Time Spent For SARFAESI Proceedings Can Be Excluded For Computing Limitation Under IBC : NCLAT

Time Spent For SARFAESI Proceedings Can Be Excluded For Computing Limitation Under IBC : NCLAT

Since the proceedings initiated under the SARFEASI Act were within limitation period, NCLAT held that the Financial Creditor was entitled for the exclusion of time period under the Limitation Act.

In the matter of Sesh Nath Singh and Anr. vs. Baidyabati Sheoraphuli Cooperative Bank Ltd, while computing the limitation period in respect of the section 7 application (for initiating insolvency proceedings) under the Insolvency and Bankruptcy Code, 2016 (IBC), the NCLAT has excluded the time during which the financial creditor had proceeded against the corporate debtor under SARFAESI Act, 2002 for the same relief.

The Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor (CD) M/s Debi Fabtech Pvt Ltd., was initiated by the National Company Law Tribunal, Kolkata Bench on the application filed by the financial creditor (FC) Baidyabati Sheoraphuli Cooperative Bank Ltd., on 25.4.2019. The Directors of the CD Mr.Sesh Nath Singh and Mr. Akshay Kumar Singh approached the NCLAT against this order by way of an appeal, praying for the order initiating CIRP to be set aside.

As per the FC Baidyabati Sheoraphuli Co-op Bank, M/s Debi Fabtech Pvt Ltd. committed default in paying financial debt worth Rs. 1 crore facilitated by the Co-op Bank in 2012. M/s Debi Fabtech Pvt Ltd.'s account was declared as NPA in 2013 on account of irregularities in payment by the CD, and the Co-op Bank had initiated proceedings under the SARFAESI Act, 2002 by sending demand notice under section 13(2) of the Act.

M/s Debi Fabtech Pvt Ltd. had filed a writ petition challenging the Demand Notice issued under the SARFAESI Act, and the Kolkata High Court restrained the Co-op Bank from taking any coercive action against M/s Debi Fabtech Pvt Ltd. by order dated 24.7.2017. The FC Baidyabati Sheoraphuli Co-op Bank filed application under Section 7 of IBC before the NCLT, Kolkata on 27.8.2018.

The Directors of M/s Debi Fabtech Pvt Ltd. challenged the NCLT's order initiating CIRP on the ground that the appeal was barred by limitation. The Directors of the CD argued that since the date of accrual of cause of action is 31.03.2013, i.e. when the CD's account was declared as NPA, the application under Section 7 of the IBC is barred by limitation as it was filed on 27.08.2018 i.e., after about 5 years and 5 months from the date of accrual of cause of action. The Directors relied on the Supreme Court's decision in the case of B.K. Educational Services Pvt Ltd Vs Parag Gupta and Associates which held that the Article 137 of the Limitation Act is applicable to applications filed under Section 7 and 9 of the Code, and that "The right to sue", accrues when a default occurs.

The directors of M/s Debi Fabtech Pvt Ltd. also relied on SC's recent judgement in Vashdeo R Bhojwani Vs Abhyudaya Cooperative Bank Ltd. And Anr., and Gaurav Hargovindbhai Dave Vs Asset Reconstruction Company (India) Ltd & Anr to support the argument that Article is applicable to Section 7 of the IBC, and the intent of the Code is not to give a new lease of life to debts which are already time barred.

The NCLAT Bench headed by Justice Jarat Kumar Jain (Judicial Member), observed that the Co-Op Bank had bonafidely initiated proceedings under the SARFEASI Act, against M/s Debi Fabtech Pvt Ltd. within limitation period, without being negligent. Therefore, the Appellate Bench was of the opinion that the Co-Op Bank was entitled for the exclusion of time period under Section 14(2) of Limitation Act i.e. the period of 3 years and 6 months.

Thus, upon allowing the exclusion of time spent in SARFAESI proceedings, the section 7 application was found to be within limitation, and accordingly the appeal was dismissed.

Click to Read Order.