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This article is written by Jotsna O, pursuing a Certificate Course in National Company Law Tribunal (NCLT) Litigation from LawSikho.

Introduction

Kishanlal Likhmichand Bothra vs Canara Bank has joined a slew of recent NCLT and NCLAT judgments, in clarifying and establishing the position and applicability of the Limitation Act, 1963 with reference to applications for initiating insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 [IBC]. In the instant case, the applicability of Section 18 of the Limitation Act to proceedings under IBC, as well as the question of extension of the period of limitation in the event of acknowledgement of debt in the Balance Sheets or Books of Accounts by the corporate debtor, were dealt with. Over the past year, the various facets of Section 18 of the Limitation Act and its inexhaustible inclusions are being laid out, through several judgments, most prominently, Laxmi Pat Surana vs Union Bank of India & Anr, in which the Supreme Court finally settled the question of applicability of Section 18 of the Limitation Act to IBC proceedings relying primarily on the insertion of Section 238A to the IBC.

A brief background of the case

In the Kishanlal case, an appeal was filed by the Erstwhile Director of Bothra Metals and Alloys Ltd. [the corporate debtor] before the Hon’ble NCLAT, New Delhi against the impugned order of the Hon’ble NCLT, Mumbai Bench [adjudicating authority] admitting the application under Section 7 of IBC against the corporate debtor, by Syndicate Bank in the capacity of financial creditor [now amalgamated with the respondent – Canara bank]. 

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The appellant claimed that the date of the NPA was 03-12-2015 and that the application under Section 7 of IBC was filed on 04-07-2019, more than three years from the date of NPA, and hence, the same should have been dismissed by the Adjudicating Authority, taking into consideration Section 137 of the Limitation Act, wherein it is provided that the period of limitation shall be three years from the date of default. In support of their submissions, several judgments of the Hon’ble High Courts were relied upon, and the Appellant contended that if within three years of NPA, a Section 7 application has not been filed, Section 5 of Limitation Act would come into play, and the application and the related debt would become time-barred. 

On the other hand, the respondent stated that the appellant had raised the very same issue before the adjudicating authority, also. However, the adjudicating authority had considered the Balance Sheets placed on record and the One-Time Settlements [OTS] proposals admittedly given by the corporate debtor and came to the conclusion that the debt of the corporate debtor had not become time-barred. Rather, the respondent relying on several High Court and Supreme Court judgments, submitted that acknowledgments in the Balance Sheets or Books of Accounts satisfy the conditions under Section 18 of Limitation Act, and therefore, can be treated as acknowledgments within its meaning for the extension of the limitation period, under Section 18 of Limitation Act.

While admitting the Section 7 application, the adjudicating authority had observed the acknowledgement of debt in the balance sheets by the corporate debtor, and had placed reliance on various judgments of the Hon’ble Supreme Court, and held that such a written acknowledgement would satisfy the conditions of Section 18 of the Limitation Act, leading to computation of a fresh period of limitation, commencing from the date of the latest acknowledgement of the kind.

Issues raised before the court

The issues left to be considered by the hon’ble NCLAT were namely,

  1. Whether acknowledgments made in the Balance Sheets, Books of Accounts, or OTS proposals fall within the meaning of acknowledgments under Section 18 of the Limitation Act, for the purpose of extension of the period of limitation while computing the limitation period?
  2. Whether the adjudicating authority had made an error in admitting the application for initiating insolvency under Section 7 of IBC in the instant case?

