Case Analysis on B.K. Educational Services (P) Ltd. V. Parag Gupta & Associates
Sanchita Gaur
LL.M. Student, O. P. Jindal Global University, Sonipat
Introduction
In this case Parag Gupta and Associates, a financial creditor (Respondent) had filed an application in the National Company Law Tribunal (NCLT) for initiation of insolvency proceedings under Section 7 of the Code and was rejected because it was barred by limitation, the respondent not satisfied by this order of the NCLT appealed before the National Company Law Appellate Tribunal (NCLAT). On November 7, 2017, the NCLAT ruled that the Limitation Act doesn’t apply to initiating Corporate Insolvency Resolution Process (CIRP). It allowed delayed filings if creditors provided reasonable justifications. B.K. Educational Services, the corporate debtor, challenged this decision in court. In the meantime, with affect from 6th June 2018 an amendment was made, and Section 238A was inserted in the Code vide the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018, applying Limitation Act provisions to proceedings before NCLT, NCLAT, and other tribunals. NCLAT allowed explanations for delays exceeding three years.
After this stance by the NCLAT, the case was heard before the Supreme Court and it was faced with the issue of whether the Limitation Act would apply to applications filed by financial and operational creditors for initiation of CIRP (under section 7 and 9 of IBC) before the Amendment of 2018?[1]
The following case analysis will highlight the legal provisions involved in the case and what NCLAT suggested and how SC decided upon the case keeping in mind the position of NCLT and NCLAT, how the Supreme Court determined the applicability of the Limitation Act, by reading the Code together with, the Companies Act, basically this case is important in studying the interplay between the Insolvency and Bankruptcy Code and the Limitation Act and this helps to understand how retrospectively laws can be used in a way that they protect the meaning of both the laws separately and linking them don’t add burden on the tribunals or the courts.
Background
The National Company Law Tribunal (NCLT), responsible for handling insolvency matters, often faced uncertainty regarding the application of the Limitation Act to creditor applications under the IBC. To resolve this, the legislature introduced Section 238A, explicitly applying the provisions of the Limitation Act, 1963, to IBC proceedings before the NCLT. However, this amendment raised questions about its binding nature and clarity, as well as whether the Limitation Act applied to insolvency applications from the beginning.
Further let’s look into the legal provisions involved in the case,
Legal Provisions Involved:
There are many Legal provisions that are dealt with in the case they are mentioned briefly as follows but are subsequently discussed further as you proceed:
IBC- Section 7, section 9, section 238A
Limitation act- Article 137, section 5
So the initial case was that Parag Gupta & Associates filed a case in the NCLT for seeking relief under Section 7 of the Insolvency & Bankruptcy Code, 2016, due to the Corporate Debtor’s failure to repay loans.
Hence it was a case under section 7 of the IBC,
Section 7 talks about the Initiation of corporate insolvency resolution process by financial creditor
Section 7 of the Insolvency & Bankruptcy Code (IBC) allows individuals or businesses who have lent money to the debtor to seek legal action if the debtor defaults in the repayment of the loan. This section enables creditors to file a petition to initiate a process called the Insolvency Resolution Process. This process aims to find a solution to the unpaid debt issue, which could involve restructuring the debt or liquidating the debtor’s assets to repay the creditors.
Similarly, under Section 9 of the IBC even the operational creditor can initiate the corporate insolvency resolution process.
Further Article 137 of the Limitation Act, provides that where no limitation period is given for an application anywhere under the division, 3 years will be provided as a period of limitation for the same.
Now, the issue before the NCLAT was that whether the limitation Act applies on the application filed under section 7 of the IBC, here NCLAT to bridge the gap gave the absolute right to, authorities to determine if a claim is late or time-barred. The NCLAT decision could have led to a rise in insolvency applications and appeals. Thus, Section 238A was added through the Insolvency and Bankruptcy (Second Amendment) Act, 2018, effective from June 2018, to address this concern
Section 238A clearly stated that the provisions of the Limitation Act would apply to the proceedings or appeals before the NCLT, NCLAT, DRT and DRAT.
The contentions made by both the parties in this case were:
The Appellant contended that:
Limitation Act applies to creditors’ applications. NCLT is the Adjudicating Authority. Time-barred debts can’t trigger the Insolvency Code.
The Respondent contended that:
Limitation Act doesn’t apply uniformly to NCLT proceedings. The Code deals with insolvency, not just debt recovery. Debt must be ‘due and payable’ for Code’s application.
Issue raised before the Supreme Court:
Whether the Limitation Act, 1963 would apply to applications that were made under Section 7 and/or Section 9 of the IBC on and from its commencement on 1st December, 2016 till 6th June 2018 i.e. the date on which the Amendment Act came into force?
Observations by the Court:
The Supreme Court while rejecting the contentions made by the respondent observed and gave opinions on the following aspects:
Report of the Insolvency Law Committee of March 2018
The core message of the 2018 Insolvency Law Committee report was that the Code wasn’t designed to offer new chances to creditors and claimants who missed their opportunities under existing laws within the time limits. Therefore, the committee introduced a section incorporating the Limitation Act into the Code. This move aimed to prevent the revival of old and expired claims.
