Case: JIGNESH SHAH Vs. UNION OF INDIA

4. The brief facts necessary to appreciate the narrow controversy that arises in Writ Petition (Civil) No.455 of 2019 and its connected matters are asOn 20 th August, 2009, a share purchase agreement was executed between Multi-Commodity Exchange India Limited (hereinafter referred to as ?MCX?), MCX Stock Exchange Limited (hereinafter referred to as ?MCX-SX?) and IL&FS, whereby IL&FS agreed to purchase 442 lakh equity shares of MCX-SX from MCX.(ii) Pursuant to this agreement, La-Fin, as a group company of MCX, issued a ‘Letter of Undertaking? to IL&FS on 20 th August, 2009 (hereinafter referred to as the ?Letter of Undertaking?) stating that La-Fin or its appointed nominees would offer to purchase from IL&FS the shares of MCX-SX after a period of one year, but before a period of three years, from the date of investment. On facts, this period of three years expired in August, 2012.(iii) IL&FS, therefore, by its letter dated 3 rd August, 2012, exercised its option to sell its entire holding of shares in MCX-SX, and called upon La-Fin to purchase these shares in accordance with the Letter of Undertaking. On 16 th August, 2012, La-Fin replied that it was under no legal or contractual obligation to buy the aforesaid shares.(iv) Thereafter, correspondence between the parties continued, until finally, on 19 th June, 2013, IL&FS filed a Suit No.449 of 2013 in the Bombay High Court for specific performance of the Letter of Undertaking by La-Fin or, in the alternative, for damages. It is important to note that the cause of action for the suit - as stated in the plaint - arose on 16 th August, 2012, i.e. the day La-Fin purportedly refused to honour its obligation under the Letter of Undertaking.(v) On 13 th October, 2014, a learned Single Judge of the Bombay High Court passed an injunction order restraining La-Fin from alienating its assets pending disposal of the suit, subject to attachments of La-Fin?s properties that had been made by the Economic Offences Wing of the Mumbai Police (hereinafter referred to as the ?EOW?) during the pendency of the suit. An appeal against this order was dismissed by a Division Bench of the Bombay High Court on 11 th September, 2015.(vi) On 3 rd November, 2015, a statutory notice under Section 433 and 434 of the Companies Act, 1956 was issued by IL&FS to La-Fin, referring to the attachment by the EOW, and stating that La-Fin was obviously in no financial position to pay the sum of INR 232,50,00,000/- which, according to IL&FS, was owing to them as of 31 st October, 2015. On 18 th November, 2015, a reply was promptly given by La-Fin to the aforesaid notice referring to the pending suit, and stoutly disputing the fact that any amount was due and payable. The reply went on to state that La-Fin was otherwise commercially sound and that the statutory notice issued under Sections 433 and 434 of the Companies Act, 1956 was only a pressure tactic.(vii) On 21 st October, 2016, a winding up petition (hereinafter referred to as the ?Winding up Petition?) was then filed by IL&FS against La-Fin in the Bombay High Court under Section 433(e) of the Companies Act, 1956.(viii) The Code came into force on 1 st December, 2016, and as a result, as per the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016, the Winding up Petition was transferred to the NCLT as a Section 7 application under the Code. The statutory form under these Rules, namely, Form-1 was filled up by IL&FS indicating that the date of default was 19 th August, 2012.(ix) On 28 th August, 2018, the said Winding up Petition was admitted by the NCLT as an application under Section 7 of the Code, stating on a reading of the share purchase agreement and the Letter of Undertaking that a financial debt had, in fact, been incurred by La-Fin. The National Company Law Appellate Tribunal (hereinafter referred to as the ?NCLAT?) by an order dated 21 st January, 2019 dismissed the appeal filed by Shri Jignesh Shah against the aforesaid admission order, agreeing with the 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 on which the Code came into force, viz., 1 st December, 2016.(x) A Writ Petition was filed by Smt. Pushpa Shah against these orders in the Bombay High Court, challenging certain provisions of the Code, with which we are not directly concerned. Writ Petition (Civil) No.455 of 2019 was then filed in this Court on 4 th April, 2019 challenging the constitutionality of certain provisions of the Code, as well as the NCLT and NCLAT orders, after which the Civil Appeal (Diary No. 16521 of 2019) was also filed against the NCLAT order under Section 62 of the Code.

