Supreme Court Settles the Law on the Interplay Between the IBC and the Limitation Act
[Paridhi and Yagya are students at Institute of Law, Nirma University, Ahmedabad.]
On 22 March 2021, the Supreme Court (SC) in Sesh Nath Singh and Another v. Baidyabati Sheoraphuli Co-Operative Bank Limited and Another decided the question of applicability of the Limitation Act 1963 (Limitation Act) to the Insolvency and Bankruptcy Code 2016 (Code / IBC). In the instant case, the issue was whether a financial creditor could have initiated proceedings under the Code seven years after the debt had become due, when the delay was on account of previous proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act 2002 (SARFAESI Act).
The applicability of Section 14 (2) of the Limitation Act was considered. Section 14(2) of the Limitation Act provides for the exclusion of the time spent in bona fide proceeding in a court without jurisdiction, for the purpose of computing the limitation period for any application. Applying the provision, the National Company Law Appellate Tribunal (NCLAT) had held that the proceedings were initiated within the period of limitation. On appeal, the SC was approached, and it held that Section 14 of the Limitation Act will be applicable to an application filed under Section 7 of IBC. This article discusses the issue of applicability of Section 14 of the Limitation Act to applications under Section 7 of the IBC. It also argues that a proceeding under the SARFAESI Act is a 'civil proceeding' within the meaning of Section 14 of the Limitation Act.
The court, in order to determine the applicability of the Limitation Act to the IBC, went on to observe the provisions of the two laws. Under the IBC, the application of the Limitation Act was incorporated by way of an amendment introducing Section 238A within the IBC, which provides that “the provisions of the Limitation Act shall, as far as may be, apply to the proceedings or appeals before the NCLT/NCLAT.” Prior to introduction of Section 238A, the NCLAT in the case of Neelkanth Township and Construction Private Limited vs. Urban Infrastructure Trustees Limited held that the provisions of the Limitation Act are not applicable to the Code. The decision was appealed before the SC, wherein the appeal was dismissed. The question of application of the Limitation Act to the Code was left open, leaving the law unsettled. However, eventually, a clarificatory amendment was brought about by the Insolvency and Bankruptcy (Second Amendment) Act 2018.
Further, the court observed that no specific period of limitation has been prescribed under the Limitation Act vis-a-vis the IBC. Therefore, the period of limitation for making an application under Sections 7 or 9 of the IBC is 3 years, following the residuary provision of Article 137 in the schedule to the Limitation Act. In Gaurav Hargovindbhai Dave v. Asset Reconstruction Company (India) Private Limited, this position of law was categorically stated.
Issue of Applicability of Section 14 of the Limitation Act
In order to decide this question, the court drew a parallel with the applicability of Section 14 of the Limitation Act to an application under the Arbitration and Conciliation Act 1996 (A&C Act). The court transposed the reasoning adopted in such applications and observed that the provisions of the Limitation Act are applicable to applications under the A&C Act by virtue of Section 43. The said section provides that the Limitation Act shall be applicable to arbitrations as it applies to court proceedings. Additionally, in the absence of an express provision excluding the application of Section 14 of the Limitation Act to the A&C Act, there was no reason why Section 14 should not be applicable to arbitrations, and that a party is legitimately entitled to exclusion of time spent in prosecuting proceedings in good faith in the wrong forum. The court stated that, similarly, Section 238A of the IBC provides for the application of the provisions of the Limitation Act, ‘as far as may be’, and in the absence of an express provision excluding the application of Section 14 of the Act to the IBC, there is no reason why Section 14 must not be applied to the IBC.
Conundrum of ‘Courts’ and ‘Quasi-Judicial Tribunals’
Section 14(2) of the Limitation Act excludes the time for which the applicant has been prosecuting, with due diligence, another civil proceeding, whether in the court of first instance or of appeal or revision. The conditions precedent for exclusion under this section are: (a) the earlier proceedings were against the same party; (b) the earlier proceedings were for the same relief; (c) they were prosecuted with diligence and good faith; and (d) the proceedings were prosecuted in a forum which could not entertain it for want of jurisdiction, or any other defect of like nature.
