In this article, Gauri Nagar discusses the applicability of Limitation Act to proceedings under the Insolvency And Bankruptcy Code, 2016.
All about The Insolvency and Bankruptcy Code
The Insolvency and Bankruptcy Code was enacted in 2016. It was brought about in order to alleviate the burden of huge debts that primarily lay on the shoulders of corporate houses and business. With the introduction of this Code, it is expected to revive the various banks NPA status. It has proved to be of immense importance for the creditors as well as for those who have been able to retrieve their dues or debts. The only question that hovers around is whether this code is applicable on a time-barred debt or not and whether the Limitation Act, 1963 be applicable on the IBC or not.
Whether section 7 of IBC is time barred or not?
In the case of Neelkanth Township and Construction Private Limited v Urban Infrastructure Trustee Limited (judgment of Supreme Court dated 11 August 2017) numerous issues were discussed with respect to the IBC, 2016. One of the most focal point that was discussed before the NCLAT was whether Section 7 of IBC is time barred or not because the claim of debt was with respect to the years 2011, 2012 and 2013. It was also contended by the appellant that the application was filed in 2017 and therefore, the claim was time barred. NCLAT dismissed the appeal of the Corporate Debtor (Appellant). The NCLAT ruled that the Limitation Act will not apply and that a time barred debt can very well be enforced by filing an application for Corporate Insolvency Resolution Process.
The NCLAT, in this particular case, has given a very reasoned decision. The view taken by NCLAT is that there is nothing explicitly given in the Insolvency and Bankruptcy Code that says that the Limitation Act will be applicable to IBC.
“IBC is not an Act for recovery of money claim. If there is a debt which includes interest and there is a default of debt and having a continuous course of action, the argument that the claim of money is barred by limitation cannot be accepted.”
The objective of Limitation Act is to ensure that there is a time limit for pursuing a legal remedy and the same was said in the case of M/s Bharat Barrel & Drum MFG Co. v Employee State (judgment dated 23 September 1971) It insists on being proactive so that legal action can be taken in time to retrieve the dues. This objective in turn makes the litigant diligent. The whole purpose of the Limitation Act is based on a sound public policy. Section 433 of the Companies Act, 2013 provides for application of the provisions of the Limitation Act to proceedings or appeals before the Tribunal or the Appellate Tribunal. Section 60(6) of the code says that the Limitation Act shall not apply during moratorium.
Now the question that crops up is whether this provision is inconsistent with the Limitation Act or not. After having a close look at the provision, if we say that the limitation Act does not apply to the IBC, then we can find that an equilibrium is created between the code and the Limitation Act by this section. It can be said that there lies an intricate intent of the code to provide further extension to the limitation period. This is so because the creditor cannot take any action during the stand-still period. Therefore, the limitation will still be evaluated in accordance to the Limitation Act but the limitation determined will be extended by the moratorium period.
The importance of other cases cannot be ignored wherein an opposite stance had been taken. It is noteworthy to discuss the case of Sanjay Bagrodia v Sathyam Green Pvt Ltd (judgment dated 25 May, 2017). It was argued that the provisions of Limitation Act cannot be incorporated into code as its incorporation has not been mentioned anywhere in the code. Moreover, NCLT and NCLAT should work only within the confines of the code. Another very important provision of the code is Section 255. The section of IBC provides that the Companies Act, 2013 will get amended only in the manner mentioned in the eleventh schedule of IBC. The eleventh schedule envisages the amendments made to the Companies Act but not Section 433 of the Companies Act in which the provisions of the limitation act are made applicable.
In the case of State Bank of India Columbo v Western Refrigeration Private Limited (judgment dated 26 May, 2017), the Ahmedabad’s NCLT inclination was towards the view that insolvency proceedings cannot be started on a claim that is not recoverable because of it being time barred. Similarly, in the case of Prowess International Private Limited v Action Ispat and Power Private Limited (judgment dated 15 March 2017), the petition was dismissed because the claim was time barred.
The judgment of the Mumbai Bench of the NCLT in the case of Urban Infrastructure Trustee Ltd. v Neelkanth Township and Construction Pvt Ltd (judgment dated 21 April 2017) was challenged before the NCLAT (judgment dated 11 August 2017) wherein it was categorically held that the Limitation Act shall not be applicable to the Code. Moreover, an appeal to the Supreme Court was disposed off by way of an order (dated 23 August 2017) wherein the Supreme Court failed to answer categorically as to whether provisions of limitation act will apply or not, thereby keeping the question of applicability open. In a recent judgment given by the Mumbai Bench of NCLT in Machhar Polymer Pvt Ltd v Sabre Helmets Pvt Ltd (judgment dated 3 October 2017) it was reiterated that a time barred claim cannot be used as a ground for initiating a cause of action for winding up proceedings. A clear approach can be seen in the case of Black Pearl Hotels Pvt Ltd v Planet M Retail Ltd (judgment dated 17 October 2017) wherein it was observed that in order to apply under IBC, 2016, the right would accrue only on December 1, 2016 i.e the date when the code came into force.
To sum up, it can be said that if provisions of the Limitation Act are not applied on IBC to initiate insolvency proceedings, then, the very purpose of the Code shall get destroyed. It will lead to a chaotic situation wherein numerous petitions would get filed even with respect to time barred debts. The principle of “maximum vigilantibus non dermientibus jura sub veniunt (laws provide help to those who are watchful and not to those who sleep)” would get frustrated. It is possible to draw a tacit implication for the application of the Limitation Act to the IBC. However, since nothing has been explicitly given in the code with regards to this, a staunch stance cannot be taken as the Supreme Court has also left the question of applicability of Limitation Act to IBC open.