Insolvency and Bankruptcy Code, 2016: s. 238A – Limitation – Application of Limitation Act, 1963 to applications u/s 7 under IBC – Execution of share purchase agreement between MCX, MCX– E and Financial Services Company in 2009 whereby Financial Services Company agreed to purchase equity shares of MCX–E from MCX – Pursuant thereto, LF, a group company of MCX, issued a ‘Letter of Undertaking’ to Financial Services Company to purchase shares of MCX–SX after a period of one year, but before a period of three years, from the date of investment – Expiry of the said period – In 2012 Financial Services Company exercised its option to sell its entire holding of shares in MCX–SX – However, LF’s case that it was under no legal or contractual obligation to buy the said shares – Suit by Financial Services Company for specific performance of the Letter of Undertaking by LF – High Court passing an injunction order by restraining LF from alienating its assets pending disposal of the suit – In 2016, Financial Services Company filing winding up petition against LF u/s. 433(e) in the High Court – However, due to introduction of IBC, 2016, transfer of the winding up petition to the NCLT as an application u/s. 7 – NCLT admitted the petition holding that the bar of limitation not attracted – Appeal by shareholders of LF – Dismissed by NCLAT – On appeal, held: Trigger point for the purpose of limitation for filing of a winding up petition would be the date of default in payment of the debt – Though it is clear that a winding up proceeding is a proceeding ‘in rem’ and not a recovery proceeding, the trigger of limitation for the winding up petition would be the date of default – On facts, statutory notice given on 03.11.2015 does not refer to any facts as to the commercial insolvency of LF – Statutory notice only refers to the suit proceedings and attachment by the Economic Offences Wing in December 2013 – Company’s insolvency neither been pleaded nor is on facts – In Form-1, upon transfer of the winding up proceedings to the NCLT, date of default is 19.08.2012; making it clear that three-years from that date had long since elapsed when the winding up petition was filed in 2016 – Thus, the winding up Petition being beyond the period of threeyears mentioned in Article 137 of the Limitation Act is time-barred, and cannot therefore be proceeded with – Impugned judgment of the NCLAT and the judgment of the NCLT set aside – Limitation Act, 1963 – Article 137 – Companies Act, 1956 – ss. 433 and 434.
Disposing of Writ Petition (Civil) No.455 of 2019, Special Leave Petition (Diary No.13468 of 2019), Transfer Petition (Civil) No.817 of 2019 and allowing Civil Appeal (Diary No. 16521 of 2019), the Court
HELD: 1.1 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. [Para 19] [701-B-D]
1.2 The Financial Services Company pursued with reasonable diligence the cause of action which arose in August, 2012 by filing a suit against LF for specific performance of the Letter of Undertaking in June, 2013. What has been lost by the said party’s own inaction or laches, is the filing of the Winding up Petition long after the trigger for filing of the said petition had taken place; the trigger being the debt that became due to Financial Services, in repayment of which default has taken place. [Para 21] [703-D-E]
1.3 A reading of the Section 433(e) and Section 434 of the Companies Act, 1956 would show that the starting point of the period of limitation is when the company is unable to pay its debts, and that Section 434 is a deeming provision which refers to three situations in which a Company shall be deemed to be “unable to pay its debts” under Section 433(e). In the first situation, if a demand is made by the creditor to whom the company is indebted in a sum exceeding one lakh then due, requiring the company to pay the sum so due, and the company has for three weeks thereafter “neglected to pay the sum”, or to secure or compound for it to the reasonable satisfaction of the creditor. “Neglected to pay” would arise only on default to pay the sum due, which would clearly be a fixed date depending on the facts of each case. Equally in the second situation, if execution or other process is issued on a decree or order of any Court or Tribunal in favour of a creditor of the company, and is returned unsatisfied in whole or in part, default on the part of the debtor company occurs. This again is clearly a fixed date depending on the facts of each case. And in the third situation, it is necessary to prove to the “satisfaction of the Tribunal” that the company is unable to pay its debts. The trigger point is the date on which default is committed, on account of which the Company is unable to pay its debts. This again is a fixed date that can be proved on the facts of each case. Thus, Section 433(e) read with Section 434 of the Companies Act, 1956 would show that the trigger point for the purpose of limitation for filing of a winding up petition under Section 433(e) would be the date of default in payment of the debt in any of the three situations mentioned in Section 434. [Para 22] [704-D-H; 705-A]
1.4 Nowhere in the Winding up Petition is it alleged that the company sought to be wound–up has lost its substratum, in the sense that there is no reasonable prospect of it ever making a profit in the future, nor can it be said that the company had abandoned its business and is, therefore, unable to meet the outstandings owed by it. On the other hand, what emerges, is that it is not open for a company to say that a debt is undisputed, that it has ability to pay the debt, but will not pay the debt. Equally, where a debt is clearly owed, but the exact amount of debt is disputed, the company will be held to be unable to pay its debts. What has to be seen in each case is whether the debt is bona fide disputed. If so, without more, a winding up petition would then be dismissed. One other thing must be noticed at this stage. The trigger for limitation is the inability of a company to pay its debts. Undoubtedly, this 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. Though it is clear that a winding up proceeding is a proceeding ‘in rem’ and not a recovery proceeding, the trigger of limitation, so far as the winding up petition is concerned, would be the date of default. Questions as to commercial solvency arise in cases covered by Sections 434(1)(c) of the Companies Act, 1956, where the debt has first to be proved, after which the Court will then look to the wishes of the other creditors and commercial solvency of the company as a whole. The stage at which the Court, therefore, examines whether the company is commercially insolvent is once it begins to hear the winding up petition for admission on merits. Limitation attaches insofar as petitions filed under Section 433(e) are concerned at the stage that default occurs for, it is at this stage that the debt becomes payable. For this reason, it cannot be said that the cause of action for the purposes of limitation would include the commercial insolvency or the loss of substratum of the company. [Para 25] [706-G-H; 707-A-E]
1.5 Softsule (P) Ltd., Re states the law on winding up petitions filed under Section 433(a) of the Companies Act, 1956, the primary test is that a winding up petition is not a legitimate means of seeking to enforce payment of a debt which is bona fide disputed by the Company. Absent such dispute, the petition may be admitted. Equally, where the debt is bona fide disputed, there cannot be ‘neglect to pay’ within the meaning of Section 434(1)(a) of the Companies Act, 1956 so that the deeming provision then does not come into play. Also, the moment there is a bona fide dispute, the debt is then not ‘due’. The High Court also correctly appreciates that whether the company is commercially solvent is one of the considerations in order to determine whether the company is able to pay its debts or not. [Para 28] [709-D-F]
Softsule (P) Ltd., Re (1977) 47 Comp Cas 438 (Bom) – approved.
