SC gives purposive interpretation to section 238A of IBC:

Time lost in SARAFESI proceedings can be excluded from limitation period for IBC initiation

-By Sikha Bansal and Urmil Shah [resolution@vinodkothari.com]

The recent ruling of Supreme Court (SC) in Sesh Nath Singh v. Baidyabati Sheoraphuli Co-Operative Bank Ltd., Civil Appeal No. 9198 of 2019 (Ruling) partially addresses the persistent debate on the interplay between the Limitation Act, 1963 (‘Limitation Act’) and the Insolvency and Bankruptcy Code, 2016 (‘IBC’).

The central issue involved in the case was – the financial creditor had initiated SARFAESI proceedings against the corporate debtor years back when the default occurred.  Later, while the SARFAESI proceedings were still pending before the High Court (which prima facie viewed that the financial creditor, being a co-operative bank, could not invoke the provisions of SARFAESI), the financial creditor filed for insolvency proceedings under section 7 of IBC against the corporate debtor. Such application was filed after a lapse of 3 years from the default. Hence, the corporate debtor objected the initiation of insolvency on grounds of the application being barred by limitation.

SC, however, read the expression “as far as maybe” as used in section 238A of IBC as a conscious choice of words by the legislature. As such, the words are to be understood in the sense in which they best harmonise with the subject matter and object to the legislation. These words permit a wider, more liberal, contextual, and purposive interpretation by necessary modification.  Therefore, section 5, 14, and even section 18 of the Limitation Act would apply to proceedings under IBC.

The article below notes the important observations of SC, along with the authors’ insights.

Clarity on applicability of section 18 of the Limitation Act

Though the section could not be invoked in the instant case; at the outset, it would be interesting to note that the Ruling unequivocally upholds the applicability of section 18 of the Limitation Act to IBC proceedings. Therefore, an acknowledgment of debt, made before the expiry of limitation, would refresh the limitation period, even for the purpose of initiating IBC proceedings.

Notably, the SC, in Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries Pvt. Ltd. & Anr., denied the benefit of section 18 to the creditor. In a related article, it was noted that the common judicial perception allowing applicability of section 18 and opined that the said ruling must be read in light of the given facts and shall not be seen as a last word on the issue. The Ruling in Sesh Nath case reinforces the view and settles the dust around section 18.

Applicability of Section 14 of Limitation Act

Section 14(2) of the Limitation Act excludes the time period spent by the petitioner in computing the period of limitation for any application, subject to the followjng essentials –

• civil proceedings have been initiated with due diligence and in good faith.
• proceedings initiated against the same party for the same relief.
• the Court, from defect of jurisdiction or other cause of a like nature, is unable to entertain

In the instant case, SC ruled in favour of applying section 14, observing the following –

• SARFAESI proceedings are civil proceedings[1]
• The proceedings have been stayed by the High Court on the prima facie satisfaction that the proceedings initiated by the financial creditor, which is a cooperative bank[2], was without jurisdiction.
• Keeping in mind the scope and ambit of proceedings under IBC before NCLT/NCLAT, the expression ‘Court’ in section 14 would be deemed to be any forum for a civil proceeding including any Tribunal or any forum under SARFAESI.
• The substantive provisions of section 14 do not say that section 14 can only be invoked on termination of the earlier proceedings, prosecuted in good faith. Explanation to section 14 of the Limitation Act cannot be construed in a narrow pedantic and the explanation is merely clarificatory in nature.
• While the NCLT under IBC is not a substitute forum for collection of debt, or for resolving disputes; however, the ultimate objective of an application under IBC is realisation of debt by invoking corporate insolvency resolution process.
• Section 14 has to be interpreted liberally to advance the cause of justice and would also be applicable in cases of mistaken remedy or selection of a wrong forum.[3]

Hence, pursuant to the broad-based provision of Section 238A and in absence of any express exclusion of provisions of Limitation Act, section 14 must apply to proceeding under Section 7 or Section 9 of the IBC.

Notably, the SC called for a liberal interpretation and application of  the ‘principles’ of section 14, that to hold that only civil proceedings in Court would enjoy exclusion u/s 14, might defeat the legislative intent (see, paras 95 and 102). Thus, even if in cases where section 14 does not strictly apply, the principles of section 14 can be invoked to grant relief to a party under section 5 of the Limitation Act (as discussed below). Hence section 14 and section 5 are not mutually exclusive.

“Sufficient cause” under section 5 of Limitation Act

Section 5 of the Limitation Act gives the Courts the discretion to entertain appeals filed after the prescribed period of limitation on case-by-case basis on the ground of sufficient cause.[4] The Supreme Court has time and again held that the expression ‘sufficient cause’ must be construed liberally to advance substantial justice[5], which being a factual exercise for which there cannot be any straight jacket formula. Acceptance of explanation should be the ‘rule’, and refusal an ‘exception’, when no negligence or inaction or want of bona fides can be imputed to the defaulting party.

Neither there is any requirement for a formal application to be made for condonation of delay, and there is no bar on exercise of judicial mind in absence of any formal application.

Closing Thoughts

There have been precedents facilitating initiation of IBC proceedings, even when SARFAESI/RDBA proceedings are pending – see, Rakesh Kumar Gupta v. Mahesh Bansal[6], and Punjab National Bank v. Vindhya Cereals Pvt. Ltd.[7] However, this judgment of SC comes as an additional relief for creditors otherwise stuck in protracted SARFAESI or other realisation proceedings. The SC gave a purposive interpretation to the words ‘as far as may be’ as used in section 238A of IBC, which must be understood in the sense in which they best harmonise with the subject matter and object of the legislation.

[1] Relying on S.A.L. Narayan Rao v. Ishwarlal Bhagwandas, AIR 1965 SC 1818 and disagreeing with Ishrat Ali v. Cosmos Cooperative Bank Limited, Company Appeal (AT) (Insolvency) No. 1121 of 2019.

[2] Note, the Supreme Court, in Pandurang Ganpati Chaugule v. Vishwasrao Patil Murgud Sahakari Bank Limited, vide judgment dated 5^th May, 2020, has already upheld the applicability of SARAFESI Act to co-operative banks.

[3] Commissioner, M.P. Housing Board v. Mohanlal & Co, (2016) 14 SCC 199.

[4] Ramlal Motilal and Chhotelal v. Rewa Coalfields Ltd, AIR 1962 SC 361.

[5] State of West Bengal v. Administrator, Howrah Municipality, (1972) 1 SCC 366.

[6] Company Appeal (AT) (Insolvency) No. 1408 of 2019

[7] Company Appeal (AT) (Insolvency) No. 854 of 2019