Supreme Court: In an appeal filed under Section 62 of the Insolvency and Bankruptcy Code, 2016 (‘IBC’) against the judgment of the National Company Law Appellate Tribunal (‘NCLAT’), wherein NCLAT dismissed the appeal preferred by the appellant against order of the National Company Law Tribunal (‘NCLT’) dismissing the application filed under Section 9 of the IBC, in its capacity as operational creditor of Shah Alloys Limited /respondent, Ajay Rastogi and C.T. Ravikumar*, JJ. held that in absence of provisions for exclusion of period in respect of an application under Section 9, IBC, despite the combined reading of Section 238-A, IBC and the provisions under the Limitation Act what is legally available to such a party is to assign the same as a sufficient cause for condoning the delay under Section 5 of the Limitation Act. In such an eventuality, the question of condonation of delay must be considered lest it result in injustice, as the party was statutorily prevented from initiating action against the industrial company concerned.
Issues:
• Whether in computation of the period of limitation regarding an application filed under Section 9 IBC, the period during which the operational creditor’s right to proceed against or sue the corporate debtor that remain suspended by virtue of Section 22(1) of the Sick Industrial Companies (Special Provisions) Act, 1985 (‘SICA’) can be excluded, as provided under Section 22(5) of SICA?
The Court referred to Section 22(5), SICA and said that there was a statutory bar to take to any proceeding for realisation of a right referred to in the said Section against an industrial company when once an enquiry under Section 16, SICA is pending against it or any scheme referred to under Section 17 thereof is under preparation or consideration or a sanctioned scheme is under implementation, or where an appeal under Section 25 relating to an industrial company is pending, except with the consent of the Board or the Appellate Authority, as the case may be.
Further, the Court took note of Paramjeet Singh Patheja v. ICDS Ltd., (2006) 13 SCC 322, wherein it was held that “the object of Section 22, in protecting guarantors from legal proceedings pending a reference to Board for Industrial and Financial Reconstruction (‘BIFR’) of the principal debtor, is to ensure that a scheme for rehabilitation would not be defeated by isolated proceedings adopted against the guarantors of a sick company. To achieve that purpose, it is imperative that the expression “suit” in Section 22 be given its plain meaning, namely, any proceedings adopted for realisation of a right vested in a party by law. This would clearly include arbitration proceedings”.
Further, it referred to Kailash Nath Agarwal v. Pradeshiya Industrial & Investment Corpn. of U.P. Ltd., (2003) 4 SCC 305, wherein it was held that “the words “proceedings” and “suit” had to be construed differently as carrying different meanings, since, they had been raised to denote different things. Section 22(1), SICA only prohibits recovery against the industrial company and there would be no protection offered to guarantors against the recovery proceedings” thus, it said that this case was not brought to the notice of the later bench while deciding Paramjeet Singh Patheja’s (supra). Thus, it was decided per incuriam.
The Court placed reliance on KSL & Industries Ltd. v. Arihant Threads Ltd., (2015) 1 SCC 166, wherein the question was, whether a recovery application under the Recovery of Debts Due to Banks and Financial Institutions Act, 1963 (‘RDDB Act’) would lie or be proceeded with against a sick company in view of the bar contained in Section 22(1) of SICA. It was held that certainly a proceeding which may result in the execution and distress against the property of the company, is liable to be construed as a proceeding for the execution, distress or the like against any of the properties of the industrial company.
The Court noted that in the case on hand it was the industrial company (respondent) that approached the BIFR under the provisions of SICA and got it declared as ‘sick company’. Thus, it said that obviously, proceedings under SICA were then pending before the BIFR when the default from the part of the respondent allegedly occurred and by virtue of Section 22(1), SICA and the decisions referred above, the appellant could not have, then, resorted to any legal proceedings for enforcing any right which may result in recovery from the properties of the respondent company. Therefore, the Court rejected the contention of the respondent that pending the proceedings before the BIFR the appellant could have resorted to arbitration proceedings.
The Court said that the purported intent of Section 22(5), SICA appears to protect the interest of such a party who was prevented from lawfully enforcing the right to seek for recovery of dues during the operative period of the bar under Section 22(1), SICA, if it is otherwise available even after the conclusion of proceedings before the BIFR, to the extent specifically mentioned therein.
Placing reliance on B.K. Educational Services (P) Ltd. v. Parag Gupta & Associates, (2019) 11 SCC 633, the Court said that this case reveals that Articles 137 and 5 of the Limitation Act, 1963 are applicable to applications filed under Sections 7 and 9 of IBC.
Thus, it held that when a party was legally disabled from resorting to legal proceeding for recovering the outstanding dues without the permission of BIFR and even on application permission therefor was not given, the period of suspension of legal proceedings is excludable in computing the period of limitation for the enforcement of such right in terms of Section 22(5), SICA. In the absence of provisions for exclusion of such period in respect of an application under Section 9, IBC, despite the combined reading of Section 238-A, IBC and the provisions under the Limitation Act what is legally available to such a party is to assign the same as a sufficient cause for condoning the delay under Section 5 of the Limitation Act. In such an eventuality, the question of condonation of delay must be considered lest it result in injustice, as the party was statutorily prevented from initiating action against the industrial company concerned.
• Whether the respondent has raised a dispute which is describable as ‘pre-existing dispute’ between itself and the appellant, warranting dismissal of application under Section 9 of the IBC at the threshold?
The Court took note of Macquarie Bank Ltd. v. Shilpi Cable Technologies Ltd., (2018) 2 SCC 674 and Mobilox Innovations (P) Ltd. v. Kirusa Software (P) Ltd., (2018) 1 SCC 353, wherein it was said that the existence of the dispute and/or the suit or arbitration proceeding must be pre-existing i.e., it must exist before the receipt of the demand notice or invoice.
The Court said that the demand notice under Section 8, IBC was issued by the appellant on 01-04-2017 and the respondent replied the same as per letter dated 10-04-2017 within 10 days from the date of receipt of it.
Therefore, it said that there existed a ‘pre-existing dispute’ between the parties before the receipt of demand notice under Section 8, IBC, thus held that the dismissal of the application under Section 9, IBC on the ground of ‘pre-existing dispute’ cannot be held to be patently illegal or perverse. However, it clarified that it has not upheld the dispute set by the respondent regarding the dues. Further, it said that the Tribunals have rightfully held that if there existed a ‘pre-existing dispute’ between the parties there cannot be an order of remand of the matter to the Tribunal for reconsideration of Section 9 application under IBC.
[Sabarmati Gas Ltd. v. Shah Alloys Ltd., 2023 SCC OnLine SC 7, decided on 04-01-2023]
*Judgment by: Justice C.T. Ravikumar.