Applicability of Limitation Act 1963 in the Insolvency and Bankruptcy Code (IBC), 2016

Introduction

The Insolvency and Bankruptcy Code 2016 was enacted to consolidate and amend laws relating to reorganization and insolvency resolution of corporate persons, partnership firms, and individuals in a time-bound manner. When the IBC was initially introduced, a critical question arose regarding the applicability of the Limitation Act 1963 to proceedings under the IBC. This ambiguity created significant uncertainty among creditors, corporate debtors, and insolvency professionals, leading to conflicting decisions by various benches of the National Company Law Tribunal and the National Company Law Appellate Tribunal. The interaction between these two legislative frameworks has now been substantially clarified through judicial pronouncements, particularly after the insertion of Section 238A into the Code and landmark Supreme Court decisions.

The Genesis of Controversy

When the Insolvency and Bankruptcy Code 2016 came into force on December 1, 2016, it did not contain any specific provision addressing the applicability of limitation periods. This silence in the statute gave rise to divergent interpretations. Some tribunals held that the Code was a self-contained and complete legislation, implying that no other enactment, including the Limitation Act 1963, would apply to it. Others took the view that limitation principles were procedural in nature and would apply even in the absence of an express provision, as the law of limitation is founded on public policy considerations aimed at preventing stale claims and encouraging diligence.

The early jurisprudence developed by the National Company Law Appellate Tribunal initially suggested that the Limitation Act would not be applicable to proceedings under the Code. In matters such as Speculum Plast Private Limited versus PTC Techno Private Limited and Parag Gupta & Associates versus B.K. Educational Services Private Limited, the appellate tribunal took the position that the Code being a complete and self-contained legislation would not attract the provisions of the Limitation Act. This view created considerable confusion and allowed creditors to potentially resurrect time-barred claims, defeating the very purpose of limitation laws.

Legislative Intervention Through Section 238A

To address this ambiguity and settle the confusion, the legislature intervened by inserting Section 238A into the Code through the Insolvency and Bankruptcy Code (Second Amendment) Act 2018, which came into effect on June 6, 2018. Section 238A provides that “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 Law Appellate Tribunal, the Debt Recovery Tribunal or the Debt Recovery Appellate Tribunal, as the case may be.”

The insertion of this provision was based on the recommendations of the Insolvency Law Committee in its report of March 2018. The Committee’s report specifically noted that the intent of the Code could not have been to give a new lease of life to debts which were time-barred. The report emphasized that given the intent was not to package the Code as a fresh opportunity for creditors and claimants who did not exercise their remedy under existing laws within the prescribed limitation period, it was necessary to insert a specific section applying the Limitation Act to the Code.

Retrospective Application of Section 238A

A critical question that arose after the insertion of Section 238A was whether this provision would apply prospectively only from June 6, 2018, or would have retrospective effect from the inception of the Code. This question was authoritatively answered by the Supreme Court in the landmark judgment of B.K. Educational Services Private Limited versus Parag Gupta and Associates. [1]

In this case, the Supreme Court held that Section 238A was clarificatory in nature and therefore had retrospective application. The Court observed that the intention of the legislature from the inception of the Code was to apply limitation principles to applications filed under Sections 7 and 9 of the Code. The Court reasoned that limitation being procedural in nature would ordinarily be applied retrospectively, except that a new law of limitation cannot revive a dead remedy. The Court emphasized that an application filed after the Code came into force cannot suddenly revive a debt which is no longer due as it is time-barred.

The Supreme Court relied on various principles of statutory interpretation and examined the object of the Code to conclude that debts which were already time-barred under the Limitation Act 1963 before the enactment of the Code could not be resurrected by filing applications under the Code. The Court noted that the Report of the Insolvency Law Committee itself stated that the intent of the Code could not have been to give a new lease of life to debts which are time-barred.

