In this article, Jitika, pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses the applicability of limitation act in insolvency proceedings
What is Limitation Act?
The word ‘limitation’ is defined as a restraint, restriction or a limiting rule, or in legal terms, it is the specifically stated time period, at the expiry of which, the victim parties cannot approach the court for any remedy or justice. Once the period of limitation is elapsed, any right to seek relief is extinguished.
In India, this statute of limitation is termed as Limitation Act which was adopted in 1963. According to the Section 2 of Limitation Act, 1 963, “period of limitation” is defined as the period set for any suit, appeal or the application as prescribed by the respective Schedule. A Schedule, under the Limitation Act, 1963 is mainly based on the description of suits. The time from which the period begins to start is also clearly specified in the Schedule. The Act sets a period of time in which a legal action must be taken, starting from the time the cause of action arises, up to which the cause of action is done. With 137 descriptions, the suits are divided into three divisions. According to the description of the suit, the time for the starting of the limitation period differs from suit to suit. It can be from 10 days up to the time of 30 years. (India Code, Limitation Act, 1963)
What is IBC?
A situation in which a debtor cannot pay his creditor back is known as Insolvency and when a legal declaration is made for Insolvency, it is known as bankruptcy.
Not every business can make it, which necessitates the process of corrective measures. The Insolvency and Bankruptcy Code enacted in 2016, ensures a certainty in the process of insolvency, the course to be followed to resolve the matters, and once bankruptcy has been determined, having the course of action to be followed to settle that issue as well. It makes a very clear differentiation between bankruptcy and insolvency — the former being a long-term notion on the business, while the latter is the short-term incapacity to meet liabilities during the ordinary course of businesses. The IBC works to consolidate and amend the laws related to reformation and insolvency resolution of corporate persons, individuals and partnership firms in a time and in a manner for maximum valuation of assets of these persons, to encourage entrepreneurship, to set up IBBI (Insolvency and Bankruptcy Board of India), as well as other matters connected. (Ministry of Corporate Affairs, Insolvency and Bankruptcy Code, 2016)
The Point Of Contention
Since the conception of the code, it has been made use of by more than a few creditors to claim their monies or debts. With so many cases related to the matter, it is not unexpected to have questions raised. The code has gone through amendments to resolve the issues. But still several matters persist. One of the main issues which have been in mainstream is the applicability of Limitation Act on IBC. What actually forms the point of dispute is the matter of time-barred debts. This question has been raised in number of cases. There is no specific provision which makes the act applicable on IBC.
National Company Law Tribunal
One of the first decisions of NCLT, so as to discuss the admission of time-barred debt was the decision of the adjudicating authority in the case M/s. Prowess International Private Limited v. Action Ispat and Power Private Limited. In the held decision, the Bench said that the provisions of the Limitation Act would be made applicable to proceedings under the I&B Code, and any claim that was barred by time, being unenforceable, could not be deemed by the NCLT
Similarly, in M/s Deem Roll -Tech Limited vs. R.L. Steel & Energy Ltd and Sanjay Bagrodia vs. Satyam Green Power Pvt., the NCLT (Shah, 2017) Delhi held that the provisions of Limitation Act would be applicable to the IBC.
In the Deem Roll Case, the question about the initiation of CIRP for a time-barred claim was put forwarded before the Principal Bench of NCLT. The bench took the view that the period of limitation would be applicable because the claim made by the operational creditor was barred by the limitation act i.e. of 3 years. And therefore cannot be made the basis for evoking IBC before the Tribunal. A similar view was taken by the NCLT Bench in the Sanjay Bagrodia Case. By the plain reading of the Subsection 6 of section 60, IBC, it was again held that the Limitation Act is applicable on the proceedings under IBC, 2016.
However, in Machhar Polymer Pvt. Ltd. v. Sabre Helmets Pvt. Ltd. and PCI Ltd. Vs. Ashimori India Pvt. Ltd., the Tribunals have affirmed that the Limitation Act would not be applicable to IBC. It was also observed by the Bench that the delays and the laches will also have to be accounted for. (Sharma, 2018)
The Case of Neelkanth Township and Construction Pvt. Ltd. Vs. Urban Infrastructure Trustees Ltd. An appeal was filed by Neelkanth Township & Construction Pvt. Ltd. (corporate debtor) against the order of the National Company Law Tribunal (NCLT) which allowed the commencement of insolvency proceedings on the action of Urban Infrastructure Trustees Ltd (the financial creditor). The latter had subscribed to the optionally convertible debentures (OCDs) issued by the Neelkanth Township & Construction Pvt. Ltd. Which matured in years 2011, 2012 and 2013. The Appellant challenged the order on numerous grounds, one of which was that, that the time-barred debt cannot be enforced by the filing of an application for CIRP (Corporate Insolvency Resolution Process). It was contended that the claim of the respondent is time-barred as the Debenture Certificates were due for redemption back in the years 2011, 2012 and 2013 respectively; the limitation period of 3 years for seeking the remedy for the debenture certificates had already expired. Therefore, the application filed in the year 2017 is time-barred.
