A&C Act| Court Must Exercise Its Discretion U/S 5 Limitation Act Only In Exceptional Cases Where Very Strong Case Is Made For Condonation Of Delay: SC

The Supreme Court observed that the Court must exercise its discretion under Section 5 of the Limitation Act, 1963 only in exceptional cases where a very strong case is made for the condonation of delay in filing a Section 11(6) application under the Arbitration and Conciliation Act, 1996 (A&C Act).

The Court observed thus in a civil appeal preferred against the judgment of the Bombay High Court by which it allowed the petition under Section 11(6) of A&C Act and appointed a Sole Arbitrator to adjudicate the disputes and differences between the parties.

The two-Judge Bench of CJI D.Y. Chandrachud and Justice J.B. Pardiwala held, “The legislative intent of expeditious dispute resolution under the Act, 1996 must also be kept in mind by the courts while considering an application for condonation of delay in the filing of an application for appointment of arbitrator under Section 11(6). Thus, the court should exercise its discretion under Section 5 of the Limitation Act only in exceptional cases where a very strong case is made by the applicant for the condonation of delay in filing a Section 11(6) application.”

The Bench said that the necessary pre-condition for availing the remedy under Section 5 of the Limitation Act is that the applicant must satisfy the Court that there was a sufficient cause which prevented him from instituting the application within the prescribed time period.

Solicitor General of India Tushar Mehta appeared for the appellant while Senior Advocate Jay Savla appeared for the respondent.

Facts of the Case -

The appellant, a government company was engaged in the business of manufacturing bio-fuels and the respondent was engaged in the business of manufacture, supply, and erection of the equipment and machinery required for setting up sugar factories. In 2012, the appellant floated tenders for enhancing the capacity of various process stations and the respondent participated in the bidding process and was declared as the successful bidder. Subsequently, the appellant issued purchase orders in favour of the respondent and invoices were raised accordingly. While the work was in progress, the appellant expressed its concerns about the slow progress of work, quality of materials supplied, and non-adherence to timelines by the respondent and attempts were made to resolve the same through mutual discussions between the parties.

The discussions between the parties undertaken between October 2013 and January 2014 did not yield any fruits as the issues relating to payment and deficiency in services rendered could not be resolved. In this regard, the respondent vide an e-mail made a request to release the balance amount at the earliest, so as to enable it to complete the balance work. But the appellant refused to clear the outstanding dues and hence, a legal notice was issued, seeking a release of the payment. Resultantly, an arbitration petition was filed before the High Court. Thereafter, the National Company Law Tribunal (NCLT) admitted the respondent’s application and appointed an Interim Resolution Professional (IRP), however, the NCLT’s order was set aside by the National Company Appellate Tribunal (NCLAT). The respondent filed a fresh petition before the High Court seeking appointment of arbitrator and the same was allowed. Being aggrieved, the appellant approached the Apex Court.

The following issues arose before the Supreme Court –

I. Whether a fresh application under section 11(6) of the Act, 1996 filed by the respondent could be said to be maintainable more particularly when no liberty to file a fresh application was granted by the High Court at the time of withdrawal of the first application under section 11(6) of the Act, 1996?

II. Whether the fresh application under section 11(6) of the Act, 1996 filed by the respondent on 09.12.2022 could be said to be time-barred? If yes, whether the respondent is entitled to the benefit of section 14 of the Limitation Act? In other words, whether the period spent by the respondent in pursuing proceedings under the IBC is liable to be excluded while computing the limitation period for filing the application under section 11(6)?

III. Whether the delay caused by the respondent in filing the fresh arbitration application under section 11(6) of the Act, 1996 can be condoned under section 5 of the Limitation Act?

While dealing with the first issue, the Court noted, “Undoubtedly, an application under Section 11(6) of the Act, 1996 is not a suit and hence will not be governed stricto-sensu by Order 23 Rule 1 of the CPC. However, in a number of decisions, this Court has extended the principle underlying Order 23 Rule 1 to proceedings other than suits on the ground of public policy underlying the said rule. The appellant has submitted that in view of the aforesaid decisions, there is no reason why the principles of Order 23 Rule 1 should not be extended to an application for appointment of arbitrator under Section 11(6) of the Act, 1996.”

The Court added that a petition under Section 11(6) of A&C Act is not a proceeding merely seeking the appointment of an arbitrator and it is in reality a proceeding for appointing an arbitrator and for commencing the actual or real arbitration proceedings.

“… the unconditional withdrawal of a Section 11(6) petition amounts to abandoning not only the formal prayer for appointing an arbitrator but also the substantive prayer for commencing the actual arbitration proceedings. It amounts to abandoning the arbitration itself. It results in abandonment of the notional ‘arbitration proceeding’ that had commenced by virtue of Section 21 and thus amounts to an abandonment of a significant nature. Therefore, it is all the more important to import and apply the principles underlying Order 23 Rule 1 of the CPC to abandonment of applications under Section 11(6)”, it observed.

With regard to the second issue, the Court said that the High Court fell in error in holding that an application under Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC) and an application under Section 11(6) of A&C Act are filed for seeking the same relief. It added that, while the relief sought in the former is the initiation of the CIRP (Corporate Insolvency Resolution Process) of the corporate debtor, the relief sought in the latter is the appointment of an arbitrator for the adjudication of disputes arising out of a contract.

“The object of initiation of insolvency proceedings under the IBC is to seek rehabilitation of the corporate debtor by appointment of a new management, whereas the objective behind the appointment of an arbitrator is to resolve the disputes arising between the parties out of a private contract. As soon as the CIRP of a corporate debtor is initiated, it becomes a proceeding in rem. On the contrary, arbitration being concerned with private disputes is not an in-rem proceeding”, it further remarked.

The Court enunciated that the insolvency proceedings are fundamentally different from proceedings for recovery of debt such as a suit for recovery of money, execution of decree or claims for amount due under arbitration, etc.

“… by no stretch of imagination can insolvency proceedings be construed as being for the same relief as any ordinary recovery proceedings, and therefore no case is made out for exclusion of time under Section 14(2) of the Limitation Act, 1963. … As the relief sought in an application under Section 11(6) of the Act, 1996 is not the same as the relief sought in an application under Section 9 of the IBC, the benefit of Section 14(2) cannot be given to the respondent in the present case”, it held.

Coming to the third and last issue, the Court said that in the absence of any specific statutory exclusion, there is no good reason to hold that the benefit under Section 5 of the Limitation Act cannot be availed for the purpose of condonation of delay caused in filing a Section 11(6) application.

“Although it is a general practice that a formal application under Section 5 of the Limitation Act has to be filed by the applicant, yet no such requirement can be gathered from a bare reading of the statute. Thus, even in the absence of a formal application, a court or tribunal may consider exercising its discretion under Section 5 of the Limitation Act subject to the applicant assigning sufficient cause for condoning the delay”, it added.

Accordingly, the Apex Court allowed the appeal and set aside the impugned order.

Cause Title- M/s HPCL Bio-Fuels Ltd. v. M/s. Shahaji Bhanudas Bhad (Neutral Citation: 2024 INSC 851)

Appearance:

Appellant: Solicitor General Tushar Mehta, AOR Sanjay Kapur, Advocates Surya Prakash, Devesh Dubey, Arjun Bhatia, Divya Singh Pundir, Mahima Kapur, Isha Virmani, and Shubhra Kapur.

Respondent: Senior Advocate Jay Savla, Advocates Prakash Shah, Durgaprasad Poojari, Jasddep Singh Dhillon, and Anirudh Jamwal.

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