Article 137 and the Three-Year Limitation Period

Having established the applicability of the Limitation Act to proceedings under the IBC, the next question was which specific article from the Schedule to the Limitation Act would govern applications filed under Sections 7 and 9 of the Code. The Supreme Court in B.K. Educational Services case clarified that Article 137 of the Limitation Act, which is a residuary provision providing for a three-year limitation period for any application for which no period of limitation is provided elsewhere in the Schedule, would apply to applications under the Code. [1]

Article 137 of the Limitation Act provides that “Any other application” shall be filed within three years from the date when the right to apply accrues. The Supreme Court held that the right to apply under Sections 7 or 9 of the Code accrues when a default occurs, not from the date of enactment of the Code or from the date when the Code became applicable to a particular case. This interpretation meant that if a default occurred more than three years before filing an application under the Code, such application would be time-barred, unless the delay could be condoned or the limitation period was extended through acknowledgment or other mechanisms provided under the Limitation Act.

This position was further reinforced in the case of Jignesh Shah & Anr. versus Union of India & Anr., where the Supreme Court reiterated that the bar of limitation of three years would be attracted from the date when default occurred and not from the date of filing of winding up petition or from the date when the Code came into force. The Court emphasized that time-barred claims cannot be given a fresh lease of life simply because a new forum or new legislation has come into existence.

Applicability of Section 5: Condonation of Delay

Section 5 of the Limitation Act provides that any appeal or application may be admitted after the prescribed period if the applicant satisfies the court that there was sufficient cause for not preferring the appeal or making the application within the prescribed period. The question arose whether Section 5 would apply to applications under Sections 7 and 9 of the Code, allowing condonation of delay in filing such applications.

The Supreme Court in B.K. Educational Services case held that Section 5 of the Limitation Act may be applied to condone delay in filing applications under Sections 7 and 9 of the Code by showing sufficient cause for the delay. [1] However, the Court also clarified that Section 5 would not be applicable to appeals under Section 61 of the Code, as the Code itself provides for a specific period of limitation for filing appeals, along with a provision for extension not exceeding fifteen days. Where the Code prescribes a specific period of limitation with its own mechanism for extension, Section 5 of the Limitation Act would be excluded by necessary implication.

This distinction is crucial because it recognizes that while the general provisions of the Limitation Act apply to the Code “as far as may be,” specific provisions in the Code that deal with limitation would override the corresponding provisions of the Limitation Act. The phrase “as far as may be” in Section 238A is interpreted to mean that the Limitation Act applies subject to any contrary provision in the Code itself.

Applicability of Section 14: Exclusion of Time

Section 14 of the Limitation Act provides for exclusion of time during which a party has been prosecuting with due diligence another civil proceeding, whether in a court of first instance or in a court of appeal or revision, in good faith in a court which, from defect of jurisdiction or other cause of a like nature, is unable to entertain it. The question of whether Section 14 would apply to proceedings under the Code was examined by the Supreme Court.

The Supreme Court held that Section 14 of the Limitation Act is applicable to appeals under Section 61 of the Code. [2] In cases where an appellant had filed a writ petition before a High Court which was subsequently withdrawn with liberty to file an appeal before the National Company Law Appellate Tribunal, the time spent in prosecuting the writ petition would be excluded while computing the limitation period for filing the appeal. The Court observed that Section 14 provides for exclusion of time spent in proceedings bona fide before a court without jurisdiction, and this provision applies to appellate proceedings under the Code.

The Court rejected the narrow interpretation that Section 14 would not apply to the Code merely because Section 61 provides for a specific limitation period. The Court held that neither the expression “but such period shall not exceed fifteen days” in Section 61 nor Section 238 of the Code excludes the applicability of Section 14. The expression “not exceed fifteen days” was given a purposive, contextual and practical meaning, as any other interpretation would deprive an appellant of the statutory appellate remedy.

Section 18 and Acknowledgment of Debt

Perhaps one of the most contentious issues regarding the applicability of the Limitation Act to the IBC relates to Section 18, which deals with the effect of acknowledgment in writing. Section 18 provides that where, before the expiration of the prescribed period for a suit or application in respect of any property or right, an acknowledgment of liability in respect of such property or right has been made in writing signed by the party against whom such property or right is claimed, a fresh period of limitation shall be computed from the time when the acknowledgment was so signed.

