Limitation period for application for initiation of CIRP is three years from date of default

Limitation period for making application for initiation of CIRP is three years from date of default. IBC not a money recovery legislation for creditors – SC

ABACUS Case Law Citation
ABCAUS 3365 (2020) (08) SC

Important case law relied upon by the parties:
B. K. Educational Services Pvt. Ltd. vs. Paras Gupta & Associates: AIR 2018 SC 5601
Innoventive Industries Ltd. v. ICICI Bank: (2018) 1SCC 407
Sashidhar v. Indian Overseas Bank: 2019 SCC Online SC 257
Jignesh Shah and Anr. v. Union of India and Anr. 2019 SCC Online 1254

In the instant case, an appeal was filed by the director of the corporate debtor company u/s 62 of the Insolvency and Bankruptcy Code, 2016 (IBC 2016/The Code) against the judgment passed by the National Company Law Appellate Tribunal NCLAT) whereby, the NCLAT had rejected the contention that   the application made by the financial creditor u/s 7 of the Code, seeking initiation of Corporate Insolvency Resolution Process (CRIP) in respect of the debtor company was barred by limitation.

In the instant case, several lender banks under a consortium had sanctioned and extended various loans, advances and facilities to the corporate debtor.

The corporate debtor had executed various security  documents in favour of the lender banks in the years 2008 and 2009, including equitable mortgage against the facilities  obtained.    

One of the lender banks rephased/enhanced the facilities to the corporate debtor from time to time and lastly on 27.08.2010 wherefor, various additional security documents were   executed by the corporate debtor.  

The said lender bank had assigned to the financial creditor the rights in relations to debts of the corporate debtor by way of   an Assignment Agreement dated 30.03.2013; and a deed of modification of charge over the assets of the corporate debtor was also executed on 26.04.2013.

The account of the corporate debtor was classified as Non Performing Asset (NPA) in the accounts of various lending banks as early as on 08.07.2011.

On default of the corporate debtors in payment of the amount due against said loans/facilities, the matter travelled to the Debts Recovery Tribunal (DRT).

During the pendency of the proceedings before DRT, on 21.03.2018, the financial creditor moved an application before the Adjudicating Authority for initiation of CIRP in relation to the corporate debtor while stating its own capacity as the financial creditor, for being the assignee of loans and advances   disbursed by one of the lending banks to the corporate debtor.

Consequently, the application was admitted and an interim resolution professional (IRP) was appointed.

The appellant preferred an appeal before the NCLAT challenging the maintainability of the application. The matter travelled up to the Hon’ble High Court. However, in the remand proceedings, the NCLAT, by its impugned order held that neither the application made not the claim of the financial creditor was barred by limitation.

The NCLAT observed that the Code having come into force on 01.12.2016, the application made in the year 2018 was within limitation. The NCLAT assigned another reason that mortgage security having been provided by the corporate debtor, the limitation period of twelve years is available for the claim made by the financial creditor as per Article 61(b)3 of the Limitation Act, 1963 (Limitation Act) and hence, the application was within limitation period.

IBC not a money recovery legislation for creditors

The Hon’ble Supreme Court stated that Corporate Insolvency Resolution   Process under IBC is not intended to be adversarial to the corporate debtor but is essentially to protect its interests and the Code is not a mere money recovery legislation for the creditors.

Basics of Limitation under IBC 

The Hon’ble Supreme Court opined that when Section 238-A of the Code is read with the various consistent decisions of the Court, the following basics undoubtedly emerges:

(a) that the Code is a beneficial legislation intended to put the corporate debtor back on its feet and is not a mere money recovery legislation;

(b) that CIRP is not intended to be adversarial to the corporate debtor but is aimed at protecting the interests of the corporate debtor;

(c) that intention of the Code is not to give a new lease of life to debts which are time-barred;

(d) that the period of limitation for an application seeking initiation of CIRP under Section 7 of the Code is governed by Article 137 of the Limitation Act and is, therefore, three years   from the date when right to apply accrues;  

(e)  that the trigger for initiation of CIRP by a financial creditor   is default on the part of the corporate debtor, that is to say, that the right to apply under the Code accrues on the date when default occurs;

(f) that default referred to in the Code is that of actual non payment by the corporate debtor when a debt has become   due and payable;  and  

(g)  that if default had occurred over three years prior to the date of filing of the application, the application would be time-barred save and except in those cases where, on facts, the delay in filing may be condoned; and

(h) an application under Section 7 of the Code is not for enforcement of mortgage liability and Article 62 of the Limitation Act does not apply to this application.

Satisfaction of Adjudicating Authority must as to occurrence of ‘default’ before admitting application

The Apex Court stated that after completion of all other requirements, for admitting such an application of the financial creditor, the AA has to be satisfied, as per sub-section (5) of Section 7 of the Code, that “default” has occurred and, in this process of consideration by the AA, the Corporate Debtor is entitled to point out that default has not occurred in the sense that the “debt”, which may also include a disputed claim, is not due. A debt may not be due if it is not payable in law or in fact.

Limitation period for making application for initiation of CIRP is three years from date of default

The Hon’ble Supreme held that the application made by   the financial creditor under Section 7 of the Code in the month of March 2018, seeking initiation of CIRP in respect of the corporate debtor with specific assertion of the date of default as 08.07.2011, was clearly barred by limitation for having been filed much later than the  period of three years from the date of   default as stated in the application.

Accordingly, the Hon’ble Supreme Court set aside the orders passed by the NCLT and NCLAT and rejected the application filed by the financial creditor being barred by limitation.

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