SAGA OF LIMITATION IN THE INSOLVENCY & BANKRUPTCY CODE, 2016

SAGA OF LIMITATION IN THE INSOLVENCY & BANKRUPTCY CODE, 2016

Insolvency & Bankruptcy Code, 2016 (“The Code”) in light of the Limitation Law Applicability of Limitation Law

How the law of limitation would apply to an applicant’s claim as well as claims of other creditor who submit proof of claim before the RP/liquidator.

The Applicability of the Limitation Act,1963 has been a well-traversed issue since the inception of the code

The issue of Applicability of the Limitation Act to proceedings under the code emerged as moot point in the matter of “Neelkanth Township and Construction Pvt. Ltd. v. Urban Infrastructure Trustees Ltd” (Company Appeal (AT) (Insolvency) No. 44 of 2017) wherein the Hon’ble NCLAT, vide its order dated 11.08. 2017 observed that since the Code is not for recovery of claims, so long as the debt is due, application under the Code can be filed regardless of limitation, and as such held that the Limitation Act shall not be applicable for matters under the Code. The above view was again affirmed by the Hon’ble Appellate Tribunal in “Black Pearls Hotel Pvt. Ltd. v Planet M Retail Ltd” (Company Appeal (AT) (Insolvency) No. 91 of 2017)

However, on the contrary Hon’ble NCLAT observed the traditional view that “a time barred debt is not a debt at all”. Having said that must also note that the Hon’ble Apex Court in its landmark judgment in the matter of “Innoventive Industries Ltd. v. ICICI Bank Limited” (2018) 1 SCC 407” held that “a debt may not be due if it is not payable in law or in fact”, from which, one can imply indication towards applicability of limitation law for ascertaining the validity of an application filed under the Code.

Meanwhile, in spirit of the principles of purport of the law of limitation and in light of the confusion of an explicit provision, a counterpart to section 433 of the Companies Act, 2013 was introduced in the Code by way of section 238A w.e.f. 06.06.2018, which stated that:

“238A. Limitation:

The provisions of the Limitation Act, 1963 shall, as far as may be, apply to the proceedings or Appeals before the Adjudicating Authority, the National Company aw Appellate Tribunal, the Debt Recovery Appellate Tribunal, as the case may be.” (Emphasis Supplied)

This States the Limitation provisions are applicable to the proceedings of the law

This gave rise to the landmark judgment of the Hon’ble Apex Court in the matter of “B.K. Educational Services Private Limited v. Parag Gupta & Associates” (Civil Appeal No.23988 of 2017),, wherein the Apex Court held that the Limitation Act will apply to the Code on and from its very commencement i.e. 01.12.2016.

Conflicting Views

Thus, on the contrary The Apex Court in the matter of “Gaurav Hargovindbhai dave v. Reconstruction Company (India)” – (2019) 10 SCC 572 Ltd and reiterated in the matter of the “Jignesh Shah v. Union of India” (2019) 10 SCC 750 observed that proceedings under section 7 of the code are  “an application” and not “suits”, Thus, they would fall within the residuary article of 137 of the Limitation Act. Further, it was observed that right will arise from the date of default not from the date of enactment of the Code i.e 1^st December 2016.

Further, the apex court in the matter of “Sagar Sharma & Anr. v. Phoenix ARC Pvt. Ltd. & Anr”. – Civil Appeal No.7673 of 2019 – (2019) 10 SCC 353 referring to the decision in B.K. Educational Services Private Limited held that for application under Section 7 of the Code, Article 137 of the Limitation Act, 1963 will apply. Article 62, which relates to deed of mortgage executed between the parties, cannot be taken into consideration for counting the period of limitation. The Hon’ble Apex Court specifically observed that Article 141 of the Constitution of India mandates that its judgments are followed in letter and spirit. The date of coming into force of Code does not and cannot form a trigger point of limitation for application filed under the Code.

In the Addition to above the Hon’ble Appellate Tribunal in the matter of “V Hotels Limited v. Asset Reconstruction Company (India) Limited” – Company Appeal (AT) (Insolvency) No.525 of 2019” decided on 11th December, 2019 held that The Books of Account cannot be treated as an acknowledgment of liability in respect of debt payable to the ‘Asset Reconstruction Company (India) Ltd.’- (‘Financial Creditor’) signed by the ‘Corporate Debtor’ or its authorised signatory.

Furthermore, “Sesh Nath Singh & Ors. v. Baidyabati Sheoraphuli Cooperative Bank Ltd”. held that time spent under the proceeding SARFASEI Act can be condoned by the virtue of the Section 14 of the Limitation Act for the purpose of filling the application under the code. It is pertinent to mention that herein that under section 14 only such time can condoned that was spent in bona-fide proceedings.