The applicability of section 18 of limitation act to proceedings under the IBC was the subject of conflicting decisions by various benches of the National Company Law Appellate Tribunal. The controversy centered on whether entries in balance sheets of corporate debtors showing amounts owed to creditors would constitute acknowledgment of debt under Section 18, thereby starting a fresh period of limitation.

This issue was conclusively settled by the Supreme Court in the case of Asset Reconstruction Company (India) Limited versus Bishal Jaiswal & Anr. [3] The Supreme Court held that Section 18 of the Limitation Act is applicable to proceedings under the Code, and entries made in signed balance sheets of the corporate debtor would amount to acknowledgment of liability, subject to the facts and circumstances of each case. The Court set aside the majority decision of a five-member bench of the National Company Law Appellate Tribunal in V. Padmakumar versus Stressed Assets Stabilisation Fund, which had held that entries in balance sheets would not amount to acknowledgment of debt for purposes of extending limitation.

The Supreme Court reasoned that there was nothing in Section 238A to suggest that the applicability of Section 18 is excluded from proceedings under the IBC. The Court noted that the phrase “as far as may be” in Section 238A does not exclude Section 18 unless there is some specific provision in the Code that is inconsistent with the application of Section 18. The Court relied on its earlier decisions in Sesh Nath Singh versus Baidyabati Sheoraphuli Co-operative Bank Limited and Laxmi Pat Surana versus Union Bank of India, where it had been held that the Code does not exclude the application of Section 6, Section 14, Section 18, or any other provision of the Limitation Act to proceedings under the Code.

The Supreme Court further held that several judgments had established that entries made in books of accounts, including balance sheets, can amount to acknowledgment of liability within the meaning of Section 18 of the Limitation Act. The Court referred to its decision in Mahabir Cold Storage versus Commissioner of Income Tax, where it had been held that entries in the books of accounts would amount to acknowledgment of liability and extend the period of limitation for discharge of the liability as debt. Similarly, the Court noted that in Bengal Silk Mills Company versus Ismail Golam Hossain Ariff, the Calcutta High Court had held that an acknowledgment of liability made in a balance sheet can amount to acknowledgment of debt.

However, the Supreme Court added an important caveat that not every entry relating to a debt would automatically qualify as an acknowledgment for purposes of Section 18. The Court held that each entry must be understood in the context in which it occurs and in light of the notes annexed to the balance sheet. The Court emphasized that while filing of balance sheets is a statutory requirement under the Companies Act 2013, determining whether an entry in a balance sheet amounts to acknowledgment of debt can only be done by examining the factual matrix of each case.

Non-Performing Assets and Declaration Date

An important aspect of limitation in the context of the Code relates to Non-Performing Assets and the significance of the date on which an account is classified as a Non-Performing Asset. Initially, there was some confusion about whether the limitation period would run from the date of original default or from the date when the account was declared as a Non-Performing Asset.

The Supreme Court in Babulal Vardharji Gurjar versus Veer Gurjar Aluminium Industries Private Limited clarified that the period of limitation for filing an application under Section 7 of the Code would be three years from the date of default, not from the date of declaration of the account as a Non-Performing Asset. The Court held that if the default occurred over three years prior to the date of filing the application, the application would be time-barred, except in cases where such delay is condoned or limitation is extended through acknowledgment under Section 18 or by operation of other provisions of the Limitation Act.

This position was reiterated by the National Company Law Appellate Tribunal in subsequent decisions, emphasizing that the period of three years from the date the account of the corporate debtor is classified as a Non-Performing Asset would make it impermissible to proceed with a Section 7 application if the original default occurred beyond the limitation period. The date of declaration as a Non-Performing Asset by itself does not restart the limitation period, although it may be relevant as evidence of acknowledgment depending on the circumstances.

