An Analysis Of Recent Judgments On Limitation Under IBC

R Venkatavaradan & Saai Sudharsan
19 Sep 2020 4:51 AM GMT
An Analysis Of Recent Judgments On Limitation Under IBC
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Prior to the enactment of IBC (Second Amendment) Act, 2018 through which Sec. 238A of the Code was introduced, in a series of judgments, [1] the NCLAT and NCLT considered claims which were otherwise barred by limitation for the purpose of initiating of CIRP under Sections 7 and 9 of the Code. The Supreme Court, in B.K. Educational Services Private Limited v Parag Gupta and Associates,[2] held that S. 238A, being clarificatory and procedural in nature, would be applicable to claims made under Sections 7 & 9 from the Code's inception and that the commencement of the Code in 2016, as a consequence, would not revive stale claims.

Subsequent to B.K. Educational Services, two judgments of the Supreme Court dealing with specific aspects of limitation are noteworthy. In Jignesh Shah v. UOI,[3] after holding that pendency of a suit for recovery of money did not extend the period of limitation for filing a winding-up petition, the Supreme Court, in paragraph 21 of its judgment, observed that an acknowledgement of liability would extend the period of limitation. In Babulal Vardharji Gurjar v Veer Gurjar Aluminium Industries Pvt. Ltd.,[4] the Supreme Court, relying on its earlier decision in B.K. Educational, held that the period of limitation for application under S. 7 was three years which could be extended only by an application under S. 5 of LA, 1963, if a plea of condonation of delay was made out. Noting that the question of limitation was a mixed question of law and facts, the court held that a party seeking application of extension or enlargement of the period of limitation had to plead the relevant facts and adduce requisite evidence. That being the position, the Court was of the view that no case for extension of the period of limitation was required to be examined. However, three aspects in Babulal require critical appraisal and analysis:

  • Relying on BK Educational Services, the judgement holds that the period of limitation for filing an application under S. 7 is three years, which can be extended 'only' by an application under S. 5 of LA, 1963, if a plea of condonation of delay is made out. This observation would have to be tested in an appropriate case since proceedings under the Code are original in nature and, as such, the provisions of S. 5 may not apply.[5] As Art. 137 refers to an application and not a suit,[6] the Supreme Court referred to S. 5 for condonation of delay, leaving it open as to the circumstances under which S. 5 can be invoked for filing applications for condonation of delay after the expiry of the three year period under Article 137.

  • On the issue regarding acknowledgment of liability, the Supreme Court, on facts, found that the Financial Creditor had failed to submit any pleading regarding the corporate debtor's acknowledgment of liability. The judgement also refers to the Financial Creditor's failure to submit necessary evidence/documents in Form-1 regarding acknowledgment of liability in the balance sheets of the CD. Based on the above factual position, the judgement concluded that the benefit of S. 18 of LA, 1963 was not available. Even though proceedings under the Code cannot be viewed as civil proceedings, the Supreme Court rejected the arguments on acknowledgment of liability made in the financials of the Corporate debtor and extension of limitation as a consequence on the ground that the Form filed by the FC did not plead extension of time based on acknowledgement. In the author's opinion, if the balance sheet of the corporate debtor contains an acknowledgement of debt, the FC cannot be denied the benefit of such acknowledgement so long as it placed for consideration even though not specifically pleaded.
  • As noted, the arguments on Section 18 relating to acknowledgment of liability was rejected by the Supreme Court only on facts. But the court also made reference to paragraph 21 of Jignesh Shah, which states that "an acknowledgment of liability under Section 18 of the Limitation Act would certainly extend the limitation period," and held it as being 'illustrative' in nature and made 'only' in relation to the suit or other proceedings. The court went on to observe:

"Even if it be assumed that the principles relating to acknowledgement as per S. 18 of the limitation act are applicable for extension of time for the purposes of application of S. 7 of the Code, in our view neither the said provision and principles come in operation in the present case nor they enure to the benefit of respondent no. 2." (Respondent 2 is the Financial Creditor)

The above observation in Babulal creates an impression that the benefit of the provisions of Section 18 of LA 1963 may not be available for applications filed under Ss. 7 & 9 of the Code, though the judgment does not specifically bar the application of Section 18 in appropriate cases. One can, therefore, safely assume that the above ratio would hold good only to the facts in Babulal. This position has also been affirmed in the decision of the NCLAT in Yogeshkumar Jashwantlal Thakkar v. Indian Overseas Bank.[7] In this case, the NCLAT rejected the contentions raised on behalf of the Corporate Debtor that Babulal excludes the applicability of S. 18 of LA, 1963. The NCLAT, relying on P. Sreedevi v. P. Appu,[8] observed that an acknowledgment of debt interrupted the running of prescription and that a mere denial would not take the sheen off documents and the claim of the creditor remained alive as a consequence of Section 18 of LA, 1963.

On a conspectus of the above decisions, it is clear that an acknowledgment of liability extends the period limitation, provided such acknowledgment is within time as stipulated in Section 18.

