Interpretation of Section 5 and 14 of the Limitation Act in Section 7 Application under IBC

The Supreme Court (“SC”) in its recent judgment in Sesh Nath Singh & Anr. v. Baidyabati Sheoraphuli Co-operative Bank Ltd. & Anr.¹ without interfering with the orders passed by National Company Law Tribunal, Kolkata bench (“NCLT”), confirmed by National Company Law Appellate Tribunal (“NCLAT”), interpreted Section 5 and 14 of the Limitation Act, 1996 (“Act”) along with Section 238A of the Insolvency and Bankruptcy Code (“Code”), in the light of facts and circumstances of the case before it. The said judgment is the outcome of an appeal preferred against the judgment and order of NCLAT, which dismissed the appeal, challenging the admission order passed by the NCLT in Section 7 Application for initiation of Corporate Insolvency Resolution Process (“CIRP”) of the Corporate Debtor (“CD”).

In the instant case, the Financial Creditor had granted certain cash credit facility (“Facility”) to the CD for which hypothecation agreement was executed. Pursuant to the account of the CD turning Non-Performing Asset (“NPA”) on March 31, 2013, the Financial Creditor issued a notice under Section 13 (2) and 13(4) (a) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”) on January 18, 2014 and December 13, 2014 respectively (“SARFAESI Notices”). The CD filed a writ petition challenging SARFAESI notices. During the pendency of the writ petition, District Magistrate passed an order for granting possession of the hypothecated assets to the Financial Creditor. On July 24, 2017, the Calcutta High Court (“Cal HC”) passed an interim order restraining the Financial Creditor from taking steps against the CD under the SARFAESI Act. During the operative stay of the interim order (July / August 2018), the Financial Creditor filed a Section 7 Application.

Before NCLT, the CD contended that the maintainability of SARFAESI proceedings were pending before the Cal HC and challenged Section 7 Application on the ground that the Special Officer appointed as administrator over the Financial Creditor was only to hold elections and such officer did not have any authority to initiate Section 7 Application. NCLT admitted the Section 7 Application, appointed interim resolution professional and declared moratorium. Being aggrieved by the NCLT order, the CD preferred an appeal before NCLAT, challenging the NCLT order on the ground that Section 7 Application was barred by limitation as the account of the Corporate Debtor was declared an NPA on March 31, 2013 whereas Section 7 Application was filed in July/ August 2018. The NCLAT dismissed the Appeal with the observation that the ground of limitation was raised for the first time in appeal and examined the issue of limitation. The NCLAT held that since the Financial Creditor had initiated proceedings against the CD under SARFAESI Act within limitation period, it was entitled for exclusion of time under Section 14 (2) of the Act. The CD further challenged the NCLAT order before SC by preferring the present appeal.

The issues for consideration before the SC were :-

• Whether delay beyond three years in filing Section 7 Application can be condoned, in absence of an application for condonation of delay under Section 5 of the Act; and
• Whether Section 14 of the Act, applies to Section 7 Application? If so, is the exclusion of time under Section 14 available only after the proceedings before the wrong forum is terminated?

The apex court re-iterated that Section 238A of the Code makes the Act applicable ‘as far as may be’ to proceedings in the NCLT and the NCLAT. The words “as far as may be’ is to be harmoniously construed with Section 14 of the Act. The phrase “as far as may be”, is indicative that provisions of the Act will apply to the proceedings before the NCLT and the NCLAT to the extent feasible and would not apply only if there was any inconsistency in the provision of the Act read with the Code. The Court inter alia observed that the Explanation (a) to Section 14 of the Act cannot be construed in a narrow pedantic manner to mean that Section 14 can never be invoked unless the earlier proceedings have actually been terminated for want of jurisdiction or any other cause. The Court added that the Explanation (a) to Section 14 is clarificatory in nature and that it only restricts the period of exclusion to the date of initiation and the date of termination. In the present case, the Court observed that the proceedings under SARFAESI were not formally terminated but were stayed by the High Court and the interim order was operative when Section 7 Application was filed before the NCLT. Therefore, the entire proceeding period under the SARFAESI Act till filing of Section 7 Application can be excluded. The Court also clarified that Section 7 Application was within the limitation period of three years. The Court further observed that in terms of Section 5 of the Act, the delay can be condoned if there are material on record disclosing sufficient cause for such delay, irrespective of a formal application seeking condonation of delay is filed or not.

This judgment has highlighted the basic legal principles which can be of assistance for subject matter other than the proceedings under the Code. The principles inter alia includes –

• unless there are apparent errors, courts would not interfere with the orders of the lower court;
• the provisions of the Act are to be harmoniously construed to aid the purpose of the Act;
• Explanation (a) of Section 14 of the Act is clarificatory in nature and that does not restrict the period of exclusion from the date of initiation until the date of termination. Pending proceedings / interim stay orders are also to be considered; and
• mandatory requirement for delay condonation is material on record disclosing sufficient cause and not a formal application seeking condonation of delay.

Pertinently, the plea that Section 7 Application was barred by the Act was not challenged before the NCLT but the same was challenged before the Appellate Courts i.e., the NCLAT and the SC. Despite, the aforesaid, the NCLAT and the SC analyzed if Section 7 Application was barred by the Act, restricting its scope to interpretation of the aforesaid provisions and confirmed the orders passed by NCLT and NCLAT.