Introduction
In the case of HPCL Bio-Fuels Ltd. v. Shahaji Bhanudas Bhad[i], the Hon’ble Supreme Court delivered a crucial ruling distinguishing the nature of legal remedies and limitations imposed upon them in contractual disputes. The judgment clarifies the applicability of the Limitation Act, 1963 (‘LA’) in arbitration and insolvency proceedings, emphasizing the importance of identifying the specific relief sought.
The Court thoroughly examined the principles analogous to o. 23 r. 1 of the Civil Procedure Code, 1908 (‘CPC’) and their applicability to arbitration clauses in contracts. It also analysed the scope of excluding time under s. 14 of the LA and the discretionary nature of condoning delays under s. 5 of the LA.
The judgment emphasized the importance of procedural compliance in arbitration applications and the strict interpretation of limitation statutes. It clarified the legal relationship between arbitration and insolvency proceedings, highlighting the importance of procedural diligence and the timely pursuit of legal remedies. By reaffirming established precedents in procedural jurisprudence, the Court reiterated that limitations are not designed to extinguish rights but to ensure finality and predictability in litigation. After all, the law assists those who vigilantly observe their rights within these limitations; it does not extinguish the right itself. Limitations exist so that one does not go bench hunting, bending laws and rules to suit one’s convenience at the expense of justice and fairness.
Brief Facts
Hindustan Petroleum Corporation Biofuel Ltd. (‘Appellant’) is a government company engaged in manufacturing bio-fuels and is a wholly-owned subsidiary (WOS) of Hindustan Petroleum Corporation Ltd. The Respondent operates as a sole proprietor and is engaged in manufacturing, supplying, and erecting equipment and machinery for sugar factories and allied products.
The Appellant had floated tenders to enhance the capacity of various process stations and Boiling Houses. The Respondent was declared the successful bidder and, as per the tender’s terms, received purchase orders (‘POs’) from the Appellant on a turnkey basis. Between 21.11.2012 and 25.03.2014, the Respondent supplied equipment under these POs and issued invoices accordingly.
The Appellant expressed dissatisfaction with the progress, punctuality, and quality of materials supplied by the Respondent, which led to mutual discussions for resolution. In 2013, the Appellant floated two additional tenders for similar work at the same plants, awarding the POs again to the Respondent. The Respondent raised invoices for various supplies totalling Rs. 38.18 crore, of which the Appellant paid Rs. 19.02 crore, leaving an outstanding balance of Rs. 18.12 crore.
The dispute over the quality of work remained unresolved, and the Appellant refused to clear the outstanding balance. In July 2016, the Respondent issued a legal notice demanding payment, invoking the arbitration clause in case of non-payment. Receiving no response, the Respondent filed an arbitration petition under s. 11(6) of the Arbitration and Conciliation Act, 1996 (‘Act’), in February 2018, before the High Court of Bombay seeking an appointment of an arbitrator.
Before filing the arbitration petition, the Respondent sent a demand notice under s. 8 of the Insolvency & Bankruptcy Code, 2016 (‘IBC’), claiming the outstanding amount with interest. In October 2018, the Respondent withdrew the arbitration petition and instead filed a petition under s. 9 of the IBC before the National Company Law Tribunal (‘NCLT’), Kolkata, seeking initiation of a corporate insolvency resolution process (‘CIRP’) against the Appellant. The Appellant opposed the IBC proceedings on the grounds that there were pre-existing disputes between the parties even prior to the issuance of the demand notice under s. 8 of the IBC.
The NCLT admitted the Respondent’s application and appointed an interim resolution professional (‘IRP’). On appeal, the National Company Law Appellate Tribunal (‘NCLAT’), Delhi, set aside the NCLT order. The Respondent’s subsequent civil appeal before the Supreme Court was dismissed, bringing an end to the insolvency proceedings.
Thereafter, the Respondent filed a fresh petition under s. 11(6) of the Act before the High Court, seeking the appointment of an arbitrator. The Appellant opposed it, arguing it was time-barred under the LA. However, the High Court ruled in favour of the Respondent and appointed an arbitrator. Aggrieved, the Appellant challenged this decision before the Supreme Court.
Issues Raised
The Court identified three primary issues based on the facts and circumstances of the appeal:
Whether a fresh application under s. 11(6) of the Act is maintainable when the High Court did not grant permission to file a new application at the time of withdrawing the first application under the same provision?
Whether the fresh application under s. 11(6) of the Act, filed by the Respondent, is time-barred? If so, is the Respondent entitled to the benefit of s. 14 of the LA?
Can the delay in filing the fresh arbitration application be condoned under s. 5 of the LA?
