Case number: Civil Appeal No. 6347 of 2019

Judges name: Hon’ble Justice Dinesh Maheshwari, J and A.M. Khanwilkar, J

Order dated: 14^th August, 2020

Facts of the Case:

On 22.12.2007, the lender banks viz., Corporation Bank, Indian Overseas Bank and Bank of India sanctioned and extended various loans, advances and facilities to the corporate debtor viz., Veer Gurjar Aluminium Industries Pvt. Ltd., who was engaged in manufacturing of aluminium ingots from aluminium scrap. The corporate debtor executed various security documents in favour of the lender banks in the years 2008 and 2009, including those of equitable mortgage against the facilities so obtained. The Corporation Bank proceeded to rephase/enhance the facilities to the corporate debtor from time to time and lastly on 27.08.2010 wherefore, various additional security documents were executed by the corporate debtor. It has been asserted by the Respondent No. 2 that the Corporation Bank had assigned to it the rights in relations to debts of the corporate debtor by way of 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 corporate debtor having defaulted in payment of the amount due against such loans, advances and facilities, its account with Corporation Bank was classified as Non-Performing Asset10 on 08.07.2011 and that with Indian Overseas Bank was classified as NPA on 05.08.2011. Then, on 15.11.2011, demand notice Under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 was issued by Indian Overseas Bank to the corporate debtor and its guarantors. These steps were followed up with recovery proceedings against the corporate debtor by the consortium of lenders and Respondent No. 2 in OA No. 172/2013 before the Debts Recovery Tribunal, Aurangabad Under Section 19 of the Recovery of Debts Due to the Banks and Financial Institution Act, 1993.

When the proceedings were pending before the DRT, the JM Financial Assets Reconstruction Company Pvt. Ltd  as a financial Creditor moved an application before the Adjudicating Authority Under Section 7 of the Code. The NCLT admitted the application for consideration; passed necessary order of moratorium; and appointed the interim resolution professional.

NCLAT:  issue: Whether the application is made under section 7 of Insolvency & Bankruptcy Code seeking initiation of Corporate Insolvency Resolution Process in respect of the debtor company is barred by limitation or not?

NCLAT held that the application Under Section 7 is not barred by limitation nor the claim of Respondent No. 2 is barred by limitation.

Then the appeal preferred to supreme court.

Supreme Court held:

The Supreme Court observed the objective of the Insolveny and Bankruptcy Code and hold that the Code came to be enacted to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, other entrepreneurs and even of partnership firms and individuals in a time bound manner; the objectives, inter alia, being maximisation of value of assets of such persons and to balance the

interest of all the stakeholders. As regards CD, the primary focus of the Code is to ensure its revival and continuation by protecting it from its own management and, as far as feasible, to save it from liquidation. CIRP is not intended to be adversarial to the CD but is essentially to protect its interests.

It observed that that intention of the Code is not to give a new lease of life to debts which are time-barred.  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. 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 and 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.

It further hold that the limitation period for application under Section 7 of the Code is three years as provided by Article 137 of the Limitation Act, which commences from the date of default and is extendable only by application of Section 5 of Limitation Act, if any case for condonation of delay is made out.

There is nothing in the Code to even remotely indicate if the period of limitation for the purpose of an application under Section 7 is to commence from the date of commencement of the Code itself. Similarly, nothing provided in the Limitation Act could be taken as the basis to support the proposition.

Therefore the Court held that NCLAT had been in error in applying the period of limitation provided for mortgage liability for the purpose of limitation applicable to the application in question. The application made by the Respondent No. 2 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, is 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.

The impugned orders of NCLAT deserve to be set aside and the application filed by the Respondent No. 2(JM Financial Assets Reconstruction Company) deserves to be rejected as being barred by limitation.