APPLICABILITY OF LIMITATION ACT UNDER IBC (BK EDUCATIONAL SERVICES PVT. LTD Vs. PARAG GUPTA ASSOCIATES)

Background

Under the Insolvency and Bankruptcy Code 2016 (the Code), there has been an ambiguity with respect to applicability of the Limitation Act, 1963 (the Limitation Act). This has been deliberated upon in several judgments of the National Company Law Tribunal (the NCLT) and the National Company Law Appellate Tribunal (the NCLAT). In the case of Mis Deem Roll Tech Limited, the NCLT held that the Limitation Act is applicable to proceedings under the Code and dismissed the debt of the petitioner as being time barred and in the case of Neelkanth Township and Construction Private Limited Vs. Urban Infrastructure Trustees Limited, the NCLAT held that the provisions of the Limitation Act, 1963 would not apply to the Code. As observed above, it may be noted that applicability is being interpreted on the merit of each case and this has led to the confusion. The Supreme Court in case of Parag Gupta Vs. B. K. Educational Services held that the provisions of the Limitation Act is applicable for initiation of Corporate Insolvency Resolution Process.

Facts of the Case

  • There was a dispute on liability between Parag Gupta & Associates, Chartered Accountants (Financial Creditors) and B. K. Educational Services Private Limited, (Corporate Debtor).
  • The Corporate Debtor denied the financial liability and contended that the all the financial claims were false except one genuine debt, being immovable property allotted by Greater Noida Industrial Development Authority (GNIDA).
  • The Corporate Debtor further alleged that the records were tampered and manipulated by the relatives of the Financial Creditors.
  • The amounts claimed were time-barred.
  • It was showed that there was nothing on record that would extend the limitation to recover the same since the period was between 01 October 2012 to 05 February 2013.

The NCLT held that documents produced by the applicants were not justifiable for the purpose of extending limitation. Therefore, the amounts stated by the petitioner are not legally recoverable. But with respect to liability of sum which was given by petitioner on 25 February 2015, it was entitled to be recovered.  However, that amount the debtor had liquidated the recoverable after admission of the application. Subsequently, the NCLT held that there were no further actions acquired and disposed of the application.

Challenging the order of NCLT, the Financial Creditor had appealed the said order of the NCLT and filed an appeal before the NCLAT. Contrary to the NCLT order, the NCLAT held that the provisions of the Limitation Act were not applicable for initiation of Corporate Insolvency Resolution Process (CIRP) under the Code and passed an order to accept the application for initiation of CIRP. Consequent upon this, the Supreme Court stayed the order of the NCLAT dated 7 November 2017. The Supreme Court[1] pointed out that ‘NCLAT Order has erred in holding that the right to apply under Section 7 of the Code for initiating Corporate Insolvency Resolution Process, accrues from 1 December 2016 i.e. from the date the Code came into force. It is submitted that in the event the rational given by the NCLAT is given effect to, it will lead to an anomalous situation where even in case of defaults in respect of debts more than fifty years ago a party will be able to initiate Corporate Insolvency Proceedings under the IBC.

The Indian jurisprudence opines that if a law is a complete code, then an express or necessary exclusion of the Limitation Act should be respected. In light of the confusion in this regard, the Insolvency Law Committee, set up on 16 November 2017 deliberated on the issue and unanimously agreed that the intent of the Code could not have been to give a new lease of life to debts which are time-barred. It is settled law that when a debt is barred by time, the right to a remedy is time-barred. This requires being read with the definition of ‘debt’ and ‘claim’ in the Code. Further, debts in winding up proceedings cannot be time-barred, and there appears to be no rationale to exclude the extension of the principle of law to the Code.

Conclusion

In view of the above the Committee recommended that it would be fit to insert a specific section applying the Limitation Act to the Code. The relevant entry under the Limitation Act may be on a case to case basis. However, in the absence such explicit provisions in the Code, the creditors would get a right to make an application for time-barred debts too. Given this, a need is felt for more clarity pertaining to entry under the Limitation Act as it is vague and criteria is not recommended, which once again leaves the question unanswered.

It is pertinent to note that the non-application of the law of limitation creates the following glitches: (i) It re-opens the right of financial and operational creditors holding time-barred debts under the Limitation Act to file for CIRP, the trigger for which is default on a debt above INR One Lakh. The purpose of the law of limitation is “to prevent disturbance or deprivation of what may have been acquired in equity and justice by long enjoyment or what may have been lost by a party’s own inaction, negligence or latches”. Though the Code is not a debt recovery law, the trigger being ‘default in payment of debt’ renders the exclusion of the law of limitation counter-intuitive.  (ii) It re-opens the right of claimants (pursuant to issuance of a public notice) to file time-barred claims with the Insolvency Resolution Professional/Resolution Professional, which may potentially be a part of the resolution plan. Such a resolution plan restructuring time-barred debts and claims may not be in compliance with the existing laws for the time being in force pursuant to Section 30(4) of the Code.

[1] http://supremecourtofindia.nic.in/supremecourt/2017/41322/41322_2017_Order_10-Jan-2018.pdf

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