Tag Archives: Corporate insolvency

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

Withdrawal Application after Initiation of Corporate Insolvency Proceedings under the IBC

Introduction

In case of any disputes between the parties, there are probabilities that parties might compromise and settle the matter during the pendency of the case before the Court.  In this blog, we analyse the situation where the application has been made before the National Company Law Tribunal (the NCLT) or National Company Law Appellate Tribunal (the NCLAT) under the Insolvency and Bankruptcy Code 2016 (the Code) and in case if such application has been admitted and the Corporate Insolvency Resolution Process (the CIRP) is initiated by the NCLT and the parties with consensus ad idem wish to withdraw the said application.

On July 24, 2017, the Hon’ble Supreme Court in case of Nisus Finance and Investment Managers LLP (“Facility Agent” or “Financial Creditor”) and Lokhandwala Kataria Construction Pvt. Ltd. (“Debtor”) ordered that the application for CIRP could be withdrawn or the subject matter could be settled by the parties even after the CIRP have been initiated.

Facts of the Case:

Nisus Finance and Investment Managers LLP (“Facility Agent” or “Financial Creditor”) filed an application before the National Company Tribunal (“NCLT”), Mumbai against the Lokhandwala Kataria Construction Pvt. Ltd. (“Debtor”) for initiation of insolvency proceedings. The Debtor was acting as a guarantor of Vista Homes Pvt Ltd. (“Principal Debtor”) with respect to amount owed by the Principal Debtor. The Financial Agent, the Debtor and the Principal Debtor are one among the parties to the Debenture Trust Deed executed between the Principal Debtor, Facility Agent and other Debenture holders. The Debtor was acting as a guarantor to redeem the debentures in the event if Principal Debtor, fails to pay to the debenture holders. The Facility Agent had the authority to invoke its rights to ensure that the returns are reached to the debentures holders. The Principal Debtor failed to redeem the debentures which were due for its redemption and the Facility Agent filed application under the Code for CIRP with the NCLT, Mumbai. The NCLT admitted the application of Facility Agent on being satisfied that the Debtor defaulted in redeeming the debentures.

Upon Moratorium being declared by the NCLT, Mumbai, the parties approached the NCLAT with a plea requesting to set aside the order of the NCLT and allow them to withdraw the case as the parties had settled the dispute and the dues are paid by the Debtor.

The NCLAT rejected the plea that the Adjudicating Authority may permit withdrawal of the application on a request made by the applicant before its admission and same cannot be withdrawn once the order for admission is issued and Moratorium is declared. Contesting the order of the NCLAT, the parties appealed the said order with the Hon’ble Supreme Court highlighting that NCLAT could utilize the inherent power recognized by Rule 11 of the National Company Law Appellate Tribunal Rules, 2016 to allow a compromise between the parties after admission of the matter.

Judgement:

The Hon’ble Supreme Court highlighted that the Rule 11 of the National Company Law Appellate Tribunal Rules, 2016 was not notified as on the date of order passed by the NCLAT. However, the Hon’ble Supreme Court utilised its powers under Article 142 of the Constitution of India, which states that Supreme court in the exercise of its jurisdiction may pass such order or decree as is necessary in doing complete justice. The Hon’ble Supreme Court while exercising its powers allowed the parties to withdraw the application. The Hon’ble Supreme Court disposed the appeal after accepting and recording the consent of the parties, where parties undertook to abide by the consent terms and the debtor agreed to pay the sums due. It is important to note that the intention of law is to provide the justice, therefore depending on the facts and circumstances, an application may be withdrawn even after the admission of the application.

Some thought provoking facts from the case:

  1. One of the objections raised by the Debtor before the NCLT, Mumbai was that the Facility Agent has no locus standi to file the case as no liability has been shown as owed and Facility Agent is not an authorised agent and not permitted under the law to file an application, hence application is not maintainable. The NCLT, Mumbai highlighted that since all the parties being privy to the Debenture Trust Deed, the Debtor cannot backout saying that the Facility Agent cannot act as Financial creditor on behalf of or as Debenture holders to initiate the CIRP against the Debtor.

 

  1. The NCLAT dismissed the appeal of the Debtor for withdrawal of application on the ground that before admission of an application under Section 7, it is open to the Financial Creditor to withdraw the application but once it is admitted, it cannot be withdrawn and is required to follow the procedures laid down under Sections 13, 14, 15, 16 and 17 of the Code. Therefore, parties cannot be allowed to withdraw the application once admitted, and matter cannot be closed till claim of all the creditors are satisfied by the corporate debtor. However, as explained in this blog, the Supreme Court may on a case to case basis, allow to withdraw the application which is already admitted by applicable authority.

 

  1. It is pertinent to note that the Supreme Court while passing order highlighted and agreed to the view of the NCLAT on Rule 11 has not been adopted at that point of time and in the absence of no inherent power, the question of exercising inherent power does not arise. Therefore, the Supreme Court took the cognizance of Article 142 of the Constitution of India where the Apex Court has authority to pass such order or decree as is necessary in doing complete justice.

Authors: Ms Shivani Handa and Mr Ashwin Bhat.