Triggering Limitation for Filing a Winding-Up Petition vis-à-vis Commercial Insolvency

Posted On - 22 October, 2019 • By - Gaurav Singh Gaur

The Hon’ble Supreme Court in its recent judgment in
Shah and another v. Union of India and another[1]

held that though the winding-up proceeding is a proceeding ‘in rem’, not a recovery proceeding, the date of default alone is relevant for the purpose of
triggering limitation for filing of a winding-up petition against a Company.

FACTS – Winding-Up Petition

facts necessary to appreciate complexities pertaining to the present case are
as hereunder:

  1. A
    winding-up petition was initiated by IL&FS Financial Services Limited
    (hereinafter referred as “IL&FS”) against La-Fin Financial Services Private
    Limited (hereinafter referred as “La-Fin”) on 21-10-2016, in the Bombay High Court under Section 433(e) of the
    Companies Act, 1956;
  2. On 01-12-2016, the Insolvency and
    Bankruptcy Code, 2016 (“Code”) came into force and consequently as per
    the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules,
    2016 the winding-up petition was transferred to NCLT as Section 7 application
    under the Code;
  3. The
    petition pertains to an alleged default by La-Fin to comply with its
    undertaking to buy back 442 lakhs shares of MCX Stock Exchange Limited
    (hereinafter referred to as “MCX-SX”) which is a group company of La-Fin. The NCLT,
    admitting the winding-up petition vide its order dated 28-08-2018, stated that
    a on mere perusal and reading of the share purchase agreement and the Letter of
    Undertaking it was clear that a financial debt had, in fact, been incurred by
  4. The NCLAT by its order dated 21-01-2019 dismissed the appeal filed
    by Mr.Jignesh Shah (shareholder of La-Fin) against the order of admission,
    wherein NCLAT affirmed the observation of NCLT that the aforesaid transaction
    would fall within the meaning of “financial debt” under the Code, and that the
    bar of limitation would not be attracted as the winding-up petition was filed
    within three years of the date from which the Code came into force i.e. on
  5. A Writ Petition was also filed by Smt. Pushpa
    Shah (shareholder of La-Fin), challenging certain provisions of the Code.
    Another Writ Petition was also filed before the Hon’ble Supreme Court on
    04-04-2019 challenging the constitutionality of certain provisions as well as
    the NCLT and NCLAT orders after which another Civil Appeal was also filed
    against the NCLAT order under Section 62 of the Code.

ISSUES – Winding-Up Petition

The Hon’ble Bench comprising of Hon’ble R.F. Nariman
J., R. Subhash Reddy J. and Surya Kant J. considered the following Question of
Law and Fact:

  • In light of Article 137 of the Limitation Act, whether the winding-up petition
    initiated by IL&FS against La-Fin on 21-10-2016, was time-barred and could
    it be proceeded with any further?


The learned Senior Advocate, Dr. Abhishek Manu
Singhvi, appearing on behalf of the Mr.Jignesh Shah & anr. (“Appellants”)
without going into the merits of the case had raised the statutory bar of
limitation against IL & FS. The learned Senior Advocate placed his reliance
on the judgment in B.K. Educational Services Pvt. Ltd. v. Parag Gupta and Associates[2].
According to him, it is clear from the judgment that the Limitation Act, 1963
would apply to all Section 7 applications that are filed under IBC and that the
residuary Article 137 of the Limitation Act would be attracted to the facts of
this case.

Furthermore, inasmuch as the winding-up petition
that has been transferred to the NCLT was filed on 21-10-2016, i.e. beyond the
period of 3 years prescribed (as the cause of action had arisen in August,
2012), it is clear that a time-barred winding-up petition filed under Section
433 of the Companies Act, 1956 would not suddenly get resuscitated into a
Section 7 petition under the Code filed within time, by virtue of the transfer
of such petition. He further emphasised on Form -1 filed by IL & FS to
transfer the winding-up petition to NCLT, that the Form itself stated that the
date of default was 19-08-2012 which clearly indicates that winding-up petition
was time-barred since it was filed beyond three years of the cause of action.

