B.K. Educational Services Private Limited Vs Parag Gupta And Associates
Abhishek Kumar
LL.M (Corporate and Financial Law and Policy), OP Jindal Global university,
Sonipat, Haryana
Introduction
The limitation act “shall as far as be” apply to the procedures before the National Company Law Tribunal (NCLAT) and NCLT, according to the revision that added section 238A to the code, which the supreme court was considering in this instance. The main issue was whether the limitation act shall be applicable to the application submitted under section 7 and section 9 of the code from its commencement on December 1, 2016, till June 6, 2018, which is the date on which amendment was made. The individuals who lodged an appeal contested the ruling of the Appellate Authority, on the non-application of the Limitation Act, 1963 to applications under Section 7 and/or Section 9 of the Code from December 1, 2016, to June 6, 2018. The Appellate Authority determined that in cases where there is a delay exceeding three years from the cause of action date and no undue delay by the Applicant, an explanation for the delay can be provided. Claims for dues without an explanation for delays should generally not be considered eligible to initiate the ‘Corporate Insolvency Resolution Process as per Sections 7 and 9 of the IB Code’. The court have mainly two issues to deal with and the issues are first, whether the limitation act, 1963 applies to the application made under section 7 and section 9 of the code. And the second, whether the limitation shall be held retrospectively on any case. The case brought to light important facets of corporate governance, financial law, and the overall state of the economy. The case made the law clearer about the relationship between the Limitation Act 1963 and the IBC 2016 . This case explored the scope and applicability of the code by determining whether time-barred debt can start the insolvency process. Both the creditors and the debtors were significantly impacted by the case. The case also highlights the need of corporate governance and timely management. The lawsuit contributed to economic stability by preventing the long-dormant claim from resurfacing. Businesses cannot be abruptly disrupted by past-due financial commitments that have reached their statute of limitations. By providing guidance to legal experts and corporate entities, this case established a solid legal precedent for cases to come. This instance offers a point of reference for interpreting the code. Ultimately, the case also highlights the legal system’s natural justice premise.
This case cleared the ambiguity and interpreted the law related to provision of the limitation act and section 238A of the insolvency code. The supreme court in this case balanced out the relation between right of creditor and protection of debtor and it also highlighted the importance of limitation act in insolvency proceedings and highlighted the intent of the legislation.
Background
The case revolves around the concept of the interpreting and understanding the application of Section 238A of the IBC 2016, and this section was inserted by an amendment to clarify the law related to application of provision of limitation act 1963 to the proceedings initiated under section 7 and section 9 before NCLT(National Company Law Tribunal) and NCLAT(National Company Law Appellate Tribunal) from the code commencement date on Dec 1, 2016 until the amendment on June 6, 2018. Section 7 of the Indian Bankruptcy Code (IBC); When a corporate debtor defaults, financial creditors are entitled to file an application to start the insolvency process against the debtor. After ten days from the date of delivery of a notice or invoice demanding payment under section 8 of the Insolvency and Bankruptcy Code, 2016 (IBC), an operational creditor may file an application to begin a corporate insolvency resolution process (CIRP) against a corporate debtor.[1]
The appellate authority on reliance on Vinod Gurudas Raikar v. National Insurance Co. Ltd. [2]decided that limitation act does not directly apply to the beginning of the CIRP but the concept of Limitation and the need to act within reasonable time are important. To avoid laches or undue delay. If the delay has happened because of unforeseeable circumstances, then the circumstance shall be explained and failure to do so will result in the application not entertained by the tribunal. If there is an ongoing issue that could potentially justify the delay, then case shall be considered.
The appellant argued that the intent of the legislation while putting Section 238A into the picture is to clarify the law and the ambiguity in the law so the law shall be applied retrospectively, and the section should affect the cases and situation that occurred before the section was added. The appellant also argued that laws which are related to the time limits are procedural law and talks about on how to proceed with the cases and it will not talk about substantive law or the rights itself so the law can be applied to the past events and cases without creating new obligations. Innoventive Industries Ltd. v. ICICI Bank & Anr.[3], the definition clause under IBC defines Debt, claim and default and which on collective reading suggest that debt shall be due to attract the insolvency process and hence the debt which is time barred has no significance in the eye of law, so it does not fall under the “Due” category of debt. The appellant council also argued that if the insolvency proceeding is allowed for old, time barred debts than it will create various instability and absurdity in the law, and which clearly is not the intent of the legislation while making this law. To bring back old claims was not the intent of the legislation. Eventually appellant argued that the framework related to time limits of the case already existed in the companies act and IBC, the new provision just clarified the ambiguity in the law and polished the interpretation and scope of the provision. The appellant also relied its arguments on the doctrine of laches that says that claims cannot be made if there was an unnecessary delay.