1.6 Even on the facts of this case, the Winding up Petition alleges that the ultimatum to the Respondent company asserting that the Respondent company was legally obliged to purchase the requisite shares in accordance with the terms of the Letter of Undertaking was on 7th January, 2013. By this date at the very latest, the cause of action for filing a petition under Section 433(e) certainly arose. Also, the statutory notice given on 3rd November, 2015 does not refer to any facts as to the commercial insolvency of LF. The statutory notice only refers to the suit proceedings and attachment by the EOW which had taken place long before in December 2013. In the Winding up Petition itself, what is referred to is the fall in the assets of LF to being worth approximately INR 200 crores as of October, 2016, which again does not correlate with 3rd November, 2015, being the date on which the statutory notice was itself issued. This again is only for the purpose of appointing an Officer of the Court as Official Liquidator in order to manage the day–to–day affairs and otherwise secure and safeguard the assets of the Respondent company. There is no averment in the petition that thanks to these or other facts the Company’s substratum has disappeared, or that the Company is otherwise commercially insolvent. It is clear therefore that even on facts, the company’s substratum disappearing or the commercial insolvency of the company has not been pleaded. Whereas, in Form–1, upon transfer of the winding up proceedings to the NCLT, what is correctly stated is that the date of default is 19th August, 2012; making it clear that three–years from that date had long since elapsed when the Winding up Petition under Section 433(e) was filed on 21 st October, 2016. [Para 29, 30] [709-G-H; 710-A-D]
1.7 The Winding up Petition filed on 21st October, 2016 being beyond the period of three–years mentioned in Article 137 of the Limitation Act is time–barred, and cannot therefore be proceeded with any further. Thus, impugned judgment of the NCLAT and the judgment of the NCLT is set aside. [Para 31] [710-E-F]
Rajender Singh and Ors. v. Santa Singh and Ors. (1973) 2 SCC 705 : [1974] 1 SCR 381 – relied on. B.K. Educational Services Pvt. Ltd. v. Parag Gupta and Associates (2018) SCC OnLine 1921 ; M.P. Steel Corporation v. CCE (2015) 7 SCC 58 ; Hariom
Firestock Limited v. Sunjal Engineering Pvt. Ltd. (1999) 96 Comp. Cas 349 ; Ferro Alloys Corporation Ltd. v. Rajhans Steel Ltd. (2000) Comp Cas 426 ; Rameswar Prasad Kejriwal & Sons Ltd. v. M/s.
Garodia Hardware Stores (2002) 108 Comp Cas 187 ; Dr. Dipankar Chakraborty v. Allahabad Bank & Ors. (2017) SCC OnLine Cal 8742 ; Indo Alusys Industries v. Assotech Contracts (India) Ltd. (2009) 110 DRJ 384 ; M/s Madhusudan Gordhandas & Co. v. Madhu
Woollen Industries Pvt. Ltd. (1971) 3 SCC 632 : [1972]
2 SCR 201 ; Pradeshiya Industrial & Investment Corporation of U.P. v. North India Petrochemicals Ltd. and Anr. (1994) 3 SCC 348 ; Mediquip Systems (P) Ltd. v. Proxima Medical System GMBH (2005) 7 SCC
42 : [2005] 2 SCR 1015 ; Re: Messrs: Bhimji Nanji and Co. (1969) Mh.L.J. 827 – referred to.
Board of Regents of the University of the State of New York et. al. v. Mary Tomanio 100 S. Ct. 1790 ; Martiza Alamo–Hornedo v. Juan Carlos Puig and Jose Perez– Riera 745 F.3d 578 ; Re Karnos Property Co. Ltd. (1989) 5 B.C.C. 14 – referred to.
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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