials showing cause, the absence of a formal written application does not oust the authority to condone delay if the record discloses sufficient cause. The exercise of discretion under Section 5 must be guided by established principles, construing 'sufficient cause' liberally to advance substantial justice while balancing legitimate rights created by limitation. (See paras 58-66, 59, 61-65.) [Paras 58, 59, 63, 64, 65]Delay beyond three years may be condoned under Section 5 even if no formal written application under Section 5 is filed, provided sufficient cause is shown and the court exercises its discretion on the materials before it.Exclusion of time for proceedings bona fide in a forum without jurisdiction under Section 14 of the Limitation Act - Proceedings under the SARFAESI Act as civil proceedings qualifying for exclusion under Section 14 - Scope of exclusion when earlier proceedings are stayed or pending - Whether Section 14 of the Limitation Act applies to applications under Section 7 of the IBC and whether time spent prosecuting proceedings under the SARFAESI Act can be excluded even where those proceedings were stayed and pending. - HELD THAT: - Section 238A brings the Limitation Act into play for IBC proceedings 'as far as may be'. The Court held that Section 14 applies to applications under Section 7 of the IBC, and that proceedings under the SARFAESI Act qualify as 'civil proceedings' for the purposes of Section 14 because they involve assertion of civil rights and are amenable to judicial review and appeals (including to the DRT). The conditions for exclusion under Section 14 - bona fide prosecution, due diligence, same relief and prosecution in a forum unable to entertain the suit for defect of jurisdiction or the like - must be satisfied. The Explanation to Section 14, which counts the day of institution and termination for exclusion, is clarificatory and does not preclude exclusion while earlier proceedings are stayed; exclusion is limited to the period legitimately spent in prosecuting the earlier proceeding. In the present case the financial creditor initiated SARFAESI proceedings in good faith and diligently, possession was taken and thereafter the High Court granted an interim stay on prima facie jurisdictional grounds; consequently the time spent since institution of the SARFAESI proceedings up to the filing under Section 7 could be excluded and, on that basis, the Section 7 application was within limitation. The Court also rejected the NCLAT larger bench view in Ishrat Ali that Section 14 cannot apply to SARFAESI proceedings. (See paras 65-76, 70-76, 77-87, 96-101.) [Paras 81, 84, 86, 87, 101]Section 14 applies to Section 7 IBC applications; time spent prosecuting bona fide SARFAESI proceedings may be excluded when computing limitation, and exclusion can extend up to the period during which such proceedings were pursued or effectively impeded (for example by a stay).Final Conclusion: The NCLAT and NCLT orders admitting the financial creditor's application under Section 7 are sustained. The Supreme Court held that the Limitation Act applies to IBC proceedings 'as far as may be', Section 5 discretion to condone delay may be exercised even without a formal Section 5 application where sufficient cause is shown, and Section 14 permits exclusion of time spent prosecuting bona fide SARFAESI proceedings (including periods during which those proceedings were stayed), rendering the Section 7 petition within limitation; the appeal is dismissed. Issues Involved:1. Whether delay beyond three years in filing an application under Section 7 of IBC can be condoned without an application for condonation of delay under Section 5 of the Limitation Act, 1963.2. Whether Section 14 of the Limitation Act, 1963 applies to applications under Section 7 of the IBC and if the exclusion of time under Section 14 is available only after the proceedings before the wrong forum terminate.Detailed Analysis:Issue 1: Condonation of Delay Beyond Three YearsThe court examined whether the delay beyond three years in filing an application under Section 7 of the IBC can be condoned without a formal application under Section 5 of the Limitation Act. It was observed that Section 238A of the IBC makes the provisions of the Limitation Act applicable to proceedings before the NCLT and NCLAT 'as far as may be.' The court noted that Section 5 of the Limitation Act does not mandate a formal application for condonation of delay, allowing the court to condone delay if sufficient cause is shown. The court emphasized that the expression 'sufficient cause' should be construed liberally to advance substantial justice, and acceptance of the explanation for delay should be the rule rather than the exception, provided no negligence or inaction can be imputed to the defaulting party.Issue 2: Application of Section 14 of the Limitation ActThe court analyzed whether Section 14 of the Limitation Act, which provides for the exclusion of time spent in prosecuting a case in a wrong forum, applies to applications under Section 7 of the IBC. The court held that Section 14 applies to IBC proceedings as the IBC does not exclude the operation of Section 14. The court clarified that Section 14 excludes the time spent in bona fide prosecution of proceedings in a wrong forum, which is unable to entertain the case due to defect of jurisdiction or other similar reasons.The court addressed the argument that Section 14 requires the earlier proceedings to have ended before its benefit can be claimed. It was held that the substantive provisions of Section 14 do not mandate that the earlier proceedings must have terminated; rather, the explanation to Section 14 merely restricts the period of exclusion to the time between the initiation and termination of the earlier proceedings.The court also discussed the nature of proceedings under the SARFAESI Act, concluding that they qualify as 'civil proceedings' under Section 14 of the Limitation Act. It was noted that proceedings under the SARFAESI Act, though initiated without court intervention, involve judicial processes and are appealable to the DRT, thus fitting within the ambit of civil proceedings.The court rejected the argument that proceedings under the SARFAESI Act do not qualify for exclusion under Section 14 because they are not conducted in a civil court. It was held that the expression 'court' in Section 14(2) should be interpreted broadly to include any forum for civil proceedings, including tribunals and forums under the SARFAESI Act.Conclusion:The Supreme Court dismissed the appeal, upholding the NCLAT's decision that the application under Section 7 of the IBC was within the limitation period after excluding the time spent in proceedings under the SARFAESI Act. The court emphasized that the provisions of the Limitation Act apply to IBC proceedings to the extent feasible, and the principles of Section 14 can be invoked to grant relief even if Section 14 does not strictly apply. The judgment clarified that the benefit of Section 14 is available even if the earlier proceedings have not formally ended, provided they were stayed by a court for want of jurisdiction.