Thus, concluding to above that take advantage of Section 14(2), the Applicant must satisfy:

(i)                 That the applicant has been prosecuting with due diligence in another civil proceeding, whether in a court of first instance or of appeal or revision.

(ii)                against the same party; and

(iii)             for the same relief

 Conclusion

In view the catena of Judgment passed by the NCLAT and Hon’ble apex court, it can be ascertain that article 137 of the Limitation Act will apply for proceedings filed under the code. Whereas, the interpretation of the term “When the right to apply accrues” wherein the Hon’ble Apex Court and Hon’ble NCLAT have different view regarding the same. However, the Hon’ble apex court affirmed that the right to apply accrues from the date of default irrespective date of enactment of the code

(i)                 Limitation in case of security

A question that arises is what limitation period in cases where a security against the loan has been given by way of a mortgage deed?

As mention above, In the matter Sagar Sharma & Anr. v. Phoenix ARC Pvt. Ltd. & Anr. – Civil Appeal No.7673 of 2019 – (2019) 10 SCC 353 Article 137 of the Limitation Act, 1963 will apply. Article 62, which relates to deed of mortgage executed between the parties, cannot be taken into consideration for counting the period of limitation.

(ii)               Status of an application under IBC filed beyond limitation, on grounds of a pending money suit

Thus, cardinal principle of insolvency is that “corporate insolvency resolution process is not a recovery proceeding”. Referring to above Jignesh Shah v. Union of India held that winding up petition vis-à-vis a money suit is filed significantly different. Therefore, the mere continuance of the money suit does not imply revival/ extension of the limitation period.

(iii)              Determination of period of limitation in case of guarantee contracts

In the matter of “Margaret Lalita Samuel Vs. Indo Commercial Bank Ltd”. (AIR 1979 SC 102)[22], wherein the Hon’ble Supreme Court held that-

“The guarantee is seen to be a continuing guarantee and the undertaking by the defendant is to pay any amount that may be due by the company at the foot of the general balance of its account or any other account whatever. In the case of such a continuing guarantee, so long as the account is a live account in the sense that it is not settled and there is no refusal on the part of the guarantor to carry out the obligation, we do not see how the period of limitation could be said to have commenced running. Limitation would only run from the date of breach under Art. 115 of the schedule to the Limitation Act, 1908.”

(iv)             Whether Acknowledgement of Debts within prescribed period would extent the Limitation Act ?

The Hon’ble Appellate Tribunal in “Vivek Jha v. Dailmer Financial Services India Private Limited & Anr” (Company Appeal (AT) Insolvency No. 756 of 2018)” held that acknowledgment of debts by the Corporate Debtor within prescribed period give rise to new limitation period for the creditor to set out its claim against Debtor under the code.

(v)               Limitation in case of Decree passed by the Tribunal(s)

The Question arise in the matter of “Sh G Eswara Rao v. Stressed Assets Stabilisation Fund” Company Appeal (AT) (Insolvency) No. 1097 of 2019, wherein it was held that in absence of any acknowledgement under Section 18 of the Limitation Act, 1963, the date of default/ NPA does not shift forward, therefore, the period of limitation for moving application under Section 7 of the Code shall be three years,  Thereby, the date of passing of Decree shall not counted as the date of default.

 It is pertinent to mention that the apex court in the aforesaid judgments set aside the decision of the National Company Law Appellate Tribunal on the applicability of article 137 of the Limitation Act from the date of enactment of the code, However, yet National Company Law Appellate Tribunal applying and referring inter-alia different provisions of Limitation Act for instance Article 14 and Article 62 of the Limitation Act. Thus, overriding the ruling of the Apex Court.

IF A GOOD WRITER LIVES INSIDE YOU, THEN MAIL YOUR BIO, PICTURE WITH YOUR BLOG.... WE WILL SHORTLY PUBLISH IT

JUST MAIL US ON ABIZCHANCELLOR@GMAIL.COM

AUTHOR: - JAIDEEP BHALLA
PARTNER AT A BIZ CHANCELLOR (ABC)
(A FIRM OF CORPORATE EXPERTS )
(Company Secretary (Aspirant), LL.B, B.COM Graduate, An Investment Portfolio analysts,
First Runner-up winner Moot Court Competition Organised by ICSI Noida Chapter)
Mobile No. 7838684213

Disclaimer: 

No reader should act on the basis of any statement contained herein without seeking professional advice. The results & the interpretation has been done on the basis of my understanding of the Act & Rules, where applicable and with reference to the general articles and analysis. The author explicitly disclaims any financial or other liability of any kind arising on account of any action taken pursuant to the results or interpretation of this document. With respect to information available herein before, the author doesn’t make any warranty, express/implied or assume any liability or responsibility for the accuracy, completeness, or usefulness of such information.

For any help/assistance write us on abizchancellor@gmail.com