Limited Period for Winding up Proceedings during Pendency of a Civil Suit

[Aman Saxena is a practicing advocate at the High Court of Chhattisgarh and a 2018 graduate of the National Law School of India University. The author was one of the counsel retained by the petitioners for this matter]

In a judgment delivered by a three-judge bench in Jignesh Shah & Anr. v. Union of India, the Supreme Court laid down the law on the applicability of Article 137 of the Limitation Act, 1963 upon transfer of winding up petitions to the National Company Law Tribunal (NCLT) under the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 during the pendency of a civil suit. Authored by Nariman J., the judgment overturned the order of the National Company Law Appellate Tribunal (NCLAT) and held that the cause of action to initiate winding up proceedings would arise on the day of the default, and that the limitation period would start running on the same date. A civil suit filed in this period would have no effect on extending the cause of action.

Relevant Facts

The relevant facts relate to a contract between La-Fin Financial Services Pvt. Ltd and IL&FS Financial Services Ltd.. The performance of obligations under that contract is the core of the dispute. IL&FS claimed that the disputed obligation arose on August 19, 2012 and that La-Fin declined the existence of the same. Aggrieved, IL&FS promptly filed a suit for specific performance on June 19, 2013 before the Bombay High Court. Certain other proceedings ensued in the Court, but it was only on November 3, 2015 that a statutory notice under sections 433 and 434 of Companies Act, 1956 was issued by IL&FS to La-Fin seeking to initiate winding up proceedings against it. La-Fin replied to that notice claiming it to be a pressure tactic, and on October 21, 2016, IL&FS filed the winding up petition.

Thereafter, the Insolvency & Bankruptcy Code, 2016 came into existence in December, 2016 whereby the winding up petition was transferred to the NCLT as a section 7 application. The admission was contested by La-Fin as barred by limitation, amongst other grounds, but the NCLT and then NCLAT on appeal both admitted the application holding that since the application was filed within three years of the Code coming into force, the same is not barred by limitation. The appeal against the order was preferred by La-Fin and the judgment was delivered on the narrow point of limitation.

Ruling of the Court

The holding of the court is two-fold. First is the reiteration of B.K. Educational Services v. Parag Gupta and Associates wherein the Court held that the object of the Code and particularly section 238A is not to give new lease of life to time barred debts. Ruling in the favour of the petitioner, it found that Limitation Act would apply to the proceedings sought to be initiated under the Code. Therefore, what is important to determine is whether the winding up petition thus transferred to NCLT was itself time barred.

Second, the holding lays down the law on when the limitation period starts running for filing the winding up petition and whether an existing civil suit extends it for instituting the same. Article 137 of the Limitation Act is applicable to winding up proceedings, which provides three years as the duration for limitation for all unknown residuary proceedings not covered under the other articles. The Court extensively reviewed High Court judgments as well as relevant decisions of courts in the United States (Board of Regents of the University of the State of New York et al. v. Mary Tomanio) and the United Kingdom (In Re: Karnos Property Co. Ltd, [1989] 5 BCC 14). In para 19, it agrees to the principle laid down in these judgments that a suit in a separate and independent remedy will not extend the limitation period for winding up proceedings and held:

The aforesaid judgments correctly hold that a suit for recovery based upon a cause of action that is within limitation cannot in any manner impact the separate and independent remedy of a winding up proceeding. In law, when time begins to run, it can only be extended in the manner provided in the Limitation Act. For example, an acknowledgement of liability under Section 18 of the Limitation Act would certainly extend the limitation period, but a suit for recovery, which is a separate and independent proceeding distinct from the remedy of winding up would, in no manner, impact the limitation within which the winding up proceeding is to be filed, by somehow keeping the debt alive for the purpose of the winding up proceeding.

To answer the query before it, the Court also went into the question of when the cause of action truly arises for initiating a winding up proceeding. The Court rejected the argument of the respondent that a winding up petition could not have been brought earlier as it was only in 2016 that the company’s substratum, i.e., the worth of its assets, fell from rupees 1000 crores to rupees 200 crores.  Holding that the cause of action arises on the date of default, the Court laid down that the “trigger occurs when a default takes place, after which the debt remains outstanding and is not paid. It is this date alone that is relevant for the purpose of triggering limitation for the filing of a winding up petition.” (para 25) The examination of commercial insolvency of a company is carried out by the Court only after it begins hearings on admission of winding up petition on merits.

Conclusion

The Court has held that winding up proceedings are separate, distinct and independent proceedings as against a civil suit for recovery. Even though the suit for specific performance was filed well in time, the winding up proceedings were only initiated after lapse of more than three years since the cause of action, i.e., the default. Hence, Article 137 of the Limitation Act became applicable and the winding up proceeding itself was barred by limitation. Since the winding up proceeding could not be initiated in law, it could not be transferred to NCLT as a section 7 application. This was barred by limitation due to section 238A of the Code, as held in BK Educational Services. As a result, the order of NCLAT was set aside and La-Fin was pulled out of the insolvency proceedings.

The judgment will have applicability on all such transfers of winding up petitions to the NCLT, which were initiated after the limitation period of three years. It may also have general applicability in situations where continuing cause of action to initiate a proceeding is claimed on account of another distinct and independent pending suit.

Aman Saxena

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