To counter the same, Shri Neeraj Kishan Kaul, the
learned Senior Advocate appearing on behalf of the IL & FS (“Respondent“)
argued that the cause of action for the suit and the cause of action for the winding-up
petition filed, were separate and distinct. He further submitted that it is a
well-settled principle that a winding-up petition cannot be filed in order to
recover a debt, but is a proceeding ‘in rem’, which involves commercial
insolvency of the company sought to be wound up.

According to the learned Advocate for Respondents,
the suit that was filed by IL&FS for specific performance of the Letter of
Undertaking dated 19-06-2013 kept alive the debt that was owed and therefore,
in any event, the winding-up petition filed after such debt was kept alive
would be in time, notwithstanding that it was filed at a subsequent period
after the suit. Furthermore, he submitted that in any event, the limitation is a
mixed question of fact and law, and hence at best the matter ought to be
remanded to the NCLT, for determination on the same.


The Hon’ble Supreme Court rejected the arguments of
the Respondent that cause of action for the purposes of limitation would
include the commercial insolvency or the loss of substratum of the company, and
held as hereunder:

“The trigger
for limitation is the inability of the 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 the 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
insolvency 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 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 attached 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.”

The Hon’ble Court further relied on the judgment in
(P) Ltd., Re[3]
referred in
paragraph 23 in Mediquip Systems (P) Ltd. v. Proxima Medical System GMBH[4],
which states the law on winding-up petitions filed under Section 433 (a) of the
Companies Act, 1956 correctly. The primary test is set out in paragraph 1,
which is that a winding-up petition is not a legitimate means of seeking to
enforce payment of a debt which is bonafide
disputed by the company. Absent such dispute, the petition may be admitted.
Equally, where the debt is bonafide
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 does not come
into play. Also, the moment there is a bonafide
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.

Having considered the facts on the touchstone of
the provisions of the statute and the precedents, the Hon’ble Court was of the
considered view that:

“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 pleased.
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 19-08-2012; making it
clear that three-years from the date had long since elapsed when the Winding-up
Petition under Section 433 (e) was filed on 21-10-2016.”

Consequently, the Civil Appeal was allowed and the
Writ Petition was disposed of by the Hon’ble Court by holding that the winding-up
petition filed on 21-10-2016 being beyond the period of 3 years mentioned in Article
137 of the Limitation Act is time-barred and cannot, therefore, be proceeded
with any further. Accordingly, the impugned judgment of the NCLAT and the
judgment of the NCLT was set aside.


The Hon’ble Supreme Court rightly answered the
issue in favour of the Appellant- Shareholder with respect to the present Civil
Appeal. Also, as had been correctly pointed out by learned Senior Advocate for Appellant
Shareholders that the statutory notice given on 03-11-2015, does not refer to
any facts as to the commercial insolvency of La-Fin. The statutory notice only
refers to the suit proceedings and attachment by the Economic Offences Wing of
Mumbai Police, which had taken place long before in December, 2013. Factually,
therefore, no basis was laid down for the legal contentions argued by the
learned Senior Advocate for Respondent- IL & FS.

Furthermore, the Commercial Insolvency of the company
had not been pleaded either in the petition or even on facts. The statutory Form-1
also clearly stated that the date of default was 19-08-2012 and hence 3 years
from the said date had long since elapsed when the winding-up petition under
Section 433(e) was filed on 21-10-2016. In the light of the entire facts,
documents on records and the authorities relied upon by the Hon’ble Court, it
is crystal clear that the limitation for the purpose of filing a winding-up
petition, triggers only on the date of default.

  • [1] WP (Civil) No. 455 of 2019.
  • [2] 2018 SCC OnLine 1921.
  • [3] [(1977) 47 Comp Cas 438 (Bom)]: (Comp Cas pp.443-44)
  • [4] (2005) 7 SCC 42.

Contributed By – Gaurav Gaur
Designation – Associate

King Stubb & Kasiva,
Advocates & Attorneys

Click Here to Get in Touch

New Delhi | Mumbai | Bangalore | Chennai | Hyderabad | Kochi
Tel: +91 11 41032969 | Email: