The trigger of limitation is when a company is unable to pay its debts: SC
The Apex Court quashed the contention that the cause of action for the purposes of limitation would include the commercial insolvency or the loss of substratum of the company. It held that the trigger for the winding up proceeding for limitation purposes shall be the date of default.A share purchase agreement was executed between Multi-Commodity Exchange India Limited (MCX), MCX Stock...
The Apex Court quashed the contention that the cause of action for the purposes of limitation would include the commercial insolvency or the loss of substratum of the company. It held that the trigger for the winding up proceeding for limitation purposes shall be the date of default.
A share purchase agreement was executed between Multi-Commodity Exchange India Limited (MCX), MCX Stock Exchange Limited (MCX-SX) and IL&FS Financial Services Ltd. (IL&FS), whereby IL&FS agreed to purchase 442 lakh equity shares of MCX-SX from MCX. Pursuant to this agreement, La-Fin Financial Services Pvt. Ltd. (La-Fin), as a group company of MCX, issued a ‘Letter of Undertaking’ to IL&FS in August 2009 stating that La-Fin would offer to purchase from IL&FS the shares of MCX-SX within a period of three years from the date of investment. This period of three years expired in August 2012.
At the end of three years, La-Fin failed to buy the aforesaid shares. IL&FS filed a suit in the Bombay High Court for specific performance of the Letter of Undertaking by La-Fin or, in the alternative, for damages. In 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 (EOW) during the pendency of the suit.
In October 2016, a winding up petition was filed by IL&FS against La-Fin in the Bombay High Court under Section 433(e) of the Companies Act, 1956 which was transferred to the National Company Law Tribunal (NCLT) as a Section 7 application under the Insolvency and Bankruptcy Code, 2016 (I & B Code).The winding up petition was admitted by the NCLT. On appeal with the NCLAT upheld NCLT’s decision.
The shareholders of La-Fin – Jignesh Shah and Pushpa Shah – filed a writ petition with the Supreme Court of India, assailing the order of the NCLT, Mumbai bench.
The Supreme Court, relying on many judgements held 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.
The Court ruled that section 433(e) read with Section 434 of the Companies Act, 1956 shows 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 of the Companies Act, 1956.
The Apex Court ruled that a winding up proceeding is a proceeding ‘in rem’ and not a recovery proceeding. Therefore, the trigger of limitation, so far as the winding up petition is concerned, would be the date of default. The Court further held that “Upon transfer of the winding up proceedings to the NCLT, the date of default being August 2012 made it clear that three-years from that date had long since elapsed when the winding up petition under Section 433(e) was filed. 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) of the Companies Act are concerned at the stage that default occurs for, it is at this stage that the debt becomes payable.”
A bench of Supreme Court Justices R.F. Nariman, Surya Kant and R. Subhash Reddy ruled that winding up petition filed by IL&FS being beyond the period of three-years mentioned in Article 137 of the Limitation Act is time-barred, and cannot be therefore proceeded with any further. The judgment of the NCLAT and the judgment of the NCLT was set aside.