The SC has spelt out, in Consolidated Engineering Enterprises v. Principal Secretary, Irrigation Department, the conditions stated above for the application of Section 14, including the requirement that ‘both the proceedings are in a court’, which creates room for controversy. It brings to the fore the issue whether the provisions of Section 14 of the Limitation Act would be applicable to ‘quasi-judicial forums’ as against ‘courts.’ This issue came up for consideration in the case of MP Steel Corporation v. Commissioner of Central Excise, wherein the SC held that “the word ‘court’ in section 14 takes its colour from preceeding terms ‘civil proceedings’. It was held that the section would not be applied to appeals before a quasi-judicial Tribunal”.
However, the court further observed that this finding does not conclude the issue and held that even when Section 14 may not apply, the principles on which Section 14 is based shall apply by virtue of them being the principles advancing the cause of justice. This application of principles of Section 14 can be seen in the case of J. Kumardasan Nair vs. Iric Sohan. Further, in the case of Consolidated Engineering Enterprises, it was observed that in considering the provisions of Section 14, proper approach must be adopted in interpreting the provisions in a way that such interpretation advances the cause of justice rather than aborting proceedings. The SC recently, in Kalpraj Dharamshi and Another v. Kotak Investment Advisors Limited and Another, endorsed the above decisions.
It must be noted that the exclusion of time under Section 14 is mandatory, given its pre-requisites are met. The purpose of Section 14 is to grant relief to a party who has bona fide committed some mistake.
‘As Far As May Be’ under Section 238A of the IBC
By virtue of Section 238A, the provisions of the Limitation Act are applicable to the proceedings under the IBC, ‘as far as may be’. The legislative intent behind inserting the terms ‘as far as may be’ is to prevent the verbatim and literal application of the provision of the Limitation Act to the IBC and allow such application to the extent the same may be feasible. Emphasis is placed on the harmonious interpretation between the object of the statute and the intention of the legislature.
Applying this rule of interpretation to Section 238A, the terms ‘as far as may be’, according to the court, “tones down the rigors of the word ‘shall’ that indicates ‘mandatory’”. The expression, therefore, means that any or all provisions of the Limitation Act shall apply to the proceedings before the Adjudicatory Authority under the IBC only to the extent they are not ‘patently inconsistent’ with the provisions of the IBC.
In the present case, while commenting on the literal interpretation of Section 14 to allow exclusion only for ‘civil proceedings’ held in ‘courts’, the court disagreed with the corporate debtor that relied on the decision of NCLAT in the case of Ishrat Ali v. Cosmos Cooperative Bank Limited and Another, wherein it was held that “any proceeding by a financial institution under section 13(4) of the SARFAESI Act is not a proceeding before a court of law or a tribunal, therefore, such proceeding shall not be taken into consideration for excluding the time period under Section 14(2) of the Limitation Act.” It is pertinent to note that an appeal against Ishrat Ali is pending before the Supreme Court [Civil Appeal 2209 of 2020].
However, the court in the instant case held the NCLAT decision to be unsustainable in law. It reasoned that proceedings under SARFAESI are indeed ‘civil proceedings’, by noting that “even though Section 13 of the SARFAESI Act enables a secured creditor to enforce security interest created in its favour, without the intervention of the Court or Tribunal, the SARFAESI Act does not exclude the intervention of Courts and/or Tribunals altogether”. Further, for the purpose of IBC, keeping in mind the scope and ambit of proceedings therein before the NCLT/NCLAT, the court held that the expression ‘court’ in Section 14(2) must be interpreted liberally, and would be deemed to be any forum for a civil proceeding including any tribunal or any forum under the SARFAESI Act.
The instant case is of a much wider significance, as it elucidates the scope of Section 238A and interprets the application of Section 14 of the Limitation Act to the IBC. Most importantly, the court took the opportunity to rectify the decision of NCLAT in the case of Ishrat Ali, wherein the appellate authority departed from the ruling in the case of Sesh Nath Singh v. Baidyabati Sheoraphuli Cooperative Bank Limited and Others without providing any detailed reasoning supporting its decision. The Ishrat Ali case was a missed opportunity, wherein the NCLAT could have clarified the jurisprudence pertaining to IBC, SARFAESI Act, and the Limitation Act. With this decision, the position of law stands corrected.