Applicability of Limitation Act 1963, in Insolvency and Bankruptcy Code, 2016.
The Limitation Act, 1963 is the Act which governs the time period within which one can file a suit to sue another to get justice. If the suit is filed after the expiration of the time period as specified in this act, thus, it will be barred by limitation. It also includes provisions for condonation, delay etc.The first Limitation Law was established in 1859 which came into operation in 1862. The law of limitation developed in stages and finally took the form of Limitation Act in 1963. It was enacted on 5th October, 1953 and came into force from 1st January, 1964.
Objectives of The Limitation Act, 1963:
The main objective of The Limitation Act,1963 is to provide a specific time frame within which a person can file a suit in a court. If such legislation is not enacted then it will lead to never ending litigation as the person could file a suit for the cause of action which was done many years back. In other words the law of limitation aims to protect the lengthy process of penalising a person indirectly without an offence. In N. Balakrishnan vs M. Krishnamurthy,it was held by the Hon’ble Supreme Court that the Limitation Act 1963 is based upon public policy which is used for fixing the lifespan of a legal remedy for the purpose of general welfare.
The Limitation Act, 1963 signifies that it does not make any racial or class distinction since both Hindu and Muslim Law are now available under the law of limitation as per the existing statute.The major purpose of the Act is not to destroy or infringe the rights of an aggrieved person but to serve the public in a better way and to save time.This statute is basically founded on the public policy for fixing a life span for the legal actions which are taking place and to seek remedy in time with the purpose of general welfare and moreover it helps in avoiding the unexplainable delay and latches in a suit.
The Insolvency & Bankruptcy Code 2016 (“IBC”), enacted to address the troubling shortcomings in existing staggered insolvency laws in India and to bring them under one umbrella, is set up to face a monumental challenge and equally monumental expectations.According to the data available with the World Bank in 2016, insolvency resolution in India takes around 4.3 years on average, compared with the United Kingdom (1 year), USA (1.5 years) and South Africa (2 years). India was ranked 135th/190 countries in the World Bank Ease of Doing Business Index 2015 on the ease of resolving insolvency. Thus it is apparent that the Code is perhaps one of the most critical legislations introduced in recent years impacting the ease of doing business in India. The Insolvency and Bankruptcy Code 2016, enacted to radically change the process of insolvency resolution in India, is keenly watched by economists and jurists as well as businessmen and investors, for the reason that each aspect of the implementation of law has the potential to critically impact the ease of doing business in India. For this reason, the Code is especially sensitive to interpretation and it is vital that the issues thrown up in its inaugural year of implementation be recognized and the judicial remark on the same be understood. The present article thus traces the emerging jurisprudence of the Code through judgments of the Supreme Court of India and the National Company Law Appellate Tribunal and Applicability of Limitation Act 1963 in The Insolvency & Bankruptcy Code 2016 (“IBC”).
Is the Limitation Act 1963 applicable to The Insolvency & Bankruptcy Code 2016 (“IBC”) ?
The Insolvency and Bankruptcy code 2016 was passed on Lok sabha on 5th May 2016 and Rajya sabha on 11th May 2016 and received assent of the President on 28.05.2016 and it has come into force from 5th of August 2016. But the code was initially silent on the aspect of limitation. Because the code was silent on this aspect, different interpretations from different quarters have emerged. Since the code was silent on this aspect, National company law Appellate Tribunal held that the limitation act1963, is not applicable to the Insolvency and Bankruptcy code 2016. This question was first came in the case of M/s Neelkanth Township and construction Pvt ltd Vs Urban Infrastructure Trustees ltd wherein the Hon’ble National Company Law Appellate Tribunal has categorically held that Limitation Act 1963 is not applicable to the The Insolvency & Bankruptcy Code 2016 (“IBC”). The reason attributed by the appellate authority is that the code is not meant for recovery but it is meant for resolution of stressed assets. The aspect of recovery will commence only if the resolution process ends in failure. Hon’ble National Company Law Appellate Tribunal has held that application under section 7,9,10 of the IBC 2016 can be filed even after the limitation period is over. The same opinion was reaffirmed by the Hon’ble National Company Law Appellate Tribunal in the case of M/s Black Pearls Hotel Pvt ltd Vs Planet M Retail ltd. In this case the Operational creditor has filed an application under section 9 of Insolvency Bankruptcy Code, 2016. But the Adjudicating authority has dismissed the application on the ground that the application was barred by a period of limitation. On appeal against the order of Hon’ble National Company Law Tribunal, Hon’ble National Company Law Appellate Tribunal has held that the code has come into force on 1st December 2016. Therefore the right to file an application under this code comes from 1st December 2016 and not before that date. Hon’ble National Company Law Appellate Tribunal went on to add that even if it is accepted that the Limitation Act 1963 is applicable to the code, then article 137 of the limitation Act is applicable. As per article 137, the time period for filing an application ,where no specific period is provided under other provisions of Limitation Act, the article provides a period of three years from the date in which the right to file the application accrues. Therefore the operational creditor will get the right to file an application under section 9 of the Insolvency Bankruptcy Code, 2016 with effect from 01.12.2016 for a period of three years. Since in this case the operational creditor has filed an application within three years from commencement of code. Hence Hon’ble National Company Law Appellate Tribunal has held that the order of Hon’ble National Company Law Tribunal is not in order and allowed the application.