National Company Law Appellate Tribunal
The NCLAT Bench had dismissed the appeal on the basis that there is nothing on the record to prove that provisions of the Limitation Act would apply to the I and B Code and held that that in the absence of any provision in I & B code, the Limitation Act, 1963 would not be applicable to initiation of CIRP. The bench further added that the IBC is related to the commencement of Corporate Insolvency Resolution Process, and is not the Act for the money claim recovery.
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 by Respondent is barred by Limitation cannot be accepted. This ruling of the NCLAT is in agreement with the propounded purpose of the Code i.e. it is not a medium or a tool for the debt recovery but it is a platform for reestablishing and revival of businesses which cannot be denied just because the claim is time-barred and there cannot be default in the respect of the same. The decision of the Tribunal and the Appellate Tribunal was challenged by the Petitioner in the Supreme Court of India. Further ambiguity was created by the decision of the Hon’ble Supreme Court. The Supreme Court dismissed the appeal on the basis that there was no merit in the appeal, therefore there was no reason to interfere with NCLAT Judgment. The answer to the question of applicability of the act on the code has been left open-ended by the Apex Court.
The same disputation was again raised in the case of Black Pearls Hotel Pvt. Ltd v. Planet M Retail Ltd. The issue whether or not the period of limitation prescribed under Limitation Act 1963 is applicable to I and B code 2016 was examined by the National Company Law Appellate Tribunal. The NCLT had dismissed the application of Insolvency mainly on the basis that the debt was time-barred under the Limitation Act. The NCLAT said that if the Limitation Act was even made to be applicable, then the period would only be initiated from December of 2016.
Furthermore, another NCLAT judgment in the case Speculum Plast v. PTC Techno, November 2017 had addressed the ambiguity while holding that the Limitation Act is not applicable to I&B Code. Restating the non-applicability of the Limitation Act, the NCLAT had relied on the decision of the Apex Court in M/s. Innoventive Industries Ltd. vs. ICICI Bank & Anr. It was held that the IBC is a complete code in itself, as clearly evident by the Legislative intent, the Statutory framework and as well as the principles driving the design of the said Code. And since IBC is considered a special law and a complete code in itself, even after the absence of an express omission of the Limitation Act, courts can examine its provisions to assess whether or not the Limitation Act is essentially excluded as held in Hukumdev Narain Yadav v. Lalit Narain Mishra. (NCLAT, New Delhi, 2017)
Though the judgment on the Speculum Case had been stayed by the Supreme Court in an appeal filed against the NCLAT, on January 10, 2018, in matter of B K Educational Services Private Limited v. Parag Gupta.
The NCLT, in this case, held that documents submitted by Applicants were not justifiable for the purpose of extending the limitation. So, the amounts as stated by the petitioner are not legally recoverable. Although the liability sum which was given on 25 February 2015, it was at liberty to be recovered. The NCLT held that there were no need of further actions and had disposed of the application. The order was challenged by the Financial Creditor, who appealed against the NCLT order before the NCLAT. Opposed to the NCLT order, the NCLAT held that the Limitation Act provisions were not applicable for the commencement of Corporate Insolvency Resolution Process (CIRP) under the Code and further passed the order to accept the application for initiation. Resultant upon this, the Apex Court had stayed the order of the NCLAT dated 7 November 2017. The Supreme Court held the provisions of the Limitation Act applicable for initiation of Corporate Insolvency Resolution Process. (B.K Educational Services Pvt Ltd v. Parag Gupta And Associates, 2018)
As we observed above, that applicability has been interpreted on the warrant of each case which has led to the perplexity. Due to the confusion in this regard, on 16 November 2017, the Insolvency Law Committee was set up, which deliberated on the above issue and agreed that the intent of the Code is not to give a new lease of life to debts which are time-barred.
The Committee on the basis of observations gave the recommendation that it would be fitting to insert a particular section about the application of the Limitation Act to the Code, under which the Limitation Act would be on a case to case basis. However, in the lack of such explicit provisions in the Code, the creditors would get a right to make an application for time-barred debts too. Which necessitated for more clarity relating to entry under the Limitation Act as it is imprecise and criteria is not recommended, which once again leaves the issue ambiguous. (Novojuris, 2018)
At the end, it is necessary to for the Adjudicating Authority to make the interpretations of the respective statutes in such a way, so as not to make the provisions superfluous. It is, after all, imperative to respect the legislative intent and not to render any of the provision redundant.