Case Analysis of B.K Educational Services Pvt. Ltd. Vs. Parag Gupta & Associates
Adv. Manikantan S Kandathil
LL.M. (Corporate & Financial Laws and Policy ), O.P Jindal Global University
Brief Statement of Facts
The case B.K Educational Services Private Limited vs. Parag Gupta and Associates[1] revolves around the application of the Limitation Act, 1963 (“Limitation Act”), to the applications filed under Section (“u/s”) 7 and Section 9 of the Insolvency and Bankruptcy Code 2016(“IBC”) before the amendment incorporating Section 238A[2], which explicitly made the Limitation Act applicable to IBC proceedings. The fact of the case is, that there was a dispute between Parag Gupta & Associates and B.K Educational Services Private Limited, over financial obligations. The corporate debtor disputed the claimed financial liabilities, acknowledging only one legitimate debt related to a property given by the Greater Noida Industrial Development Authority (“GNIDA”). Additionally, the corporate debtor accused the financial creditors’ relatives of falsifying the records. The claims made were beyond the permissible period of legal action, with no evidence to suggest any extension of the limitation period for recovery, which spanned from October 1, 2012, to February 5, 2013. The case is a landmark for several reasons. It clarifies the legislative intent of IBC related to time-barred debts, impacting the rights of creditors and corporate debtors’ management.
This case comment aims to critically analyze the judgement, evaluating the interpretation of courts on IBC in conjunction with the Limitation Act.
Background
The fact of the case B.K Educational Services vs. Parag Gupta and Associates centers on the question of whether the Limitation Action, 1963 applies to the applications u/s 7 and 9 of the IBC, particularly before the insertion of Section 238A into the IBC. This section commenced on June 6, 2018, and extended the applicability of the Limitation Act for proceedings or appeals before the Adjudicating Authority, the National Company Law Appellate Tribunal (“NCLAT”), the Debt Recovery Tribunal, or the Debt Recovery Appellate Tribunal.. Parag Gupta and Associates, acting as a financial creditor, appealed to the NCLAT against a decision made by the NCLT that dismissed their plea to start insolvency proceedings u/s 7 of the code due to it being beyond the statutory time limit. On November 7, 2017, NCLAT ruled that the Limitation Act would not be applicable for the initiation of the Corporate Insolvency Proceedings (“CIRP”), moreover, the same may be considered in situations when the operational and financial creditors can justify their delays in filing the applications. B.K Educational Services Private Limited, the debtor company, contested the NCLAT’s verdict.
Contentions of Parties
The appellants, in this case, argued that the Limitation Act should apply retrospectively to applications filed under the IBC from its commencement on December 1, 2016, until June 6, 2018, as a debt that is beyond the limitation period should not be considered as ‘debt due’ for initiating the code. Further it was submitted that the legislative provision for the present adjudicating authority under the code is the NCLT which was established under the company act, 2013. Since NCLT proceedings are included in Section 433 of the Companies Act which in its turn brings the Limitation Act into force. Therefore, proceedings brought under the code before NCLT would also be subject to the Limitation Act. Contrary to this, the respondents argued that enforcing Section 433[3] of the Companies Act 2013 in respect of proceedings under the IBC before the NCLAT would lead to inconsistent outcomes. This is because the NCLAT serves as the common appellate authority for three distinct laws: the Competition Act of 2002, the Companies Act of 2013, and the code itself. The respondent also argued that the Limitation Act only applies to tribunals and not courts so actions before the NCLT under the code would not be covered by it. Furthermore, the opposing party argued that the code is specifically dealing with insolvency rather than mere debt recovery. It was argued that although claims that are ‘due’ are included in the definition of ‘debt’ u/s 3(11) of the code, the term ‘default’ u/s 3(12) of the code which means non-payment of debts which are ‘due and payable’ that differs from debts ‘due and recoverable’. Thus, proceedings under the code can be initiated even for a time-barred debt that is due and payable but not due and recoverable.
Reasoning of the Court
The court referenced the March 2018 report[4] from the Insolvency Law Committee (“BLRC”) to give clarity to the intention of the code and held that the code was not designed to revive outdated and time-barred claims. Instead, its primary objective was to clarify that the provisions of the Limitation Act apply to the code. The Court, however, maintained that invoking the Code to bar a debt, which was time-barred in 1990 in 2017, would result in non-sensical confines., such as the unnecessary removal of a company’s board of directors, potentially leading to the company’s liquidation, which the Court referred to as “corporate death.” Therefore, the term “debt due” is understood only to mean debts that are “due and payable” in law, that is, debts that are not time-barred. This interpretation ensures that the insolvency resolution process is not misused to revive debts that are legally non-recoverable due to the expiration of the limitation period.
Analysis
The interpretation of the Supreme Court (“SC”) on the applicability Article 137 of the Limitation Act applies to applications, is flawed for many reasons. Firstly, the “Adjudicating Authority” under IBC does not qualify as a “court.” Article 137 is specifically intended for applications filed in courts. In the case “Kerala State Electricity Board v. T.P. Kunhaliumma”[5], the SC held that “The conclusion we reach is that Article 137 of the 1963 Limitation Act will apply to any petition to application filed under any act to a civil court”. Secondly, the way Section 238A of the IBC is written suggests that the legislature didn’t intend for all parts of the Limitation Act to be used in insolvency cases under the IBC. The phrase “as far as may be”, which the SC interpreted as “to the extent possible” in the case “Bengal Chemist and Druggists v. Kalyan Chowdhury”[6], suggests that not all parts of the Limitation Act were meant to be used for insolvency cases under the IBC. If the legislature’s intent was, every rule in the Limitation Act to apply to these insolvency cases, they wouldn’t have needed to use this phrase. So the phrase “as far as may be” clearly indicates that, Article 137 is only applicable to applications before the court and not for the cases before the “Adjudicating Authority” under IBC. From this, it is evident that the application of Article 137 to insolvency cases creates a contradiction. The SC has said that the IBC isn’t supposed to revive time-barred debts and “debt due” only means debts that are not barred by limitation. However, if Article 137 applies, it means that the tribunal can forgive delays in filing claims u/s 5 of the Limitation Act. If delays can be excused where there is sufficient cause, it would mean that the creditors could potentially claim time barred debts that they normally wouldn’t be able to. This will create contradiction and therefore the findings of the SC are clashing.
