IBC and The Limitation Act, The Conundrum Continues – Adv. Sabhay Choudhary

IBC and The Limitation Act, The Conundrum Continues

When the Insolvency and Bankruptcy Code (“IBC/Code”) came into force on 01.12.2016, there was no provision for applicability of Limitation Act, 1963 on the applications seeking initiation of Corporate Insolvency Resolution Process (CIRP) against the corporate debtor under section 7,9 and 10 of the Code. The Preamble of the Code states that it is an Act to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets of such persons. The word “consolidate” is conspicuous in the preamble which denotes that it is an exhaustive and complete Code when it comes to matters related to reorganization and insolvency resolution of mentioned entities. Further to establish the authority of IBC in unequivocal terms, Section 238 of the Code states that “The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.”

The Insolvency Law Committee, for the first time in its report submitted in March, 2018, had recommended for the introduction of the requisite provision in the Code so as to leave no room of doubt that the Limitation Act indeed applies to the proceedings under the Code. Paragraph 28.3 of the report of Insolvency Law Committee states that

28.3 Given that the intent was not to package the Code as a fresh opportunity for creditors and claimants who did not exercise their remedy under existing laws within the prescribed limitation period, the Committee thought it fit to insert a specific section applying the Limitation Act to the Code. The relevant entry under the Limitation Act may be on a case to case basis. It was further noted that the Limitation Act may not apply to applications of corporate applicants, as these are initiated by the applicant for its own debts for the purpose of CIRP and are not in the form of creditor’s remedy.

In view of recommendation made by Insolvency Law Committee, the Code was amended through Insolvency and Bankruptcy (Second Amendment) Act, 2018 and Section 238A of the Code was inserted with effect from 06.06.2018. It provides that:

“The provisions of the Limitation Act, 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.”

After the insertion of Section 238A of the Code, a question came before the Hon’ble Supreme Court in the matter of B.K Educational Services Private Limited v. Parag Gupta and Associates [2018] ibclaw.in 32 SC as to whether the provisions of Limitation Act, 1963 shall apply to the applications filed before 06.06.2018. The Supreme Court held that Section 238-A is clarificatory in nature and being a procedural law, it has retrospective effect. The court has further held that insofar as the Code is concerned, the intention of the legislature from the very beginning, was to apply the limitation act to NCLT and NCLAT while deciding the applications filed under section 7 and 9 of the Code and appeals therefrom. Section 433 of the Companies Act 2013 expressly applies the Limitation act to the Adjudicating Authority (NCLT) and NCLAT.  In view of the Supreme Court, the Code cannot be triggered in the year 2017 for a debt which was time-barred, say, in 1990, as that would lead to the absurd and extreme consequences of the Code being triggered by a stale or dead claim, inter alia, instant removal of the present board of directors of the corporate debtor permanently which may ultimately lead to liquidation and therefore, corporate death. The court held in Paragraph 42 of the judgement that :-

42. It is thus clear that since the Limitation Act is applicable to applications filed under Sections 7 and 9 of the Code from the inception of the Code, Article 137 of the Limitation Act gets attracted. “The right to sue”, therefore, accrues when a default occurs. If the default has occurred over three years prior to the date of filing of the application, the application would be barred under Article 137 of the Limitation Act, save and except in those cases where, in the facts of the case, Section 5 of the Limitation Act may be applied to condone the delay in filing such application.

Article 137 of the Limitation Act, 1963 is a residuary provision which provides that “For any application for which no period of limitation is provided elsewhere, the period of limitation is 3 years and the time from which period begins to run is when the right to apply accrues.”

Even after the law laid down by the Hon’ble Supreme Court in B.K Educational Trust (supra) that Article 137 gets attracted when the applications are filed under section 7 and 9 of the Code, The NCLAT in series of judgements had taken the contradictory view stating that when the immovable properties have been mortgaged by the corporate debtor for securing the debt, period of limitation for filing such applications under section 7 of the Code is 12 years as per Article 62 under Part -V of the Limitation Act, 1963. Article 62 provides that

“Period of limitation to enforce payment of money secured by a mortgage or otherwise charged upon immovable property is 12 (Twelve) years and the time from which such period begins to run is when the money sues for becomes due.”

