Supreme Court Clarifies The Calculation Of Limitation Under Sections 7 & 9 Of IBC, 2016

The Hon’ble Supreme Court of India in the case of M/s Tech Sharp Engineers Pvt. Ltd. v. Sanghvi Movers Ltd. vide an Order dated September 19th 2022 has clarified the stance on the calculation of limitation in cases pertaining to the Insolvency and Bankruptcy Code, 2016 (“IBC”) while specifically focusing on Sections 7 and 9.  

Sanghvi Movers Ltd. had let out, on-hire, a crane to M/s Tech Sharp Engineers Pvt. Ltd. for setting up equipment at a site in Odisha in 2012 and 2013. Over the period of more than a year between January 3rd 2012 to March 4th 2013 invoices amounting to INR 38,84,809 had accrued in favour of Sanghvi Movers Ltd. A notice was issued by the Respondent on May 6th 2013. The Appellant, while responding to the same, expressed its inability to pay and asked for a discount.

The Respondent agreed to the same and allowed payments in 5 instalments and at a discount of 10%. However, the Appellant could not meet the promise after paying one instalment and expressed its inability to pay while acknowledging the debt vide a notice dated November 7th 2013. Resultantly, a statutory notice dated May 24th 2014 was issued by the Respondent under Sections 433(e), 434 and 439 of the Companies Act 1956 for winding up of the Appellant. 

On December 22nd 2015, the Respondent filed a winding-up petition before the High Court of Madras which was returned by the High Court for curing defects on January 5th 2016. The petition was again represented in March but was returned once more owing to defects in May.

Meanwhile, the IBC came into force and the Respondent issued a demand notice under Section 8 (1) on November 14th 2017. This was followed by a Section 9 application filed by the Respondent in March 2018 for the initiation of Corporate Insolvency Resolution Process (CIRP). A notice was issued to the Appellant by the National Company Law Tribunal, Chennai (“NCLT”) in June 2018, however, the application was subsequently dismissed the following year for being barred by limitation. 

An Appeal against the Order of the NCLT was filed by Sanghvi Movers Ltd. before the National Company Law Appellate Tribunal (“NCLAT”). NCLAT vide Order dated July 23rd 2019 set aside the Order of the NCLT for having erroneously judged the application as being barred by limitation. 

The present appeal before the Division Bench of the Supreme Court of India consisting of Justice Indira Banerjee and Justice J.K. Maheshwari herein dealt with an appeal challenging the aforementioned order of the NCLAT. 

The Apex Court relied upon the case of B.K. Educational Services Pvt. Ltd. v. Parag Gupta and reiterated that Limitation Act, 1908 would apply to applications under Sections 7 and 9 of the IBC, and that if the default occurred three years prior to the inception of the code, then the applications would be barred by limitation under Article 137 of the Limitation Act. 

The Supreme Court also acknowledged the application of the principle propounded in the aforementioned case in Radha Export (India) Private Limited v. K.P. Jayaram and Anr. and Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries Private Limited.

The Supreme Court further held that the only exception to this as per the already existing jurisprudence is when there exists sufficient cause for not filing an application within the prescribed period of limitation. The Supreme Court in Ramlal, Motilal and Chhotelal v. Rewa Coalfields Ltd while affirming the view taken by the High Court of Madras in Krishna v. Chathappan had held that there was room under Section 5 of the Limitation Act to allow condonation of delay when there existed sufficient cause for such delay.

However, there was no straitjacket formula to determine ‘sufficient cause’ and the decision pertaining to the same would differ from case to case, hence leaving an open door for the Court to take the liberty to decide upon the said question. 

The court, in the present matter, opined that the idea of calculating limitations under Sections 7 and 9 from the date of enactment of these provisions arose from nothing but absurdity as allowing applications from subject matters that arose decades ago by using this approach should not be permissible. Thus, in such cases, it is crucial to determine when exactly a right to sue accrued and whether a cause of action was continuous or not. The court, in the matter at hand, held that the mere pendency of the proceedings in a parallel forum would not be enough to satisfy the ambit of ‘sufficient cause’ if the proceedings lay before a forum having the jurisdiction to entertain such matter. 

The Supreme Court of India, while analysing provisions of the Limitation Act, held that delay would be excused under two separate provisions, albeit upon fulfilment of some specific conditions. The provisions and conditions as stated above would be: 

1. Section 18 of the Limitation Act states that acknowledgement of present liability by the person against whom such right is being claimed will invoke a fresh period of limitation from the date of such acknowledgement being made, however, this acknowledgement should be signed by such party and must be before the expiry of the pre-existing period of limitation. 
2. As per Section 14 (2), a time period wherein a proceeding pertaining to a subject matter is pending before a court which does not have appropriate jurisdiction will also be excluded from a limitation when such proceedings had been initiated in good faith. 

The Supreme Court observed that, in the present case, no acknowledgement of liability had been made by the Appellant after November 7th 2013 and the Madras High Court did not lack jurisdiction to try the winding up petition that had lied before it. The Supreme Court thus adjudged that the aforementioned criteria for satisfying the test of ‘Sufficient Cause’ were not fulfilled and accordingly the order of the NCLAT was set aside.