Section 443(e) of the Companies Act 1956 dealt with winding up of a company if it couldn’t pay its debts before the IBC and the Companies Act 2013 were passed. When a corporation failed to pay its debts as per Section 434 creditors can file petitions to wind it up. It was handled by the High Courts. One key thing the High Courts had to figure out was if the creditor’s claim would have been time-barred if it had been brought as a regular suit on the date the winding-up request was filed. In Modern Decor Painting Contracts v. Jenson And Nicholson India Ltd[7], it was held that for winding up petition to be valid on the grounds that the company can’t pay its debts, the debt in question must be something that can still be recoverable which is not time-barred at the time the petition is filed. This is because, u/s 439 of the Companies Act 1956 , a person must be qualify himself as a creditor to file a petition for winding up as a creditor and it has to be satisfied that there was a clear debt owed that was due and payable at the date of the petition.
In B.K Educational Services Pvt. Ltd, the SC clarified how the Limitation Act applies to insolvency applications under the IBC. The court Highlighted that the IBC is not designed to revive time barred debts. The court highlighted that the IBC is not designed to revive old, time-barred debts. According to the court, the term “debt due” in the IBC refers only to debts that are legally recoverable and not barred by the limitation period at the time the insolvency application is filed. This means creditors cannot initiate insolvency proceedings under the IBC for debts that became unrecoverable due to the passage of time. This means creditors cannot initiate insolvency proceedings under the IBC for debts that became unrecoverable due to the passage of time, as stated in the Insolvency Law Committee Report of March 2018.
Article 31 would normally apply, for example, if a claim is based on a bill of exchange or promissory note with a definite payment date. In this case, the three-year limitation period would begin on the date the bill or note is due. In other words, the ‘core application’ must be withdrawn to ensure that the legal regime governing the insolvency proceedings is protected and that the IBC does not become a method of reviving barred debts if the NCLT were to rule that a legal action to recover the same debt would have been averted as being barred at the time of filing the insolvency application. The recommendation by the Insolvency Law Committee to introduce section 238A into the IBC was meant to bring the provisions of the Limitation Act into insolvency proceedings[8]. This addition was not intended to revive debts that have already lapsed under the Limitation period, providing creditors with renewed window to enforce time barred claims. Which implies that the Committee did not expect Article 137 of the Limitation Act, which provides for the forgiveness of delays in specific circumstances, to apply to insolvency applications. One way to interpret the SC’s ruling is to say that if the underlying debt is time-barred at the time of filing, the NCLT should reject the insolvency application. The SC, however, also implies that the NCLT may excuse late filings of insolvency petitions, so permitting creditors to bring forward claims that have expired. This appears to run counter to the SC’s own interpretation of the IBC’s purpose. The NCLT is faced with a difficult decision because of this apparent conflict in the SC’s decisions. It must weigh the prospect of allowing filing delays against the dismissal of time-barred claims, thus giving legally time-barred debtors a remedy.
Conclusion
From the inferences, in my opinion, SC’s decision in case needs to be reconsidered to avoid the NCLT getting inundated with insolvency applications based on old debts that shouldn’t be legally pursued anymore and requests to overlook the lateness of these applications. With all due respect, the SC’s view that Article 137 of the Limitation Act, and therefore section 5 which allows for forgiving delays, applies to insolvency applications made by creditors might not be right. This overlooks the fact that Article 137 is meant for applications made to actual courts, which the NCLT isn’t, and it also contradicts the point that the IBC isn’t supposed to bring old, outdated claims back to life.
References:
[1] B.K. Educational Services (P) Ltd. v. Parag Gupta & Associates, (2018) ibclaw.in 32 SC
[2] “238A – The provisions of the Limitation Act, 1963 (36 of 1963) shall, as far as may be, apply to the proceedings or appeals before the Adjudicating Authority, the National Company Law Appellate Tribunal, the Debt Recovery Tribunal or the Debt Recovery Appellate Tribunal, as the case may be” Insolvency and Bankruptcy Code, 2016
[3] 433 “The provisions of the Limitation Act, 1963 (36 of 1963) shall, as far as may be, apply to proceedings or appeals before the Tribunal or the Appellate Tribunal, as the case may be”.
[4] Report of The Insolvency Law Committee March 2018
[5] Kerala State Electricity Board v. T.P. Kunhaliumma, (1976) 4 SCC 634
[6] Bengal Chemists & Druggists Assn. v. Kalyan Chowdhury, (2018) 3 SCC 41
[7] Modern Dekor Painting Contracts P. Ltd. vs Jenson And Nicholson (India) Ltd. on 4 August, 1984
[8] Insolvency Law Committee, ‘Report of the Insolvency Law Committee’ (March 2018)[ 28.].
