Commencement of limitation period to file application under Section 9 of IBC in case of an Arbitral Award of Default

Applicability of the Limitation Act, 1963 to proceedings under Insolvency and Bankruptcy Code, 2016 (IBC) had long been a debated issue. Initially, as IBC was silent on this issue, NCLAT in M/s Neelakanth Township and Construction Pvt ltd Vs Urban Infrastructure Trustees ltd observed that the Limitation Act, 1963 will not be applicable to IBC. The same was re-affirmed by Hon’ble Appellate Tribunal in M/s Speculum Plast Pvt. Ltd. vs PTC Techno Pvt. Ltd. Finally, the legislature cleared up the uncertainties and inserted Section 238A in the Code by IBC Amendment, 2018 w.e.f 06.06.2018, which made the provisions of Limitation Act applicable to the proceedings and appeals before Adjudicating Authority, NCLAT and Debt Recovery Tribunal. However, this amendment gave rise to other related issues pertaining to the date from which the period of limitation will be determined and whether Section 238A will have retrospective application. The Hon’ble Supreme Court settled these issues in the landmark judgement of B.K. Educational Services Private Limited vs. Parag Gupta & Associates (“B.K. Educational”). It held that the Limitation Act will apply to applications made under Section 7 and 9 of IBC on and from the commencement of IBC i.e. 01.12.2016 and thus, gave Section 238A a retrospective application. With regards to the date of commencement of limitation period,  the court held that since limitation act is applicable to proceedings under IBC, Article 137 of Limitation Act will be evoked. The said article provides the period of limitation for “such applications for which no period of limitation is provided elsewhere” as three years from the time the right to apply accrues. Further, the Apex Court in the same case clarified that “the right to sue” accrues when a ‘default’ occurs and not when IBC was commenced i.e. 01.12.2016.

Initiation of proceedings under IBC by Operational Creditor with respect to an arbitral award of default

In M/s Innoventive Industries ltd. vs. ICCI bank & Anr., the Supreme Court had distinguished between the initiation of proceedings under IBC by Operational Creditor and Financial Creditor. The court clarified that in case of an operational debt, the application under Section 9 of IBC (“Section 9”) can be admitted only when there is an operational debt which is due and payable and there do not exist any dispute related to it before the receipt of demand notice (“notice”) under Section 8 of IBC. However, in case of financial creditors, proceedings can be initiated under IBC when the debt becomes due and payable as the Adjudicating Authority merely sees the record of information utility or other evidence produced by financial creditor, to satisfy itself that a default has occurred. The issue of ‘existence of dispute’ does not arise in this case.

Existence of dispute with respect to proceedings under Section 34 and 37 of Arbitration and Conciliation Act, 1996 (“Arbitration Act”)

As ‘non-existence of a dispute’ is an essential condition for an operational creditor to initiate Corporate Insolvency Resolution Process (“CIRP”), it is important to understand the ‘existence of dispute’ with regards to proceedings under Section 9. The term “dispute” is defined under Section 5(6) of IBC which states that “dispute” includes a suit or arbitration proceedings relating to the existence of amount of debt, the quality of goods and services, or the breach of warranty.

This reflects that an ongoing or a pending arbitration proceedings will amount to ‘dispute’ under Section 9, but whether the proceedings challenging an arbitral award under Section 34 of the Arbitration Act (“Section 34”) or appeal from such orders under Section 37 (“Section 37”) of the Arbitration Act would constitute a “dispute’ barring the initiation of CIRP under Section 9, is a question which has been dealt by the courts time and again.

NCLAT has dealt with a similar question in Annapurna Infrastructure Pvt Ltd & Anor v SORIL Infra Resources Ltd (“Annapurna case”). In that, the dispute between the parties was adjudicated by an arbitral award in favor of the creditor which was then challenged under Section 34. The said challenge was subsequently dismissed by the High Court. The appeal against the order of the High Court under Section 37 was filed and was pending when operational creditor invoked Section 9 against the debtor. NCLAT observed that the arbitral tribunal’s order is required under Form 5 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 to record an event of default and concluded that non-payment of the awarded amount, thus amounts to ‘default’ under the code. Further, by analyzing the scheme of Arbitration Act, the Tribunal observed that once the time period for challenging arbitral award is over or if the challenge is dismissed, the award becomes a decree, a valid proof of default and, thus, CIRP can be initiated against it regardless of the pendency of appeal under Section 37.

This question was then dealt by the Apex Court in K. Kishan v. M/s Vijay Nirman Company Pvt. Ltd.(“Kishan’s case”) which provided clarity on the issue and widened the scope of Annapurna case. In this case, after the arbitral award came in favor of operational creditor, on 06.02.2017, a demand notice was served on the debtor which was disputed within 10 days. Thereafter, the particular award was challenged under Section 34. Operational creditor filed an application under Section 9 at the time when Section 34 challenge was pending in the court. NCLT and NCLAT admitted the application and initiated CIRP against the corporate debtor. While looking into this matter, the Supreme Court considered its own decision in Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd. where it held that for a matter to fall within the scope of ‘dispute’ under Section 9, it should be a real dispute and not hypothetical or illusory and it need not be bona fide. The Court then delved into the merit of the dispute and held that “the filing of a Section 34 petition against the arbitral award shows that a ‘pre-existing dispute’ which culminates at the first stage of the proceedings in an award, continues even after the award, at least till the final adjudicatory process under Sections 34 & 37 has taken place”. It further added that, CIRP can be initiated in cases where challenge petition under Section 34 is clearly barred by limitation i.e. it is not filed with in the period of 90 days plus the discretionary period of 30 days, starting from the date of arbitral award. It can be inferred from this case, that even if under Section 34, challenge is not filed before the receipt of notice, the dispute will still be considered to exist if the notice is made with in the limitation period to challenge the award.