However, Shri Ashish Dholakia, who spoke on behalf of a few of the respondents, that IBC is a self-contained code which focuses on the insolvency and not on the recovery of debt so the time limits that are mentioned in the IBC shall be considered sufficient and eventually suggested that Limitation act is not needed here. The reliance on the judgment of Innoventive Industries Ltd. v. ICICI Bank & Anr. [4]was taken by the learned advocate. It was also argued that limitation act does not apply to NCLT because it is a tribunal and not the court. Dholakia also argued that IBC uses term “due” and “due and payable” which according to him shall include old debts that are barred by time. The application of limitation act according to Dholakia will lead to strange situation in which time limit are applied to certain cases and are not applied to other cases and he argued that this was not the intent of the legislation. He also argued that sec 238A can is not applied retrospectively as it would take away the vested right of the application filed under Sec. 7 and Sec 9. He also argued that is doctrine of lashes is to be applies it shall be applied while keeping in mind doctrine of acquiescence and doctrine of estoppel according to the merit of the various cases.
Analysis
It was held that NCLT is set up to discharge powers and functions in ‘any other law for the time being in force’ and all of the proceeding which are related to arbitration, compromise, arrangement and reconstruction and winding up of companies pending before the court shall be transferred to tribunal and they will be directly governed by the limitation act as they were proceeding before the court mere transfer of the proceeding from court to tribunal will not amount to cease of limitation act. Sec 433 of companies act 2013 would also apply when the tribunal decide the matter related to section 7 and section 9. It was also held that limitation act being procedural in nature shall ordinarily be retrospective and the new law of limitation cannot revive a dead remedy. Court held that sec 238A would not serve its objective unless it is construed as being retrospective. The court relied on SBI v V. Ramakrishnan[5] and said that amendment done to clarify the law shall be retrospective in nature.
The court also relied on various judgements and gave statement that debt do not just vanish just because suit is time barred the debt still have legal significance and can become the basis for new agreements or allowing creditors some rights to get repaid. The meaning of the term “due” will vary depending on the situation. According to Sections 7 and 8 of the code, the only parties authorized to commence CIRP against a corporate debtor are the operational or financial creditors for debts that have not yet reached the statute of limitations. Additionally, the March 2018 report from the insolvency law committee made it abundantly evident that the legislation’s original goal was to clarify the interpretation of section 238A and other provisions rather than to bring back long-dead claims. It was decided that the legislation’s goal was to apply the limitation act to the NCLT and NCLAT processes from the inception. The court held that limitation act is applicable to application filed under section 7 and section 9 from the inception of the code article 137 of the limitation act will be applicable and section 5 may be applying to condone the delay in filling such application. [6]
The “right to sue” under sections 7 and 9 of the code is accrued upon default, as stated in the ruling. Respectfully, the author disagrees with the court’s decision. The word “right to apply” is used, while the “right to sue” is found in article 113 of the limitation act. This usage of the expression is peculiar because it is not specified in article 137 of the limitation act. While Article 137 pertains to applications and petitions, Article 113 only addresses lawsuits and does not apply to any other type of legal procedure. There is no mention of a deadline for starting an insolvency case in Sections 6, 7, 8, and 9.[7]
Conclusion
The decision greatly reduced confusion, defined how section 238A should be interpreted, and made it easier to comprehend how sections 7 and 9 apply. The purpose of the law, which guaranteed that only rightful and timely claims are brought forward for appropriate settlement, was upheld. Additionally, the verdict struck a balance between the interests of the debtors and creditors, thereby advancing economic stability. The author’s proposal states that certain ambiguities in the interpretation of section 5 of limitation can be eliminated by merely including a proviso or an explanation indicating that the same would apply to applications filed under sections 7 and 9 in cases where the default occurs three years before the code’s implementation. This would guarantee that the condonation may be given if a valid reason for the delay was shown.
References:
[1] IBC 2016: Suspension of Section 7, 9 & 10: Its Implications & Way Forward (taxguru.in) accessed on 11-03-2024.
[2] Vinod Gurudas Raikar v. National Insurance Co. Ltd. [(1991) 4 SCC 333]
[6] https://main.sci.gov.in/supremecourt/2021/2660/2660_2021_33_1502_27520_Judgement_15-Apr-2021.pdf
[7] https://www.barandbench.com/columns/bk-educartional-services-parag-gupta-supreme-court