The final judgment

  • The hon’ble NCLAT relied on the very recent Sesh Nath Singh vs Baidyabati Sheoraphuli Co-operative Bank, delivered on 22-03-2021, in which the Hon’ble Supreme Court, while referencing extension of limitation under Section 18 of Limitation Act, observed that an acknowledgement of a present continuing liability, where it is made in writing, concerning a right claimed by the opposite party and is signed by the party against whom the right is claimed, effectively refreshes the period of limitation, commencing now from the date on which the acknowledgement was signed. This takes effect, subject to the condition, whereby the acknowledgement has to be signed before the expiry of the period of limitation.
  • Also, in Sesh Nath case, the Hon’ble Supreme Court observed, that even though an adjudicating authority under the IBC is not a suitable forum for collection or recovery of debt, either barred by law or time, the intention behind applications under Section 7 and 9 of the IBC, is to ensure the realisation of debt by the initiation of insolvency resolution process against the corporate debtor, and keeping in mind that intention, there exists no rhyme or reason as to why Section 14 or 18 of Limitation Act, should not apply to IBC proceedings for computation of the period of limitation.
  • In addition to this, the Hon’ble NCLAT also took into consideration the landmark judgments, viz. Mahabir Cold Storage vs Commissioner of Income Tax, and A.V. Murthy vs B.S. Nagabasavanna, wherein the Hon’ble Supreme Court while considering entries in Books of Accounts or Balance Sheets had observed that entries in such records may amount to acknowledgement of debt.
  • Based on these judgments, the hon’ble NCLAT, with ease, came to the conclusion, that Section 18 of Limitation Act shall apply to proceedings under IBC, and where there has been an acknowledgement of debt in the Balance Sheets or the OTS proposal, the period of limitation would get extended, provided the acknowledgement was made or signed, before the period of limitation had already expired. Resultantly, the hon’ble NCLAT, held that the adjudicating authority had not erred in admitting the Section 7 application and that it is finding that the debt was not time-barred, based on the Balance Sheets and the admitted dates on the OTS proposals by the corporate debtor, was in fact correct.

Analysing the case further

Considering the purpose and object of the Limitation Act and the IBC are in essence to ensure the provision of legal remedies in a time-bound and efficient manner, both of these enactments have to be interpreted harmoniously and, in a manner, where the objects of both statutes are effectuated, keeping in mind the intention of the legislature. With the introduction of Section 238A to the IBC, in which it is provided that provisions of the Limitation Act, shall apply to the proceedings and appeals, as the case may be under the IBC with retrospective effect, any remnants of uncertainty can be cast aside with respect to the applicability of Limitation Act and its provisions to IBC proceedings. Given that, the subtle nuances and underlying complexities of both enactments have not been put to test in their entirety, and hence, it is only through judgments such as Sesh Nath and Kishanlal, and numerous others, that the ambiguity that still persists, gradually clears, case by case.

Conclusion

As the rationale behind the order passed by the hon’ble NCLAT is based on interpretation of legal provisions, sound precedents, and evidence placed on record, the author is definitely agreeable with the order arrived at. Once the existence of a subsisting debt is admitted by the party against whom the debt is claimed, on multiple occasions, the date of default should not be the sole consideration in determining whether the debt has become barred by law or time. In the instant case, in addition to the acknowledgement in the Balance Sheets, the corporate debtor had provided OTS proposals and even submitted resolution plans to the financial creditor/respondent, each being repeated affirmations of the existence of the debt against the corporate debtor. Each of these acknowledgements in the Balance Sheets, OTS proposals, and resolution plans, should very well come within the context of Section 18 of the Limitation Act. Computation of fresh period of limitation from each acknowledgement under Section 18 of Limitation Act, is not unfair on the corporate debtor, rather non-consideration of the acknowledgement would be unfair, unjust, and irreparably injurious to the respondent.

Lastly, the condition of getting acknowledgement, before the expiry of three years of the limitation period under Section 137 of the Limitation Act, acts as a strong deterrent against the creditors claiming under IBC, from misusing the provisions of Section 18 of Limitation Act, creating a level playing field for all the parties involved. In conclusion, with the introduction of Section 238A to the IBC, there is no justification in gatekeeping specific provisions of the Limitation Act, bearing in mind that no exemptions were implied or expressed by the legislature while inserting the provision.

References

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