Commencement of Limitation period in case of Operational Debt

As discussed above, Supreme Court in B.K Educational made it clear that the limitation period of 3 years to file application under Section 7 and 9 of IBC commences when the right to apply accrues i.e. when the ‘default’ occurs. How far does this view stand correct in case of an operational debt where there is an existence of dispute?

As mentioned earlier, according to section 7, application to commence insolvency proceedings by financial creditor can be filed when a ‘default’ occurs but in case of operational creditor, the application under Section 9 can only be made when the ‘default’ occurs and there is no dispute. In case of an existing dispute, the operational creditor’s right to apply, in its true sense, accrues only when the existing dispute comes to an end and is finally settled.

With regards to the existence of dispute in case of an arbitral award of default, it can be inferred from Kishan’s case that the dispute persists until the time the limitation period of challenging an award under Section 34 continues. If the challenge under Section 34 is filed before the limitation period expires and gets dismissed, the dispute will only be deemed to be finally settled:

i. when the limitation period to file an appeal under Section 37 expires and the appeal is not filed within it; or

ii. when the appeal is filed and gets dismissed thus, making the ‘default’ final and undisputed.

Therefore, only after the above-mentioned proceedings are over, the right to apply under Section 9 will accrue and limitation period of 3 years will begin from the date, the dispute is settled. As per the B.K. Educational case, even if we take the right to apply to accrue on the occurrence of default, the time for which the dispute persists is excluded from that time period and ultimately the limitation period will commence when the dispute is finally settled.

Recently, NCLAT in G. Shivramkrishna Vs. M/s Isgec Covema Limited (“G. Shivramkrishna’s case”), dealt with the issue of commencement of limitation period for filing an application under Section 9. In this matter, an arbitral award was passed in favor of operational creditor on 30.05.2013 which was then challenged under Section 34 and got dismissed by court on 27.01.2016. It was not appealed further under Section 37. Operational creditor served the debtor with demand notice to which debtor failed to reply. Thus, the creditor invoked the jurisdiction of Adjudicating authority under Section 9 by filing an application on 03.04.2019. The question before the authority was whether, the application under section 9 was filed within the limitation period? For this, NCLAT took into account the limitation period to file an appeal under Section 37 i.e. 90 days from the date of decree as per Article 116 of Limitation Act. NCLAT relied on Kishan’s case where it was held that dispute exists till the final adjudication under Section 34 and 37 is done, and therefore, it excluded the limitation period of appeal under Section 37 i.e. 90 days from 27.01.2016, while calculating the limitation period to file an application under Section 9. Hence, it averred to commence the said period of limitation from 27.04.2016. The limitation period as per Article 137 extends for 3 years, i.e. in this case it will extend till 27.04.2019. Thus, the application filed under Section 9 on 03.04.2019 is well with in limitation period.

Therefore, one can observe that NCLAT excluded the time period for which the dispute persists and commenced the limitation period from the date the dispute was settled and not when the award was passed or challenge against the award was dismissed.

Conclusion

In case of operational debt, the limitation period under Article 137 will ideally commence from the date, the existing dispute is finalized. With regards to the arbitral award of default, Courts in Kishan’s and G. Shivramkrishna’s case pointed towards a legal scenario where proceedings against operational creditors under IBC can be unwarrantedly deferred due to the long-lasting on-going litigations under Section 34 and 37 and this will put an automatic stay to proceedings under IBC. Even after the challenge against the award of default under section 34 is dismissed and appeal is not filed thereafter, CIRP can only be initiated after 90 days from the dismissal order. This can be used to unnecessarily stall the insolvency process even when the dispute lacks merit and is a total sham. The Adjudicating Authority while dealing with the issue of pendency of dispute in such cases, shall conscientiously examine the merits of the dispute pending under section 34 or 37 to the extent it is necessary to determine whether it is a real dispute or a bogus one. The authority should stay the insolvency proceedings against operational creditor only when the dispute has some merits and is not illusory. This will prevent the misuse of legal intricacies for delaying a legitimate insolvency process against a corporate debtor.

However, this article is concerned only with those proceedings, which relate to the ‘default’ arisen before 25th March, 2020. With the introduction of Section 10A by Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020, the proceedings under Section 7, 9 and 10 of IBC, in relation to any default arising on or after 25th March, 2020 has been suspended for a period of 6 months or extended period not beyond 1 year. It will be interesting to see how the courts ascertain the limitation period in cases of such defaults which are under the purview of Section 10 A of IBC.

Author Bio

Qualification: Student- Others
Company: ILS Law College
Location: Pune, Maharashtra, IN
Member Since: 01 Jul 2020 | Total Posts: 1

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