Introduction
On 10.07.2023, the National Company Law Appellate Tribunal, Principal Bench, New Delhi (‘NCLAT’) delivered a judgment in Asset Construction Company (India) Ltd. v Uniworth Textiles Ltd.,[i] wherein it was, inter alia, held that the time period of the pendency of the case under the Sick Industrial Companies (Special Provisions) Act, 1985 (‘SICA’) would be excluded for computation of the period of limitation for filing an application under the Insolvency and Bankruptcy Code, 2016 (‘IBC’). Additionally, it ‘incidentally’ observed that the pendency of proceedings in the Debt Recovery Tribunal (‘DRT’) does not debar the right of the Appellant in pursuing legal remedy under s. 7 of the IBC.[ii]
Brief Facts
The Appellant challenged the order of the National Company Law Tribunal (‘NCLT’), which dismissed the application under s. 7 of the IBC[iii] moved against Uniworth Textiles Limited, the Corporate Debtor (‘CD’), primarily on the grounds of limitation.[iv]
Since this case primarily concerns the computation of the period of limitation, it is essential to take stock of the events that ensued. The CD had taken loans from the Industrial Finance Corporation of India Ltd. (‘IFCIL’) and Investment Corporation of India Ltd. (‘ICICI’) in 1992, amounting to Rs. 41.50. Subsequently, ICICI and IFCIL assigned the debt to the Appellant in 2004 and 2007, respectively.
The CD initiated proceedings under SICA before the Board for Industrial and Financial Reconstruction (‘Board’) in 2004, which continued until 2013. The Appellant issued a notice under s. 13(2) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) on 20.11.2007 and the CD’s account was declared a non-performing asset (NPA) on 31.08.2007.
The Appellant filed an application before the DRT on 05.09.2014, which was allowed on 04.12.2018. The CD acknowledged its debt to the Appellant multiple times, including letters dated 11.11.2016 and 22.01.2018, and part payments were made towards the settlement of dues. Thereafter, the Appellant issued a letter revoking the terms of the settlement due to non-compliance by the CD on 22.11.2018 and filed an application under s. 7 of IBC on 27.11.2018, which the NCLT dismissed on the grounds of limitation.
The NCLAT identified 3 main issues in the matter: whether the application was barred by limitation, whether balance sheet entries acknowledged debt for extending the limitation, and whether the letter dated 11.11.016 could be relied upon as an admission of acknowledgement of dues.
Contentions of the Parties
The Appellant argued that for the computation of the period of limitation for filing the application under s. 7 of IBC, the period of pendency of the proceedings under SICA, i.e., from 2004 to 2013, should be excluded. It contended that the CD had maintained specific entries with respect to the debt due to the Appellant from time to time, thereby expressly acknowledging the debt and further that several communications between the Appellant and the CD regarding settlement of the dues were ongoing until the Appellant revoked the same due to alleged non-compliance by the CD.
On the other hand, the CD contended that the pendency of cases under SICA or the Recovery of Debts and Bankruptcy Act, 1993 (RDB Act) does not affect the period of limitation to be computed for filing an application under IBC. It argued that merely mentioning the alleged debt in the balance sheet cannot be construed as an acknowledgement of the debt since the same was in dispute in the directors’ report. On an ancillary note, the CD argued that since it has already filed an appeal against the DRT order, the DRT proceedings are still pending.
Decision
The NCLAT held that the NCLT erred in rejecting the application of the Appellant under s. 7 of IBC on the ground of limitation and allowed the appeal, thereby remanding the matter back to the NCLT for a decision on merits. The NCLAT, on an incidental note, while rejecting the contention of the CD that the DRT proceedings were still pending, observed that the pendency of an appeal in the DRT case would not debar the right of the Appellant to move the NCLT under s. 7 of IBC.
For the computation of the period of limitation, the Tribunal bifurcated the entire case into two timelines: (i) the period from 2004 (when the proceedings under SICA were initiated) to 22.05.2013 when the proceedings were abated by the Appellate Authority for Industrial and Financial Reconstruction (‘AAIFR’), and (ii) the period from 22.05.2013 to 27.11.2018 when the application under s. 7 of IBC was filed by the Appellant. Based on these periods, the NCLAT adjudicated upon the 3 issues identified by it.