Held
Maintainability of the Fresh Application: The Court ruled in favour of the Appellant by setting aside the High Court’s order. It held that since no liberty was granted at the time of withdrawing the first application under s. 11(6) of the Act, the fresh application filed by the Respondent under the same provision was not maintainable. The Court further concluded that the fresh application was time-barred under the LA, and the Respondent was not entitled to the benefit of s. 14(2) of the LA, or the condonation of delay under s. 5 of the LA.
Analysis of Procedural Abandonment: The Court observed that the Respondent did not withdraw the first arbitration application due to any defect that could have led to its dismissal. Instead, the withdrawal was a calculated decision aimed at abandoning arbitration proceedings to pursue insolvency proceedings under the IBC. It was observed that this move was intended to maximize the chances of success in the insolvency process. The Court analysed the applicability of o. 23 r. 1 of the CPC to proceedings beyond suits and clarified the difference between ‘withdrawing’ and ‘abandoning’ a suit. It was explained that a suit could be withdrawn with the leave of the court if it suffers from a formal defect or for sufficient grounds that justify the institution of a fresh suit on the same subject matter. However, abandonment of a suit or claim is an absolute right of the plaintiff and does not require court permission. Once abandoned, such claims cannot be reinstituted. The Court noted that o. 23 r. 1(3) CPC is founded on public policy to prevent repeated litigation on the same cause of action while ensuring justice is not thwarted by technicalities.
Scope of S. 14(2) of the LA: The Court further held that the High Court had erred in treating proceedings under s. 9 of the IBC and s. 11(6) of the Act as seeking the same relief. It found that a petition under s. 11(6) of the Act is not a suit and falls under s. 14(2) of the LA, where the scope of the expression ‘same matter in issue’ is narrower than ‘same relief’ under s. 14(1) of the LA. The Supreme Court explained the distinct purposes of both proceedings. It held that insolvency proceedings aim to rehabilitate a corporate debtor (CD) by bringing in new management and are proceedings in rem (affecting public rights). In contrast, arbitration is a private dispute resolution mechanism limited to the parties involved and considered in personam (affecting private rights). Thus, the Court concluded that insolvency proceedings cannot be equated with recovery proceedings, nor can they be considered seeking the same relief. Hence, no case was made for excluding the time spent in insolvency proceedings under s. 14(2) of the LA.
Lack of Bona Fide Intent: The Court emphasized that an inherent ingredient for granting relief under s. 14 of the LA is the element of bona fide mistake. The Respondent’s actions, however, were found to demonstrate a lack of good faith. Despite being aware of the Appellant’s objection regarding pre-existing disputes, the Respondent consciously abandoned arbitration to pursue insolvency. It was stated that such strategic choice cannot be termed a mistake, and the Respondent must bear the consequences of its decision.
Condonation of Delay under S. 5 of the LA: The Court reminded that relief under s. 5 of the LA is discretionary, not mandatory. Even upon showing sufficient cause, an applicant cannot claim condonation of delay as a matter of right. The Court affirmed that s. 5 applies to applications under s. 11(6) of the Act unless expressly excluded. While the absence of a formal application for condonation does not preclude courts from exercising discretion, the Respondent failed to demonstrate any sufficient cause for the delay. Given the Respondent’s deliberate abandonment of arbitration proceedings and strategic actions, the Court declined to grant relief under s. 5. The Court reiterated that procedural safeguards cannot be exploited to prolong litigation or bench hunting and that such practices undermine the principles of fairness and justice.
Our Analysis
In this case, the Supreme Court’s judgment reinforces the importance of procedural compliance and highlights the distinct nature of different legal remedies. It brings forth the need for strict adherence to procedural rules and statutory timelines to ensure legal certainty and predictability. However, since no legal framework is perfect, the rigidity of such rules can sometimes overlook substantive justice, especially in complex commercial disputes where procedural missteps may result in disproportionate consequences.
The Court’s distinction between in rem (public) and in personam (private) proceedings is a crucial aspect of the judgment. It reinforces that insolvency proceedings under the IBC are meant to address broader public interests, while arbitration focuses on resolving private disputes. This clear demarcation preserves the integrity and distinct purpose of each legal framework.
The Court’s interpretation of limitation periods and the conditions for condoning delays reflects a balanced approach. While recognizing the need for timely dispute resolution, the judgment also emphasizes the importance of judicial discretion to allow flexibility under existing limitation laws in the interest of fairness and justice.
While the judgement provides much-needed clarity and predictability, it also highlights the potential rigidity of the legal system in dealing with overlapping issues in commercial disputes. This rigidity may limit the system’s ability to adapt to the complexities of such cases. Ultimately, the judgment serves as a reminder of the delicate balance courts must strike between procedural rigour and substantive justice. It reinforces the principle that while procedural discipline is essential, it must not come at the expense of fairness in resolving disputes.
End Note
[i] 2024 SCC OnLine 3190 dated 07.11.2024.
Authored by Shivangi Bhardwaj, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.