Reasoning: 10. This judgment clinches the issue in favour of the Petitioner/Appellant. With the introduction of Section 238A into the Code, the provisions of the Limitation Act apply to applications made under the Code. Winding up petitions filed before the Code came into force are now converted into petitions filed under the Code. What has, therefore, to be decided is whether the Winding up Petition, on the date that it was filed, is barred by lapse of time. If such petition is found to be time-barred, then Section 238A of the Code will not give a new lease of life to such a time-barred petition. On the facts of this case, it is clear that as the Winding up Petition was filed beyond three years from August, 2012 which is when, even according to IL&FS, default in repayment had occurred, it is barred by time.The aforesaid judgments correctly hold that a suit for recovery based upon a cause of action that is within limitation cannot in any manner impact the separate and independent remedy of a winding up proceeding. In law, when time begins to run, it can only be extended in the manner provided in the Limitation Act. For example, an acknowledgement of liability under Section 18 of the Limitation Act would certainly extend the limitation period, but a suit for recovery, which is a separate and independent proceeding distinct from the remedy of winding up would, in no manner, impact the limitation within which the winding up proceeding is to be filed, by somehow keeping the debt alive for the purpose of the winding upcontext in which the learned Single Judge made an observation that the filing of a suit within limitation would keep the debt alive, is in the context of Section 13 of the Presidency-towns Insolvency Act, 1909 - which requires that the debt of the petitioning creditor should be alive even at the hearing of the insolvency petition. Obviously, if at the hearing of the petition, the debt was time-barred, the stringent result of insolvency of the individual concerned would not follow. It is in this context that the learned Single Judge held that a debt would be subsisting at the date of hearing of the insolvency petition if a suit was filed to recover it within the period of limitation. The context of Section 13 of the Presidency-towns Insolvency Act, 1909 is far removed from the present context, in which what has to be seen is whether a winding up proceeding has been filed within the limitation period provided. In the facts of the present case, no question as to subsistence of a live debt at the hearing of a winding up petition is at all involved. This case is, therefore, wholly distinguishable.21. Shri Kaul then relied strongly on the rationale for laws of limitation generally, which was set out in Rajender Singh and Ors. v. Santa Singh and Ors. (1973) 2 SCC 705  asThe policy underlying statutes of limitation, spoken of as statutes of ?repose?, or of ?peace? has been thus stated in Halsburys Laws of England Vol. 24, p. 181 (paraPolicy of Limitation Acts.—The Courts have expressed at least three differing reasons supporting the existence of statutes of limitation, namely: (1) that long dormant claims have more of cruelty than justice in them, (2) that a defendant might have lost the evidence to disprove a stale claim, and (3) that persons with good causes of actions should pursue them with reasonable diligence.?18. The object of the law of limitation is to prevent disturbance or deprivation of what may have been acquired in equity and justice by long enjoyment or what may have been lost by a partys own inaction, negligence, orobservations are apposite in the context of the facts of the present case. It is clear that IL&FS pursued with reasonable diligence the cause of action which arose in August, 2012 by filing a suit against La-Fin for specific performance of the Letter of Undertaking in June, 2013. What has been lost by the aforesaid party?s own inaction or laches, is the filing of the Winding up Petition long after the trigger for filing of the aforesaid petition had taken place; the trigger being the debt that became due to IL&FS, in repayment of which default has takenreading of the aforesaid provisions would show that the starting point of the period of limitation is when the company is unable to pay its debts, and that Section 434 is a deeming provision which refers to three situations in which a Company shall be deemed to be ?unable to pay its debts? under Section 433(e). In the first situation, if a demand is made by the creditor to whom the company is indebted in a sum exceeding one lakh then due, requiring the company to pay the sum so due, and the company has for three weeks thereafter ?neglected to pay the sum?, or to secure or compound for it to the reasonable satisfaction of the creditor. ?Neglected to pay? would arise only on default to pay the sum due, which would clearly be a fixed date depending on the facts of each case. Equally in the second situation, if execution or other process is issued on a decree or order of any Court or Tribunal in favour of a creditor of the company, and is returned unsatisfied in whole or in part, default on the part of the debtor company occurs. This again is clearly a fixed date depending on the facts of each case. And in the third situation, it is necessary to prove to the ?satisfaction of the Tribunal? that the company is unable to pay its debts. Here again, the trigger point is the date on which default is committed, on account of which the Company is unable to pay its debts. This again is a fixed date that can be proved on the facts of each case. Thus, Section 433(e) read with Section 434 of the Companies Act, 1956 would show that the trigger point for the purpose of limitation for filing of a winding up petition under Section 433(e) would be the date of default in payment of the debt in any of the three situations mentioned in Section 434.According