Reading IBC with the Companies Act,2013
The NCLT was established under the Companies Act and being an adjudicating authority under the IBC, makes Limitation Act applicable to the NCLT. Therefore, Limitation Act would be applicable to proceedings under the Code before the NCLT as well.
Retrospective application of section 238A
The Court deemed Section 238A of the Code as a procedural clarification, emphasizing its retrospective nature. It noted that the amendment’s purpose wouldn’t be fulfilled unless it was interpreted as applying retrospectively. Otherwise, there would be a risk of allowing applications to revive time-barred claims, circumventing the law of limitation.
Right to sue
While deciding that Limitation Act is applicable to applications filed under section 7 and 9 of the IBC, the court stressed on the fact that the “right to sue” is redeemable as soon as the default occurs.
*The court held that Limitation Act is applicable on the applications filed under section 7 and section 9 of the IBC and is to be applied from the inception of the code.
If the default has occurred over three years prior to the date of filing of the application, the same would be barred under Article 137 of the limitation Act, except those cases where Section 5 of the limitation Act may be applied to condone the delay in filing such application.
Section 5 of the Limitation Act- Condonation of Delay
This section provides a discretionary power to the court to extend the time limit in cases where the delay was due to genuine and valid reasons.
Analysis
As per my view the above case is a great example to understand the interplay between the IBC and the Limitation Act, it starts with a financial creditor filing an application under section 7 of the IBC to initiate a CIRP. The NCLT passed the order and rejected the same stating it was barred by limitation, this got the appellant to raise the issue that whether Limitation Act is applicable on the applications filed under section 7 and 9 of the IBC? To which the NCLAT held that the Limitation Act would not be applicable to the initiation of Corporate Insolvency Resolution Process (CIRP), and in such cases where the financial and operational creditors are able to reasonably justify their delays in filing applications, the same can be entertained.
Further vide an amendment in the IBC (second amendment) code 2018 section 238A was introduced that made limitation act applicable on the applications filed under section 7 and 9 of the IBC. However, even with coming into force of the Amendment Act, there was a major confusion as to whether the Applicability of the Limitation Act to IBC would effect from 1st December, 2016 or from 6th June 2018? This remained a grey area. Again an issue was raised that whether this application of Limitation Act by section 238A will commence from 1st December,2016 or June ,2018?
The Supreme court held that Limitation Act is applicable on the applications filed under section 7 and section 9 of the IBC and is to be applied from the inception of the code i.e. 1st December,2016.
According to my observations,
The Supreme court while deciding the case opined on various aspects as discussed above such as not to apply limitation act in such a way that it revives stale and dead claims and hence burdening the tribunals and the courts, right to sue was introduced in Article 137 of limitation act, as right to sue commences when the default occurs.
But, in cases such as
The Innoventive Industries Limited v. ICICI Bank (2018) 1 SCC 407[2] case, the Supreme Court stated that the Insolvency & Bankruptcy Code is a comprehensive law enacted by Parliament, covering all aspects of corporate insolvency.
In the case of Randhiraj Thakur v. M/s Jindal Saxena Financial Services MANU/NL/0232/2018[3], the NCLAT affirmed that the Insolvency & Bankruptcy Code is a self-contained legislation. This means that insolvency resolution procedures must exclusively adhere to the provisions outlined within the Code, without recourse to other laws.
Also Section 231 of the IBC bars jurisdiction of Civil courts on any matter in the jurisdiction of NCLT and Section 238 states that the code will override all other laws. Hence how can limitation act be applied since the code was established?
Therefore, in my opinion this is contrary to what the Supreme court stressed upon i.e. “right to sue” occurs when a default occurs but there’s no mention of “right to sue” but in fact there is “right to apply” in the code hence it is directly in conflict with the well-settled principle of interpretation that courts cannot add or substitute words in a statute.
Conclusion
To conclude in my opinion, The Amendment Act was introduced to stop bankruptcy cases from using previous claims, dead and stale claims. Recent rulings by the NCLAT, however, indicate that more clarification is required. The Limitation Act may be amended by lawmakers to clarify that, in situations governed by Sections 7 and 9 of the Code, the “right to apply” refers to the time of the default or the debt’s due date. This would counteract the intention to discourage delayed and dead claims by barring claims that are due three years prior to the Code’s implementation. A clarification of this kind will improve the efficacy and uniformity of handling insolvency cases.
References:
[1] B.K. EDUCATIONAL SERVICES (P) LTD. V. PARAG GUPTA & ASSOCIATES, (2018) ibclaw.in 32 SC
[2] Innoventive Industries Limited v. ICICI Bank (2017) ibclaw.in 02 SC
[3] Randhiraj Thakur v. M/s Jindal Saxena Financial Services [2018] ibclaw.in 79 NCLAT
