Application Of Limitation Act To Resolution Process Under Insolvency & Bankruptcy Code

The liquidity in the Indian banking sector has seen a drastic plunge due to the threat of increasing non-performing assets ('NPAs'). The enactment of the Insolvency and Bankruptcy Code, 2016 ('IBC'/ 'Code') put a fresh lease of life for resolution of stressed assets. However, there has been some conflicting views in the manner in which the Limitation Act, 1963 ('LA') could be invoked vis-à-vis the IBC. When IBC came into force in 2016, there were no provisions of the LA for filing applications for Corporate Insolvency Resolution Process under Sections 7, 9 and 10 of the Code. Neither was the LA made applicable to IBC. However, in 2017, the National Company Law Tribunal ('NCLT'), Delhi bench had held that the provisions of LA shall be applicable to the proceedings under it.[1] The National Company Appellate Law Tribunal ('NCLAT'), in an appeal on the same question of law reversed this stand and held that if there was a debt and there was default of debt having a continuous course of action, the claim would not be barred by limitation[2] and IBC being a complete Code had purposely ignored the applicability of the LA[3]. This decision of NCLAT resulted in a rise of several debt applications which were otherwise time barred. ⮚ APPLICABILITY OF THE LA: The conflict regarding the applicability of the LA came up for consideration before the Hon'ble Supreme Court ('SC') and it extensively dealt with this issue in 2 landmark judgments - B.K. Educational Services v. Parag Gupta & Associates[4] and Babulal Vardharji Gurjar v.Veer Gurjar Aluminium Industries Pvt. Ltd. & Anr[5]. In these cases, the SC primarily brought forth the nuances for the applicability of the LA. Simultaneously, the Insolvency Law Committee in its Report[6] of March 2018 recommended an amendment to the IBC. Section 238A was inserted[7] in IBC which envisaged that the LA is applicable to the proceedings/ appeals before the NCLT/ Adjudicating Authority / NCLAT/ Debt Recovery Tribunal ('DRT')/ Debt Recovery Appellate Tribunal. In B.K. Educational Services (Supra) the SC dealt with 2 main issues - first, whether the LA applied to the proceedings under Section 7/ 9 since the commencement of the Code? And second, whether the LA gets triggered on the commencement of the IBC or on the date of default? Addressing the first issue, the SC held that LA would be applicable to Tribunals while deciding the proceedings under Section 7/ 9 of the IBC as it also applies to proceedings before NCLT/ NCLAT under Section 433 of the Companies Act, 2013 ('CA'). It clarified that Section 238A of the IBC was retrospective in nature and the intention of the Code was not to give a new lease of life to debts which were time-barred. If a default had occurred over three years prior to the date of filing of the application, the application would be barred under Article 137 of the LA, save and except in those cases where, on the facts of the case, Section 5 of the LA may be applied for condonation of delay. On the second issue, the SC analyzed the terms 'debt due', 'default', 'due and payable' and held that the LA gets triggered from the date of default and the date of enforcement of IBC is wholly irrelevant for triggering the limitation period. It reasoned that the Code could not be triggered in the year 2017 for a debt which was time barred much earlier and the expression 'debt due' defined in the Code referred to debts that were 'due and payable' in law i.e. debts that were not time barred. The 'right to sue', therefore, accrued when a default occurred. ⮚ SCOPE AND EXTENT OF APPLICABILITY OF SECTION 18 OF LA ('SEC. 18') ON IBC PROCEEDINGS: The SC in Babulal Vardharji Gurjar (Supra) held that considering the facts of the case, Sec. 18 did not apply to an application under Section 7 of the IBC. The crux of Sec. 18 is that an acknowledgement of liability has the effect of commencing a fresh period of limitation from the date on which the acknowledgement was so signed. This acknowledgment, if any, has to be prior to the expiry of the prescribed period for filing the suit. In other words, if the limitation has already expired, it would not revive under this section. It is pertinent to note that there is nothing in the newly inserted Sec. 238A of the IBC which suggests that Sec. 18 is excluded. ⮚ IS A BALANCE SHEET OF A COMPANY DEEMED TO BE A VALID ACKNOWLEDGMENT UNDER SEC. 18? It is settled law, as has been consistently held by the SC and various High Courts that entries made in the balance sheet of the company are to be treated as an acknowledgement of debt for the purpose of Sec. 18. The balance sheet is a material document attached with sanctity that is submitted to the Registrar of Companies ('RoC') and is used for obtaining loans/ investments. Further the newly inserted provisions of the CA, also provide that a...

Application Of Limitation Act To Resolution Process Under Insolvency & Bankruptcy Code

Vinita Hombalkar & Shruti S Sareen

Tags