On careful analysis of the following provisions, the hope of applicability of Limitation Act 1963 to Insolvency and Bankruptcy 2016 arises.
Section 60(6) of Insolvency and Bankruptcy code 2016 lays down:
“Notwithstanding anything contained in the Limitation Act or in any other law for the time being in force, in computing the period of limitation specified for any suit or application by or against a corporate debtor for which an order of moratorium has been made under this Part, the period during which such moratorium is in place shall be excluded.”
Similarly as per provisions of Section 433 of the companies Act 2013, it says “The provisions of the Limitation Act 2013 shall as far as may be, apply to proceedings or appeals before the Tribunal or the appellate Tribunal as the case may be”.
Finally Insolvency & Bankruptcy Code (Amendment) Ordinance, 2018 (“Ordinance”) settled uncertainty regarding the applicability of Limitation Act 1963 over proceeding under the Insolvency and Bankruptcy Code 2016 (“Code”). The Ordinance introduced a new section 238 A to the Code, which categorically states that provision of Limitation Act would be applicable to proceedings before the Adjudicating Authorities and Appellate Authorities under the Code.
In the case of M/s BK Educational Services Private Limited v Parag Gupta and Associates, a dispute regarding liability arose between Parag Gupta & Associates, chartered accountants (the financial creditors) and BK Educational Services Private Limited (the corporate debtor). The corporate debtor, while denying the financial liability, contended that all but one financial claim was false and that the records were tampered and manipulated by the relatives of the financial creditors. Further, the amounts claimed were time-barred and there was nothing on record that would extend the limitation to recover the amount since the period was between 2012 and 2013.The order was challenged before Hon’ble National Company Law Appellate Tribunal by the financial creditors and Hon’ble National Company Law Appellate Tribunal held that the Limitation Act provisions were not applicable for the commencement of the corporate insolvency resolution process under the IBC and further passed the order to accept the application for initiation.
On appeal, while setting aside the Hon’ble National Company Law Appellate Tribunal order, Hon’ble Supreme Court held that an application filed after the IBC came into force in 2016 cannot revive a debt which is no longer due as it is time-barred. The expression “debt due” in the definition sections of IBC means debts that are “due and payable” in law, i.e., the debts that are not time-barred. Since the Limitation Act is applicable to applications filed under sections 7 and 9 of the IBC from inception, article 137 of the Limitation Act is evoked, which provides the period of limitation in case of “any other application for which no period of limitation is provided elsewhere” as three years from the time when the right to apply accrues.
“The right to sue”, therefore, accrues when a default occurs. If the default has occurred over three years prior to the date of filing of the application, the application would be barred under article 137 of the Limitation Act, save and except in those cases where, on the facts of the case, section 5 of the Limitation Act may be applied to condone the delay in filing such applications.
The present appeals are concerned with Section 238A of the Insolvency and Bankruptcy Code, 2016 (“Code”), which was inserted by the Insolvency and Bankruptcy Code (Second 1 Amendment) Act, 2018 with effect from 06.06.2018. The said Section is as follows:
“238A. Limitation.—The provisions of the Limitation Act, 1963 (36 of 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 question raised by the appellants in these appeals is as to whether the Limitation Act, 1963 will apply to applications that are made under Section 7 and/or Section 9 of the Code on and from its commencement on 01.12.2016 till 06.06.2018 i.e. since commencement of code and until new section 238 A was inserted. In all these cases, the Appellate Authority has held that the Limitation Act, 1963 does not so apply. Even on the assumption that Article 137 of the Limitation Act, 1963 is attracted to such applications, in any case, such applications being filed only on or after commencement of the Code on 01.12.2016, since three years have not elapsed since this date, all these applications, in any event, could be said to be within time.
