Petition filed under section 433 of Companies Act 1956 beyond the period of three-years mentioned in Article 137 of the Limitation Act is time-barred, and cannot therefore be proceeded further

The Supreme Court in the matter of Jignesh Shah & Anr. v Union of India & Ors. (W.P. Civil No. 455/2019), decided on 25.09.2019 set aside the judgment of NCLAT & NCLT admitting a winding up petition that was filed by IL&FS Financial Services Ltd. against La-Fin Financial Services Pvt. Ltd.

 

Challenge:

Whether upon transfer of the winding up proceedings to the NCLT filed beyond the period of three-years mentioned in Article 137 of the Limitation Act is time-barred, or not?

 

Held:

The Supreme Court in the above-mentioned matter held that the trigger for limitation under section 433 of the Companies Act, 1956, 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. Therefore, the trigger of limitation, so far as the winding up petition is concerned, would be the date of default.

The Court observed that 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 Supreme Court clarifies that stage at which the Court examines whether the company is commercially insolvent is once it begins to hear the winding up petition for admission on merits. Limitation attaches with the petitions filed under Section 433(e) are concerned at the stage that default occurs for, and the debt becomes payable.

The Court further observes the principles need to be consider while admitting petition of winding up under section 433 of the Companies Act, 1956, are:

  1. A winding-up petition is not legitimate means of seeking to enforce payment of a debt which is bona fide disputed by the company. If the debt is not disputed on some substantial ground, the Court/Tribunal may decide it on the petition and make the order.
  2. If the debt is bona fide disputed, there cannot be “neglect to pay” within the meaning of Section 433(1)(a) of the Companies Act, 1956. If there is no neglect, the deeming provision does not come into play and the winding up on the ground that the company is unable to pay its debts is not substantiated.
  3. A debt about the liability to pay which at the time of the service of the insolvency notice, there is a bona fide dispute, is not “due” within the meaning of Section 434(1)(a) and non-payment of the amount of such a bona fide disputed debt cannot be termed as “neglect to pay” the same so as to incur the liability under Section 433(e) read with Section 434(1)(a) of the Companies Act, 1956.
  4. One of the considerations in order to determine whether the company is able to pay its debts or not is whether the company is able to meet its liabilities as and when they accrue due. Whether it is commercially solvent means that the company should be in a position to meet its liabilities as and when they arise.