What does the Supreme Court say on the application of the Limitation Act to NCLT proceedings?

limitation-act-debt-recovery-law

Status as on- 05/07/2021

Case- B.K. EDUCATIONAL SERVICES PRIVATE LIMITED vs PARAG GUPTA AND ASSOCIATES

(Supreme Court Judgment Dated October 11, 2018 in Civil Appeal no. 23988 of 2017)

Brief Facts of the Case

  1. The current case involves Section 238A of the Insolvency and Bankruptcy Code, 2016 (“Code”), which was added by the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018, with effect on June 6, 2018.
  2. The main legal question here is whether the Limitation Act, 1963 will apply to applications made under Sections 7 and/or 9 of the Code on and from its inception on 01.12.2016 until 06.06.2018?

(Note: The Appellate Authority has ruled in all of these cases that the Limitation Act of 1963 does not apply.)

  1. “Counsel appearing on behalf of the appellants argued, relying upon the Report of the Insolvency Law Committee of March, 2018, that the object of the Amendment Act which introduced Section 238A into the Code was to clarify the law and, thus, Section 238A must be held to be retrospective. Further, according to them, in any case, the law of limitation, pertaining to the domain of procedure, must be held to apply retrospectively in any case.”

Held

The Hon’ble Supreme Court ruled as follows:

  1. The Court determined that the Limitation Act would apply to NCLT proceedings. The Court stated that Section 238A should be applied retrospectively, otherwise, applications seeking to resurrect time-barred claims would have to be allowed, not being governed by the law of limitation.
  2. The court also said the following: “The Code cannot be triggered in the year 2017 for a debt which was time-barred, say, in 1990, as that would lead to the absurd and extreme consequence of the Code being triggered by a stale or dead claim….”
  3. It was determined that “because the Limitation Act is applicable to applications filed under Sections 7 and 9 of the Code from the inception of the Code, Article 137 of the Limitation Act becomes applicable.” In essence, the Court determined that Section 238A of the Act would apply to applications filed under Sections 7 and/or 9 of the Code beginning on December 1, 2016.
  4. The term “debt due” in the definition sections of the IBC has already been interpreted by the Hon’ble Supreme Court to mean debts that are legally “due and payable,” i.e., debts that are not time-barred. In this regard, the Supreme Court cited its decision in Innoventive Industries Ltd. v. ICICI Bank & Anr., (2018) 1 SCC 407, in which it held that “a debt may not be due if it is not payable in law or in fact.”
  5. If the default occurred more than three years prior to the date of filing of the application under IBC, the application would be barred under Article 137 of the Limitation Act, unless, in the facts of the case, Section 5 of the Limitation Act could be applied to condone the delay in filing such application.

Impact of the case

It was determined that “because the Limitation Act is applicable to applications filed under Sections 7 and 9 of the Code from the inception of the Code, Article 137 of the Limitation Act becomes applicable.” In essence, the Court determined that Section 238A of the Act would apply to applications filed under Sections 7 and/or 9 of the Code beginning on December 1, 2016. There has been no disagreement with the verdict up to this point. However, the Court goes on to say that “the right to sue” accrues when there is a default. If the default occurred more than three years prior to the date of filing of the application, the application would be barred under Article 137 of the Limitation Act, except where, in the facts of the case, Section 5 of the Limitation Act may be applied to excuse the delay in filing such application.

The Hon’ble Supreme Court also noted that the legislature’s intent can be found in the Report of the Insolvency Committee, 2018, which specifically stated – “given that the intent was not to package the Code as a fresh opportunity for creditors and claimants who did not exercise their remedy under existing laws within the prescribed limitation period, the Committee thought it fit to insert a specific section applying the Limitation Act to the Code.”

According to the Report of the Insolvency Law Committee, the reason for the introduction of Section 238A was that the intent of the Code could not have been to give a new lease of life to time-barred debts, and given that the intent was not to package the Code as a fresh opportunity for creditors who did not exercise their remedy under existing laws within the prescribed limitation period, The Hon’ble Court also held that the law of limitation should be applied retroactively, with the exception that the amended law of limitation under section 238A could not bring back a dead remedy. It also held that the amendment to Section 238A would not serve its purpose unless it is interpreted as retroactive, because otherwise, applications seeking to resurrect time-barred claims would have to be allowed because they are not governed by limitation law.

The Committee recommended that a specific section applying the Limitation Act to the Code be included. The applicable entry under the Limitation Act may be made on a case-by-case basis. However, in the absence of such explicit provisions in the Code, creditors would have the right to file a claim for time-barred debts as well. Given this, there is a need for more clarity regarding entry under the Limitation Act, as it is vague and criteria is not recommended, leaving the question unanswered.

Conclusion

The purpose of limitation law is to “prevent disruption 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 fact that the trigger is ‘debt default’ makes the exclusion of the law of limitation seem counter-intuitive. It reinstates claimants’ right (following the publication of a public notice) to file time-barred claims with the Insolvency Resolution Professional/Resolution Professional, which may form part of the resolution plan.

It is thus clear that since the Limitation Act is applicable to applications filed under Sections 7 and 9 of the Code from the inception of the Code, Article 137 of the Limitation Act gets attracted. “The right to sue”, therefore, accrues when a default occurs. If the default has occurred over three years prior to the date of filing of the application, the application would be barred under Article 137 of the Limitation Act, save and except in those cases where, in the facts of the case, Section 5 of the Limitation Act may be applied to condone the delay in filing such application.

Disclaimer– The above article is based on the interpretation of related laws which may differ from person to person. The readers are expected to take legal advice before placing reliance on it. For more information, please reach at support@centrik.in

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