Exclusion of Time Spent in Other Proceedings

Another important principle established by the Supreme Court relates to the exclusion of time spent by creditors in pursuing remedies under other statutes. The question arose whether time spent in pursuing proceedings under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 or under the Recovery of Debts and Bankruptcy Act 1993 would be excluded while computing the limitation period for filing applications under the Code.

The Supreme Court held that time spent by a creditor in pursuing remedies under these statutes would stand excluded while computing limitation for proceedings under the Code. [2] This principle flows from Section 14 of the Limitation Act, which provides for exclusion of time during which a party has been prosecuting another proceeding in good faith. The Court recognized that creditors often pursue multiple remedies simultaneously or sequentially, and it would be inequitable to penalize them for pursuing one legitimate remedy before initiating proceedings under the Code.

Similarly, the Supreme Court held that a Recovery Certificate issued by a Debt Recovery Tribunal gives a fresh lease of life to a claim of a financial creditor and extends the period of limitation to initiate proceedings under the Code. The issuance of a Recovery Certificate constitutes a fresh cause of action, and the limitation period for filing an application under the Code would be computed from the date of issuance of such certificate.

Interaction with Section 238 of the Code

Section 238 of the Code provides that the provisions of the Code shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force. This non-obstante clause raised questions about whether the Limitation Act would apply to the Code at all, given that Section 238 appears to override all other laws.

The Supreme Court has consistently held that Section 238 does not exclude the application of the Limitation Act to proceedings under the Code. The Court has observed that there is no inherent inconsistency between the provisions of the Code and the provisions of the Limitation Act. On the contrary, the application of limitation principles furthers the object of the Code by ensuring that only genuine and subsisting claims are entertained and that stale claims are weeded out at the threshold.

The Court has held that the non-obstante clause in Section 238 would apply only where there is actual inconsistency between the provisions of the Code and another law. Since the Limitation Act is procedural in nature and does not conflict with the substantive provisions of the Code, Section 238 does not operate to exclude the Limitation Act. The subsequent insertion of Section 238A clarified beyond doubt that the legislature intended the Limitation Act to apply to proceedings under the Code.

Practical Implications for Creditors and Corporate Debtors

The clarification regarding applicability of the Limitation Act to proceedings under the IBC has significant practical implications for both creditors and corporate debtors. Financial creditors and operational creditors must now exercise heightened diligence in pursuing their claims and cannot afford to sleep over their rights. The three-year limitation period under Article 137 begins to run from the date of default, and creditors must initiate proceedings under the Code within this period or risk their applications being rejected as time-barred.

However, creditors have certain avenues available to extend the limitation period or exclude certain periods from the computation of limitation. If a corporate debtor makes an acknowledgment of debt in writing, whether through correspondence, balance sheets, or other documents, this would start a fresh period of limitation under Section 18 of the Limitation Act. Creditors must therefore carefully examine the books of accounts and financial statements of corporate debtors to identify any acknowledgments that may have the effect of extending limitation.

Similarly, creditors who have been pursuing remedies under other statutes such as the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 or the Recovery of Debts and Bankruptcy Act 1993 can claim the benefit of exclusion of time under Section 14 of the Limitation Act. Time spent in bona fide pursuit of other legal remedies would be excluded while computing the limitation period for filing applications under the Code.

For corporate debtors, the applicability of the Limitation Act provides an important defense against stale claims. Corporate debtors can raise the plea of limitation at the threshold and seek rejection of applications that are time-barred. However, corporate debtors must be cautious about making acknowledgments of debt through their balance sheets or other documents, as such acknowledgments would start a fresh period of limitation in favor of creditors.

Regulatory Framework and Compliance

The Insolvency and Bankruptcy Board of India, which is the regulatory authority under the Code, has issued various regulations and circulars providing guidance on procedural aspects of insolvency proceedings. While these regulations primarily deal with the conduct of insolvency resolution processes and the duties of insolvency professionals, they also have implications for limitation issues.