In view of the settled principle, while we hold that the Limitation Act, 1963 is not applicable for initiation of ‘Corporate Insolvency Resolution Process’, we further hold that the Doctrine of Limitation and Prescription is necessary to be looked into for determining the question whether the application under Section 7 or Section 9 can be entertained after long delay, amounting to laches(latches means that opposite party’s position will deteriorate due to delay in claiming the rightful remedy in a court of law within a reasonable period of time) and thereby the person forfeited his claim. . If there is a delay of more than three years from the date of cause of action and no laches on the part of the Applicant, the Applicant can explain the delay. Where there is a continuing cause of action, the question of rejecting any application on the ground of delay does not arise.Therefore, if it comes to the notice of the Adjudicating Authority that the application for initiation of ‘Corporate Insolvency Resolution Process’ under section 7 or Section 9 has been filed after long delay, the Adjudicating Authority may give opportunity to the Applicant to explain the delay within a reasonable period to find out whether there are any laches on the part of the Applicant.The stale claim of dues without explaining delay, normally should not be entertained for triggering ‘Corporate Insolvency Resolution Process’ under Section 7 and 9 of the ‘I&B Code’. . However, the aforesaid principle for triggering an application under Section 10 of the ‘I&B Code’ cannot be made applicable as the ‘Corporate Applicant’ does not claim money but prays for initiation of ‘Corporate Insolvency Resolution Process’ against itself, having defaulted to pay the dues of creditors.By reason of this finding, the order of the Tribunal was set aside, and the matter was remanded for a hearing on all points other than the point of limitation. . Learned counsel appearing on behalf of the appellants have argued, relying upon the Report of the Insolvency Law Committee of March, 2018, that the object of the Amendment Act which introduced Section 238A into the Code was to clarify the law and, thus, Section 238A must be held to be retrospective.
They also referred to and relied upon the definitions under Sections 3(11), 3(12), and Section 5(6) of the Code, which, when contrasted with Section 3(6), would show that though “claim” in Section 3(6) refers to a right to payment, the definitions of “debt” and “default” in Sections 3(11) and 3(12) respectively, refer to liability or obligation in respect of a claim which is “due” and this being the case, a time-barred debt cannot be said to be “due” so as to trigger the Code.The learned counsel further attacked the Appellate Tribunal judgment by stating that an application filed in 2017 under Section 7 or 9 of the Code, praying that the Code be triggered for a debt that has become time-barred long back, say in 2011, would lead to absurdity as it could never have been the intention of the legislature to resuscitate stale and dead claims leading to the drastic consequence of the taking away of the management of the corporate debtor, which may ultimately result in its corporate death.
Also, according to learned counsel for the appellants, if one were to read the definition of “Adjudicating Authority” in Section 5(1) of the Code, together with Sections 408, 424 and 433 of the Companies Act, 2013, it would become clear that proceedings before the Hon’ble National Company Law Tribunal (“NCLT”) arising under the Code would be covered by the Limitation Act via Section 433 of the Companies Act from the very inception or commencement of the Code. According to them, it is important to remember that the Eleventh Schedule to the Code, which made amendments in various Acts, did not introduce the limitation provision of the Companies Act so as to govern the Code as it was unnecessary, as Section 433 applied vide Section 5(1) of the Code read with Section 408 of the Companies Act.
In Gaurav Hargovindbhai Dave vs. Asset Reconstruction Company (India) Ltd. Hon’ble Supreme Court held that the proceedings under section 7 of the IBC are “an application” and not “suits”; thus they would fall within the residuary article 137 of the Limitation Act 1963 and the right to apply will arise from the date of default.
It was again reiterated by the Hon’ble Supreme Court in Jignesh Shah & Anr. vs. Union of India & Anr that the right to apply under the Insolvency & Bankruptcy Code 2016 will be from the date of default and not from the date of enactment of the IBC i.e. 01.12.2016.
Hon’ble National Company Law Appellate Tribunal considering the Babulal Vardharji Gurjar Vs. Veer Gurjar Aluminium Industries Pvt. Ltd. & Anr. held that the period of three years from the date of the Account of Corporate Debtor is classified as NPA then it becomes impermissible to proceed with Section 7 Application as observed in the para 11 of the Judgment. All these lead to reiterate that the provisions of The Limitation Act, 1963 vide Section 238A of the I&B Code, 2016 will be applicable to all NPA cases provided they meet the criteria of Article 137 of the Schedule to The Limitation Act, 1963. The extension for the period of Limitation can only be done by way of application of Section 5 of The Limitation Act, 1963, if any case for the condonation of delay is made out.
Author: Adv. Sneh Purohit