SC:Suit for recovery can’t effect limitation period of winding up proceedings

The Hon’ble Supreme Court, on 25th September 2019, in the matter of Jignesh Shah & Anr. v. Union of India & Anr. pronounced that a suit for recovery based upon a cause of action that is within limitation cannot in any manner impact the limitation within which the separate and independent remedy of a winding up proceeding is to be filed.

The Hon’ble Supreme Court observed 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. (Para 19)

In law, when time begins to run, it can only be extended in the manner provided in the Limitation Act. (Para 19)

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 up proceeding. (Para 19)

A reading of Section 433(e) and Section 434 of the Companies Act, 1956, 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. (Para 22)

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. 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. (Para 25)

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. (Para 25)

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. (Para 25)

The facts as to commercial insolvency are to be pleaded and proved at the admission stage of the winding up petition; the trigger for the winding up proceeding for limitation purposes being the date of default. (Para 26)

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’. (Para 28)

Copy of judgement: Judgement_25-Sep-2019

-Adv. Tushar Kaushik 

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