On the 1st issue, the NCLAT noted s. 14(1) of the Limitation Act, 1963 (‘Limitation Act’), which states that for the computation of the period of limitation, the duration of any suit instituted by the plaintiff (in this case, the Appellant) in good faith and with due diligence against the defendant (in this case, the CD) must be included. Further, s. 22(5) of SICA envisages that the period during which the remedy of any legal proceeding or enforcement remains suspended as per s. 22(1) of SICA[v] shall be excluded from the period of limitation. The NCLAT observed that IBC came into existence only in 2016, and thus, the only remedy prior to IBC was to move the Board under SICA. Relying on s. 22(5) of SICA read with s. 14(1) of the Limitation Act and the judgement of the Apex Court in Sabarmati Gas Limited v Shah Alloys Limited[vi], the NCLAT concluded that the period when the petition was pending before the Board and thereafter, the AAIFR was to be excluded for the computation of the period of limitation for filing the application under s. 7 of IBC.
Regarding the 2nd issue, the moot issue was whether the entries made in the balance sheet qua the debt should be treated as an acknowledgement of the same for s. 18 of the Limitation Act. The NCLAT referred to the law settled by the Apex Court in Asset Reconstruction Company (India) Limited v Bishal Jaiswal and Anr.[vii], wherein it was held that while the filing of the balance sheets in accordance with the provisions of the Companies Act 2013 is mandatory, there is no compulsion under the law to make any particular admission with respect to a certain debt/liability, as per auditor’s report, notes of accounts, etc. Thus, depending on the facts and circumstances of each case, if any such admission is made, the same shall extend the limitation under s. 18 of the Limitation Act. Based on the facts of the present case, the NCLAT observed that the balance sheets and the directors’ report of the CD had a clear admission of the debt by mentioning the negotiations with the lenders for restructuring, and the same amounted to the acknowledgement of the debt.
For the 3rd issue, the NCLAT considered various letters of the CD that acknowledged the debt and offered a certain amount for a one-time settlement, out of which a certain amount was paid. The NCLAT further observed that the letters issued by individual companies of the CD Group made on behalf of all the group companies would be viewed in the true spirit and a genuine desire to settle on behalf of the CD. Thus, the difference between individual company settlement and group settlement would be viewed as merely a technical difference and would not be considered as creating a legal barrier to treating such letters as acknowledgements.
Our Analysis
As the law stands today, in the computation of the period of limitation for filing an application under the IBC[viii], the number of days of the SICA proceedings shall be excluded, as clearly understood by a conjoint reading of s. 14(1) of the Limitation Act and s. 22(5) of SICA.[ix]
Further, annual returns, balance sheets, one-time settlement proposals, and other documents cannot be ignored. Based on the facts and circumstances of each case, such documents can be considered a valid acknowledgement of the debt for computing the period of limitation.[x]
Recurrent instances manifest that the courts and tribunals have adopted a stance favouring the pre-eminence of the IBC as the governing statute concerning corporate reorganization. Whether in confrontations between the IBC on the one hand and the Electricity Act, 2003[xi] or the Customs Act, 1962[xii] on the other, it has been established that the IBC shall maintain its paramountcy. In the present case, the NCLAT held that the IBC would reign supreme by observing (though incidentally) that any pending proceedings before the DRT shall not preclude a creditor[xiii] from filing an application under the IBC to initiate the corporate insolvency resolution process (CIRP).
Please find below the write-ups on where the IBC overrides other laws:
End Notes
[i] Company Appeal (AT) (Insolvency) No. 991 of 2020.
[ii] The judgment is primarily on the issue of computation of the period of limitation for filing an application under s. 7 of the IBC. However, the ‘incidental’ observation of the NCLAT would also have a significant impact.
[iii] See, s. 7 of IBC – Initiation of corporate insolvency resolution process by financial creditor.
[iv] Order dated 17.03.2020 passed in CA (IB) No. 1441/KB/2019.
[v] Just like the moratorium imposed under s. 14 of the IBC.
[vi] (2023) 3 SCC 229.
[vii] (2021) 6 SCC 366.
[viii] S. 7 or s. 9 of IBC, as the case may be.
[ix] Op cit, Sabarmati Gas Limited.
[x] Op cit, Bishal Jaiswal.
[xi] See Paschimanchal Vidyut Vitran Nigam Ltd. v. Raman Ispat Private Limited & Ors., 2023 SCC OnLine SC 842 wherein the top court asserted that s. 238 of IBC takes precedence over the stipulations of the Electricity Act.
[xii] See Sundresh Bhatt, Liquidator of ABG Shipyard v. CBIC, 2022 SCC OnLine SC 1101, wherein the Apex Court held that IBC would prevail over the Customs Act once a moratorium is imposed in terms of s. 14 or 33(5) of IBC, as the case may be.
[xiii] Financial Creditor (under s. 5(7)) and/or the Operational Creditor (under s. 5(20)) of IBC.
Authored by Sanyam Aggarwal, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.