For instance, the regulations prescribing forms for applications under Sections 7 and 9 of the Code require applicants to specifically state the date of default. This requirement ensures that the issue of limitation is addressed at the outset, and tribunals can determine whether applications are within the prescribed limitation period. Similarly, the regulations provide for corporate debtors to raise objections to applications, and limitation is one of the grounds on which objections are commonly raised.

The interaction between the Code and the Limitation Act also has implications for resolution professionals and liquidators. When a resolution professional issues a public announcement inviting claims from creditors, questions may arise about whether time-barred claims can be admitted in the insolvency resolution process. The Supreme Court has clarified that the intent of the legislature was not to allow time-barred claims to be restructured through resolution plans, as this would not be in compliance with existing laws as required under Section 30 of the Code.

Conclusion

The jurisprudence regarding the applicability of the Limitation Act 1963 to proceedings under the Insolvency and Bankruptcy Code 2016 (IBC) has evolved significantly since the inception of the Code. Through a series of landmark judgments, the Supreme Court has established that the Limitation Act applies to proceedings under the Code with retrospective effect from December 1, 2016, when the Code came into force. The clarificatory insertion of Section 238A merely gave statutory recognition to what was always the legislative intent.

Article 137 of the Limitation Act, which prescribes a three-year limitation period for applications for which no specific period is provided, governs applications under Sections 7 and 9 of the Code. The limitation period begins to run from the date of default, not from the date of enactment of the Code or from any other subsequent date. However, various provisions of the Limitation Act, including Section 5 relating to condonation of delay, Section 14 relating to exclusion of time spent in other proceedings, and Section 18 relating to acknowledgment of debt, are applicable to proceedings under the Code and provide flexibility in appropriate cases.

The applicability of limitation Act principles to the IBC serves the important purpose of filtering out stale claims and ensuring that the insolvency resolution mechanism is not misused to resurrect time-barred debts. At the same time, the availability of provisions for condonation of delay and acknowledgment of debt ensures that genuine claims are not defeated on technical grounds. The balance struck by the Supreme Court between these competing considerations furthers the objectives of the Code while respecting the fundamental principles underlying the law of limitation.

References

[1] B.K. Educational Services Private Limited v. Parag Gupta and Associates, (2019) 11 SCC 633, https://indiankanoon.org/doc/4992553/ 

[2] Sesh Nath Singh v. Baidyabati Sheoraphuli Co-operative Bank Limited, 2021 SCC OnLine SC 244, https://www.scconline.com/blog/post/2020/04/28/exclusion-of-section-14-of-limitation-act-1963-under-section-61-of-insolvency-and-bankruptcy-code-2016-a-bite-at-the-forbidden-apple/ 

[3] Asset Reconstruction Company (India) Limited v. Bishal Jaiswal & Anr., (2021) 6 SCC 366, https://indiankanoon.org/doc/107688497/ 

[4] Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries (P) Ltd., (2020) 15 SCC 1, https://ibclaw.in/analysis-of-the-provisions-of-limitation-act-1963-with-respect-to-insolvency-and-bankruptcy-code-2016/ 

[5] Jignesh Shah & Anr. v. Union of India & Anr., 2018 SCC OnLine SC 1290, https://ibclaw.in/analysis-of-the-provisions-of-limitation-act-1963-with-respect-to-insolvency-and-bankruptcy-code-2016/ 

[6] Laxmi Pat Surana v. Union Bank of India, 2021 SCC OnLine SC 267, https://www.barandbench.com/columns/applicability-section-18-limitation-act-proceedings-ibc-saga-ends 

[7] The Insolvency and Bankruptcy Code, 2016, https://ibclaw.in/section-238a-limitation/ 

[8] The Limitation Act, 1963, https://www.indiacode.nic.in/bitstream/123456789/1565/5/A1963-36.pdf 

[9] Insolvency Law Committee Report, March 2018, https://tilakmarg.com/opinion/jurisprudence-emanating-from-section-238-a-of-the-insolvency-bankruptcy-code-2016-b-k-educational-services-p-ltd-v-s-parag-gupta-associates-2018/