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Sabarmati Gas Limited vs Shah Alloys Limited

Civil Appeal · 2023 INSC 10Decided 4 Jan 2023
Civil Appeal No. 1669 of 2020
Ajay Rastogi · C.T. Ravikumar · M.R. Shah as the presiding judge

Background

Sabarmati Gas supplied natural gas to Shah Alloys under a 2008 Gas Sales Agreement. Shah Alloys fell behind on invoices from late 2011 and had already been declared a "sick company" by the BIFR in August 2010, which under Section 22(1) of SICA barred creditors from suing it without BIFR's permission. Sabarmati stopped supply in August 2012 and sought BIFR's permission in 2013 to recover about Rs 4.71 crore. SICA was repealed on 1 December 2016 and the IBC came in. Sabarmati sent an IBC demand notice in April 2017, and filed a Section 9 insolvency application in August 2018. The NCLT dismissed it as time-barred and because Shah Alloys had raised a pre-existing dispute (short supply and losses from disconnection); the NCLAT affirmed.

Decision Breakdown

On limitation, the Supreme Court held that a Section 9 application must be filed within three years of the date of default (Article 137 of the Limitation Act), and there is no provision in the IBC that automatically excludes the period during which SICA's Section 22(1) bar was in force. However, a creditor who was legally prevented from suing during that period can plead that as "sufficient cause" for condoning the delay under Section 5 of the Limitation Act, and the tribunal must consider such a request rather than mechanically dismissing the case -- something the NCLT and NCLAT failed to do here. The Court would ordinarily have sent the case back on that point, but did not, because the second ground independently justified dismissal: applying Mobilox Innovations, a Section 9 application must be rejected if a genuine, plausible dispute existed before the demand notice, without the tribunal deciding who will ultimately win. Shah Alloys' January 2013 letter and its reply raising short supply and disconnection losses showed such a dispute, which was not spurious or feeble. Since the parties had also agreed before the Gujarat High Court to resolve their money claims through arbitration under the gas agreement's arbitration clause, the Court left all remaining contentions to the arbitrator and dismissed the appeal.

Lesson Learnt

The insolvency process is not a debt-collection tool: if the debtor had genuinely disputed the bill before the demand notice, the creditor must go to a civil court or arbitration instead. Also, a creditor who was legally barred from suing (for example, while the debtor was a "sick company") does not get an automatic extension of time under the IBC, but can ask for the delay to be condoned by explaining that bar.

Official source (sci.gov.in)View Judgment (PDF)

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