Gas supplier waited 7 years to file insolvency plea. The Supreme Court had a surprising take on delay.

Shah Alloys stopped paying for natural gas in 2011. Sabarmati Gas couldn't sue because the company was 'sick.' In 2017, they finally filed for insolvency. The court had to decide: was the delay excusable?

For six years, Sabarmati Gas watched its unpaid bills pile up while the law tied its hands. Shah Alloys had been declared a "sick" company under a special law that froze all recovery proceedings. When that law was finally scrapped, Sabarmati Gas rushed to file an insolvency petition. But the company that owed them money had a simple answer: too late. The clock had run out.

The question before the Supreme Court was deceptively simple: when a creditor is legally barred from suing for years, does the limitation clock keep ticking? And if it does, can the court simply forgive the delay?

When the gas stopped flowing

In 2008, Sabarmati Gas Limited and Shah Alloys Limited signed an agreement. Sabarmati would supply natural gas to Shah Alloys' plant. For three years, the arrangement worked. Then, in November 2011, Shah Alloys stopped paying.

Sabarmati Gas wanted to sue. But there was a problem. Shah Alloys had been declared a "sick industrial company" by the Board for Industrial and Financial Reconstruction (BIFR) in August 2010. Under Section 22(1) of the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA), a moratorium kicked in — a legal freeze that prevented creditors from filing recovery suits or winding-up petitions against the company. The idea was to give sick companies breathing room to revive.

Sabarmati Gas did what it could. It approached BIFR, seeking permission to recover its dues. But BIFR proceedings crawled. The company remained in limbo, unable to sue, unable to collect.

The law that changed everything

On December 1, 2016, the legal landscape shifted. The Insolvency and Bankruptcy Code (IBC) came into force, replacing the old SICA regime. Sick company declarations under SICA were automatically abated — they ceased to exist. Shah Alloys was no longer "sick" in the eyes of the law.

Sabarmati Gas moved quickly. In April 2017, it issued a demand notice under Section 8 of the IBC (the formal step asking the debtor to pay within 10 days). When Shah Alloys didn't pay, Sabarmati Gas filed an application under Section 9 of the IBC in 2018, asking the National Company Law Tribunal (NCLT) to initiate the Corporate Insolvency Resolution Process (CIRP) — the formal insolvency proceeding that can lead to restructuring or liquidation.

But Shah Alloys had two defences ready. First, the claim was time-barred — the default had happened in 2011, and the three-year limitation period under Article 137 of the Limitation Act (which governs the time limit for filing applications) had expired long before the IBC even existed. Second, there was a pre-existing dispute — Shah Alloys said it had raised objections about the quality and quantity of gas supplied as early as 2013, which meant the debt was genuinely disputed.

Why the NCLT said no

The NCLT, Ahmedabad Bench, dismissed Sabarmati Gas's application in June 2019. It gave two reasons. First, the application was filed beyond the three-year limitation period under Article 137, and the period during which SICA's moratorium was in force could not be excluded from the limitation calculation. Second, there was a pre-existing dispute — correspondence from 2013 showed Shah Alloys had raised concerns about the gas supply, and that was enough to block a Section 9 application.

Sabarmati Gas appealed to the National Company Law Appellate Tribunal (NCLAT). The NCLAT upheld the dismissal in December 2019. The company then approached the Supreme Court.

The Supreme Court's surprising take on delay

The Supreme Court bench — Justices Ajay Rastogi and C.T. Ravikumar — delivered its judgment on January 4, 2023. The court agreed with the lower tribunals on one point but disagreed sharply on another.

On the limitation issue, the court took a nuanced view. The three-year limitation period under Article 137 for filing a Section 9 application starts from the date of default, not from the date the IBC came into force. That meant the clock had started ticking in November 2011 and had run out by November 2014 — two years before the IBC even existed.

But the court said that didn't automatically kill Sabarmati Gas's case. Section 5 of the Limitation Act allows courts to condone delay if the applicant can show "sufficient cause" — a good enough reason for the delay. The court held that the period during which SICA's moratorium was in force — from August 2010 until December 2016 — constituted exactly that kind of sufficient cause.

"Where an operational creditor was statutorily prevented from initiating proceedings against a sick company under Section 22(1) SICA, the period of such suspension constitutes sufficient cause for condonation of delay under Section 5 of the Limitation Act," the court reasoned.

The court noted that Section 22(5) of SICA (which specifically excludes the moratorium period from limitation calculations) does not directly apply to IBC proceedings. But that didn't matter. The underlying principle — that a creditor shouldn't be penalised for a delay caused by a legal bar — could be achieved through Section 5 of the Limitation Act.

The court made it clear: adjudicating authorities under the IBC cannot mechanically dismiss applications as time-barred without first considering whether the delay can be condoned under Section 5.

The dispute that sank the case

But the court's generosity on limitation didn't save Sabarmati Gas. On the second issue — the pre-existing dispute — the court agreed with the NCLT and NCLAT.

Under the IBC, a Section 9 application must be rejected if there is a "pre-existing dispute" between the parties before the demand notice was issued. The test, laid down in the landmark case Mobilox Innovations v. Kirusa Software, is whether the dispute is plausible and not spurious — whether it has some substance, not whether it will ultimately succeed.

The court examined the correspondence from 2013. Shah Alloys had written to Sabarmati Gas raising concerns about the quality and quantity of gas supplied. The court found that this was not a frivolous or made-up dispute. It was a genuine disagreement that predated the insolvency application. That was enough to block the Section 9 petition.

"What is to be looked into for pre-existing dispute is the existence of a dispute and/or suit or arbitration proceedings prior to receipt of demand notice or invoice; if such dispute is plausible and not spurious, the application under Section 9 must be rejected at the threshold," the court held.

What this means for creditors

The judgment sends a clear message to operational creditors — the suppliers, vendors, and service providers who are often the last to get paid. The limitation clock for IBC applications starts from the date of default, not from the date the IBC came into force. But if a creditor was legally barred from suing — by a moratorium under SICA, or by any other statutory freeze — that period can be used to seek condonation of delay under Section 5 of the Limitation Act.

But there's a catch. Even if the limitation issue is resolved, a pre-existing dispute can still kill the application. Creditors cannot use the IBC as a debt collection tool when the debtor has raised genuine objections before the insolvency process began.

THE PLAY: If you were barred from suing a debtor by a statutory moratorium, file your IBC application within three years of the moratorium lifting, but be prepared to argue Section 5 condonation — and ensure no genuine dispute existed before you issued the demand notice.

The clock paused, but the dispute remained

The Supreme Court partly allowed Sabarmati Gas's appeal on the limitation question, holding that the NCLT should have considered condonation of delay under Section 5. But on the pre-existing dispute, the court upheld the dismissal. The truncated judgment text leaves the final operative order unclear, but the ratio is unmistakable: the clock can pause for a statutory bar, but a genuine dispute is a permanent block.

For Sabarmati Gas, the gas had stopped flowing in 2011. By 2023, the Supreme Court had given them a legal principle — but not their money.