In one of the matters “Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries Pvt. Ltd. [2019] ibclaw.in 23 NCLAT, The NCLAT again held that the application filed by the financial creditor under section 7 of the Code on 21.03.2018 for the default committed on 08.07.2011 is maintainable because the period of limitation with regards to the mortgaged property is 12 (Twelve) years. The matter went to the Supreme Court. The Hon’ble Supreme Court held that Part-V deals with “Suits relating to immovable property”. Part-V does not apply to the applications filed under the Insolvency and Bankruptcy Code, 2016. It had reiterated its view taken in B.K Educational Trust (supra) that the period of limitation for an application under section 7 of the Code is governed by Article 137 of the Limitation Act and is, therefore, three years from the date when right to apply accrues and if the default had occurred over three years prior to the date of filing of the application, such application would be time-barred save and except in those cases where, on facts, the delay in filing may be condoned under section 5 of the Limitation Act.

The Supreme Court also went on to answer the question that whether Section 18 of the Limitation Act could be applied in cases where acknowledgement of debt has been made by the corporate debtors in the balance sheets and annual reports filed before the Registrar of Companies. Section 18(1) of the Limitation Act provides that :-

Where, before the expiration of the prescribed period for a suit or application in respect of any property or right, an acknowledgement of liability in respect of such property or right has been made in writing signed by the party against whom such property or right is claimed or by any person through whom he derives his title or liability, a fresh period of limitation shall be computed from the time when acknowledgement was so signed.

The Supreme Court held that the period of limitation under section 7 of the Code commences from the date of default and it can be extended only through application under section 5 of the Limitation Act, if any case for condonation of delay is made out. There is no concept of continuous cause of action for the purpose of application under section 7 of the Code. The judgement passed by Supreme Court in Babulal (Supra) was followed by NCLAT in  Jagdish Prasad Sarada v. Allahabad Bank [2020] ibclaw.in 85 NCLAT. The NCLAT in its judgement delivered on 28.08.2020 had observed that the date of default will be the date of declaration of account as NPA and such date of default would not shift. The extension for the period of limitation can only be done by way of application under Section 5 of the Limitation Act, 1963, if any case for the condonation of delay is made out.

However, once the “Corporate Insolvency Resolution Process (CIRP)” is initiated against the corporate debtor on the application moved by financial creditor or operational creditor under section 7 or 9 of the Code (as the case may be), all other creditors have to file their claims before the IRP/RP. Interim Resolution Professional (IRP) is a person appointed by the Adjudicating Authority to manage the affairs of the corporate debtor during the interregnum period. The members of CoC (Committee of Creditors) in their first meeting may appoint IRP as the Resolution Professional (RP) or replace the IRP with another Resolution Professional (RP). So, an interesting question arises here is “Can the IRP/RP admit claims which are time barred in nature?” In Swiss Ribbons Pvt. Ltd. v Union of India [2019] ibclaw.in 03 SC, the Supreme Court has categorically held that IRP/RP is not a Qausi-judicial body. It does not have any adjudicatory powers. The Role of IRP/RP is limited to admission, verification and collation of all the claims submitted against the corporate debtor. Regulation 13(1) of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 provides that

“The Interim Resolution Profession or the Resolution Professional, as the case may be, shall verify every claim, as on the insolvency commencement date, within seven days from the last date of the receipt of the claims, and thereupon maintain a list of creditors containing names of creditors along with the amount claimed by them, the amount of their claims admitted and the security interest, if any, in respect of such claims and update it.”

So a question arises as to whether the provisions of Limitation Act, 1963 will be applicable while filing claims against the corporate debtor before the IRP/RP.

(a) If the answer to this question is yes, then that would give adjudicatory powers to the IRP/RP to decide whether the claims filed before him are time barred or not. It would go against the law laid down by the Supreme Court in Swiss Ribbons (supra).

(b) If the answer is no, then that would place the original applicant who has approached Adjudicating Authority under Section 7 or 9 of the Code at different footings with the ones who will file claims before the IRP/RP even though they all would be getting equal treatment under the Corporate Insolvency Resolution Process of the corporate debtor. All the stale or rotten claims would be filed before IRP/RP, once the CIRP is triggered on the application moved by a fresh claim.

Paragraph 28.2 of the report submitted by Insolvency Law Committee in March, 2018 states that “Non-application of the law of limitation shall re-open the rights of claimants (pursuant to issuance of a public notice) to file time barred claims with IRP/RP which may potentially be a part of the resolution plan”. However, Section 238-A (inserted after the recommendation of Insolvency Law Committee Report, 2018) states that the provisions of Limitation Act, 1963 shall apply before the Adjudicating Authority (NCLT), NCLAT, DRT and DRAT. It is absolutely silent on whether the IRP/RP shall follow the provisions of Limitation Act, 1963. Let’s hope that this anomaly of “time barred claims before the IRP/RP” gets clarified soon.