Even if such an acknowledgement were to revive the period of limitation available to a creditor, the decision of the NCLAT in V. Padmakumar v Stressed Assets Stabilisation Fund,[9] poses an additional hurdle. By a majority of 4:1, the NCLAT has held that an acknowledgement of liability in the financials of the corporate debtor would not be treated as an acknowledgement of liability for the purposes of extending limitation. This was held on the ground that filing of such documents were compulsory statutory requirements that had to be made before the ROC.

The above reasoning of the NCLAT that an acknowledgement of debt in the books of accounts of the corporate debtor, in the author's opinion, ignores the well settled law that such acknowledgement of debt would amount to an acknowledgement of liability.[10]

The other aspect on limitation which would call for a closer scrutiny is the issue regarding applications filed under S. 7 and 9 of the Code based on a decree passed by a civil court. The definition of 'creditor' under Section 5(10) of the Code includes a 'decree-holder'. A financial creditor can invoke the provisions of S. 7 of the Code based on a decree passed by a civil court.[11] In view of the law laid down by the Supreme Court in B. K. Educational Services and Babulal that only Art. 137 applies to proceedings under the code, however, such applications are treated as being barred by limitation if they are beyond 3 years from the date on which the default occurs under the decree by the civil court.[12] This, in the author's opinion, gives rise to an anomalous situation where a decree or payment of money secured by a mortgage which is otherwise valid for a period of 12 years and used as proof of debt for the purposes of filing a claim with the RP/IRP, is treated as being barred by limitation under Art. 137 for the purposes of initiating corporate insolvency proceedings under the Code. The NCLAT, for instance, in Om Prakash Pandey v State Bank of India[13] and Basab Biraja Paul v. Edelwiess Asset Reconstruction Company Ltd.,[14] has held that the limitation for enforcing payment of money secured by a mortgage or otherwise charged by the immovable property was twelve years at the time when money sued for became due. Appeals filed against both these NCLAT judgments are pending before a three-judge bench of the Supreme Court, which now has the opportunity to re-examine the law laid down in B.K. Educational.[15]

Views are personal only.

[1] See among others Neelkanth Township and Construction P. Ltd. v. Urban Infrastructure Trustees Ltd., (2017) 143 SCL 538; Speculum Plast Ltd. v. PTC Techno Ltd., [2018] 142 CLA 165; Mack Soft Tech Ltd. v. Quinn Logistics India Ltd., [2018] 145 CLA 35.

[2] (2018) 146 CLA 380 (SC)

[3] (2019) 10 SCC 750

[4] 2020 SCC OnLine SC 647

[5] International Asset Reconstruction Company of India Ltd. v. Official Liquidator of Aldrich Pharmaceuticals Ltd., 2017 SCC OnLine SC 1245; The Agricultural Market v Sri Sankar Rao and Company, 2003 (1) ALD Cri 749: 2003 (2) ALT Cri 334.

[6] Gaurav Hargovindbhai Dave v. Asset Reconstruction Company (India) Ltd., (2019) 10 SCC 572.

[7] C.A. (AT) (Insolvency) No. 236 of 2020 dated 14.09.20 (NCLAT-Del.).

[8] AIR 1991 Ker 76.

[9] [2020] 221 Comp Cas 153 (NCLAT)

[10] Lakshmiratan Cotton Mills Co. Ltd v Aluminium Corporation of India, (1971) SCC 2 623; Re Pandem Tea Co. Ltd., AIR 1974 Cal 170; Mahabir Cold Storage v. CIT, AIR 1991 SC 1357; Zest Systems (P) Ltd. v. Centre for Vocational Entrepreneurship Studies, 2018 SCC OnLine Del 12116; Shahi Exports (P) Ltd. v. CMD Buildtech (P) Ltd., 2013 SCC OnLine Del 3739.

[11] Ishrat Ali v. Cosmos Co-Operative Bank Ltd., [2020] 10 Comp Cas-OL 140 (NCLAT-Del).

[12] Also see, Jignesh Shah v UOI, (2019) 10 SCC 750; International Asset Reconstruction Co. Pvt. Ltd. v. Jayant Vitamins Ltd., CA (AT) No. 1471 of 2019 dated 17.12.19 (NCLAT-Del.); HDFC Bank Ltd. v. Bhagwan Das Auto Finance Ltd., CA (AT) No. 1329 of 2019 dated 09.12.19 (NCLAT-Del.); Rameswar Prasad Kejriwal & Sons Ltd. v. Garodia Hardware Stores (2002) 108 Comp Cas 187 (SC).

[13] Company Appeal (AT) (Insolvency) No. 966 of 2019 dated 19.09.19 (NCLAT-Del.)

[14] Company Appeal (AT) (Ins) No.772 of 2019 dated 06.09.19 (NCLAT-Del.)

[15] See Basab Biraja Paul v. Edelwiess Asset Reconstruction Company Ltd., Civil Appeal No. 7732 of 2019.

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