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The Supreme Court on Wednesday set aside an order of the National Company Law Appellate Tribunal (NCLAT) on account of the law of limitation. The NCLAT had allowed insolvency proceedings against La-Fin Financial Services, owned by Jignesh Shah.
While allowing the appeal against the NCLAT order filed by Jignesh Shah, the Bench of Justices Rohinton Nariman, R Subhash Reddy, and Surya Kant observed that the winding up petition is time-barred and subject to the provisions of the Limitation Act.
Winding up petitions are dealt with under Section 7 of the Insolvency and Bankruptcy Code since its enactment, and was covered under Section 433(e) of the Companies Act prior to that. Section. 433 (e) provides that a company may be wound up by a tribunal if it is unable to pay its debts.
With this judgment, the Supreme Court has yet again reiterated that Section 7 applications under the IBC are subject to Section 137 of the Limitation Act.
In the instant case, IL&FS Financial Services Limited had filed a winding up petition under Section 433(e) of the Companies Act against Jignesh Shah owned La-Fin Financial Services before the Bombay High Court. The ground for this petition was the non-payment of purported dues by La-Fin to IL&FS.
In 2009, IL&FS had agreed to purchase 442 lakh equity shares of MCX Stock Exchange Limited from Multi Commodity Exchange India Limited (MCX) and a share purchase agreement was executed to that effect. La-Fin, which is a group company of MCX, issued a Letter of Undertaking to IL&FS stating that it would offer to purchase these equity shares from IL&FS between the period of one to three years from then. This period of three years lapsed in August 2012.
IL&FS decided to sell its entire stake in MCX-SX and sought for La-Fin to offer to purchase the same in conformity with the Letter of Undertaking. However, Jignesh Shah maintained that his company was under no legal obligation to make the purchase.
After various rounds of correspondence, IL&FS sent statutory notices to La-Fin in November 2015 under Sections 433 and 434 of the Companies Act. In response to the same, La-Fin had disputed the existence of dues claimed by IL&FS. In October 2016, a winding up petition was moved by IL&FS in the Bombay High Court. This was subsequently transferred to the NCLT as a Section 7 application under the IBC.
The Mumbai Bench of the NCLT admitted the plea in 2018, finding that a financial debt did, in fact, exist in the instant case owing to the share purchase agreement as well as the Letter of Undertaking signed by La-Fin. The Tribunal thus paved the way for insolvency proceedings against La-Fin. This decision of the NCLT was challenged by Jignesh Shah before the NCLAT, which upheld the decision of the NCLT.
This prompted Shah to approach the Supreme Court in appeal.
The Supreme Court noted that the cause of action arose in August 2012, whereas the remedy sought before the High Court was only in October 2016, more than three years after the cause of action arose. On the question of when the trigger for limitation takes place, the Court held,
“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.”
Since the relief sought by IL&FS did not pass the test of limitation, the order of the NCLAT deserves to be set aside. The Court said,
“…the Winding up Petition filed on 21st October, 2016 being beyond the period of three-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 is set aside.”
Senior Counsel Neeraj Kishan Kaul argued for IL&FS, while Senior Advocate Abhishek Manu Singhvi represented Jignesh Shah.