to Shri Kaul, it was not possible for his client to approach the High Court with a winding up petition as on the date on which he filed the suit for specific performance, because La-Fin (i.e. the Company sought to be wound up), could not be said to have lost its substratum as on such date. It was for this reason that he approached the winding up Court in 2016, when the assets of La- Fin, which, as of 2013 were worth over INR 1000 crores, had in 2016 become only worth INR 200 crores.25. This judgment does not take Shri Kaul?s argument any further. Nowhere in the Winding up Petition is it alleged that the company sought to be wound-up has lost its substratum, in the sense that there is no reasonable prospect of it ever making a profit in the future, nor can it be said that the company had abandoned its business and is, therefore, unable to meet the outstandings owed by it. On the other hand, what emerges from this judgment (and paragraph 21 therein in particular), is that it is not open for a company to say that a debt is undisputed, that it has ability to pay the debt, but will not pay the debt. Equally, where a debt is clearly owed, but the exact amount of debt is disputed, the company will be held to be unable to pay its debts. What has to be seen in each case is whether the debt is bona fide disputed. If so, without more, a winding up petition would then be dismissed. One other thing must be noticed at this stage. The trigger for limitation is the inability of a 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 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 solvency 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 then 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 attaches 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. For this reason, it is difficult to accept Shri Kaul?s submission that the cause of action for the purposes of limitation would include the commercial insolvency or the loss of substratum of the company.The Bombay High Court judgment referred to in paragraph 23 of the judgment above 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 bona fide disputed by the Company. Absent such dispute, the petition may be admitted. Equally, where the debt is bona fide 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 then does not come into play. Also, the moment there is a bona fide 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.29. Even on the facts of this case, the Winding up Petition alleges that the ultimatum to the Respondent company asserting that the Respondent company was legally obliged to purchase the requisite shares in accordance with the terms of the Letter of Undertaking was on 7 th January, 2013. By this date at the very latest, the cause of action for filing a petition under Section 433(e) certainly arose. Also, as has been correctly pointed out by Dr. Singhvi, the statutory notice given on 3 rd November, 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 EOW which had taken place long before in December 2013. Factually, therefore, no basis is laid for the legal contentions argued before us by Shri Kaul.30. In the Winding up Petition itself, what is referred to is the fall in the assets of La-Fin to being worth approximately INR 200 crores as of October, 2016, which again does not correlate with 3 rd November, 2015, being the date on which the statutory notice was itself issued. This again is only for the purpose of appointing an Officer of the Court as Official Liquidator in order to manage the day-to-day affairs and otherwise secure and safeguard the assets of the Respondent company. 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 pleaded. 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 th August, 2012; making it clear that three-years from that date had long since elapsed when the Winding up Petition under Section 433(e) was filed on 21 st October, 2016.Having heard the learned Senior Counsel for the parties, it is important to first advert to this Court?s decision in B.K. Educational Services Pvt. Ltd. (supra) in which Section 238A of the Code was referred to, which states asLimitation.—The provisions of the Limitation Act, 1963 (36 of 1963) shall, as far as may be, apply to the proceedings or appeals before the Adjudicating Authority, the National Company Law Appellate Tribunal, the Debt Recovery Tribunal or the Debt Recovery Appellate Tribunal, as the case may38. This case is most apposite. As in the present case, and as is reflected in the Insolvency Law Committee Report of March, 2018, the legislature did not contemplate enabling a creditor who has allowed the period of limitation to set in to allow such delayed claims through the mechanism of the Code. The Code cannot be triggered in the year 2017 for a debt which was time- barred, say, in 1990, as that would lead to the absurd and extreme consequence of the Code being triggered by a stale or dead claim, leading to the drastic consequence of instant removal of the present Board of Directors of the corporate debtor permanently, and which may ultimately lead to liquidation and, therefore, corporate death. This being the case, the expression ?debt due? in the definition sections of the Code would obviously only refer to debts that are ?due and payable? in law, i.e., the debts that are not48. It is thus clear that since the Limitation Act is applicable to applications filed under Sections 7 and 9 of the Code from the inception of the Code, Article 137 of the Limitation Act gets attracted. ?The right to sue?, therefore, accrues when a default occurs. If the default has occurred over three years prior to the date of filing of the application, the application would be barred under Article 137 of the Limitation Act, save and except in those cases where, in the facts of the case, Section 5 of the Limitation Act may be applied to condone the delay in filing such application.?