Insolvency and Bankruptcy

Application of Limitation Period in IBC Matters

The limitation period is construed as the time period in which the claimant is required to file his claim in a court of law. Generally, the limitation is a timeline within which the remedy for recovery of the claim is available. In India, the limitation period is governed by the Limitation Act 1963. The limitation act provides for the strict timeline in which the legal rights are to be exercised by the claimant. The Supreme Court has also upheld the objects of the act and states that a person shall exercise his right of remedy as soon as possible and neglect unfair practices.

Similarly, the Insolvency and Bankruptcy Code has been updated over the years and still requires more amendments. The IBC act is enacted with the primary purpose of reorganising and resolving the insolvency procedures of corporations and individuals in a time-bound manner so that there will maximum value of realisation of assets. The code grants the corporate creditor the right to claim the debt from a corporate debtor by initiating CIRP proceedings in NCLT.

The interlock between Limitation Act and IBC remains a question of law in many cases. The Hon’ble Supreme Court, the NCLT and NCLAT has, through various judicial pronouncements, discussed the question of the applicability of limitation period in IBC matters and tried to simplify it. Hence, the present article aims to provide a detailed scenario with a series of judgments on whether the limitation act applies to IBC proceedings.

Applicability of Limitation Period in IBC Proceedings

The code is gone under amendment so that new principles of law can be introduced and the legal intricacies can be removed. The central government looking at the complexities in the legality of the limitation period in IBC matters has amended the code and introduced Section-238A by way of the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018. It states that the Limitation Act, 1963 shall apply to all the proceedings and appeals before the adjudicating authority, NCLAT, DRT and DRAT. Therefore, in simple terms, if the limitation period is given in the code, then the case shall be adjudged accordingly, notwithstanding anything contained in the Limitation Act. Moreover, the insolvency petition cannot be filed for time-barred debt.

The NCLT, Delhi, was the first in the case of M/s Deem Roll -Tech Limited vs R.L. Steel & Energy Ltd., who took the view that the provisions of the limitation act shall apply to the proceedings under IBC. However, the NCLAT in the case Neelkanth Township and Construction Pvt. Ltd. vs Urban Infrastructure Trustees Limited [2017] 143 SCL 538 on the question of applicability of limitation period in IBC matters states that if there is a default of debt for a continuous period, then it cannot be said that the limitation act will bar the claim of the corporate creditor.

The NCLAT, in response to the question of applicability of the limitation period in IBC matters, passed a common order in the cases of Speculum Plast Private Limited v PTC Techno Private Limited, Parag Gupta & Associates v B.K. Educational Services Private Limited and Ashley Infrastructure Private Limited v LDS Engineers Private Limited. The NCLAT held that IBC is a comprehensive code and is independent of any other law. It is stated that even if there is no explicit provision of the limitation period in IBC for initiating insolvency proceedings, the court is at liberty to decide whether the limitation act applies to the proceedings. Further, it was observed that the limitation act should not be made applicable to the proceedings where a corporate debtor makes the application under Section 10 of the code; as such, the application does not carry a specific claim. The NCLAT also observes that the Article137 of the limitation act would apply if the limitation act is attracted, whereby by the period of limitation shall begin from the date when the right to apply accrues to the corporate creditor. The NCLAT, by leaving the scope of deciding questions on whether the claim is time-barred in the hands of adjudicating authority, aims to increase the adjudication proceedings, which is why Section 238A is introduced by way of legislative enactment. It is therefore held that the application made by the corporate creditor under Section 7 or 9 of the code shall be time-barred if filed after a period of 3 years from the date of occurrence of default.

In Babulal Vardharji Gurjar vs Veer Gurjar Aluminium Industries Pvt. Ltd. &Anr., 2020, the Supreme Court in the matterwhile considering the question of whether the limitation act would apply to CIRP proceedings initiated in terms of Section 7 of the IBC, 2016, states that the right to apply for initiating proceedings under IBC starts from the occurrence of default. The court states that the limitation period in IBC for filing an application under Section 7 of the code is 3 years, according to Article 137 of the Limitation Act, 1963^[1]. Hence, if the default has occurred over 3 years before the date of filing of the application, then it would become time-barred. The court also states that the limitation period could be extended if the applicant has obtained condonation in terms of Section 5 of the Limitation Act. The court further observed that the code does not mention whether the period of the limitation period in IBC would also apply to cases initiated from the commencement of the code itself.

However, to answer the question asked in the above case, whether the limitation act shall have a retrospective effect after the insertion of Section 238A, the Hon’ble Supreme Court in B.K. Educational Services Private Limited vs Parag Gupta and Associates held that Section 238A is procedural and retrospective in Nature. The apex Court based its opinion on the verdict of Thirumalai Chemicals Limited vs Union of India and stated that the limitation act is procedural in Nature and hence would have a retrospective effect unless there is any amendment to the existing law. The court also relied on the judgement Allied Motors (p) limited vs CIT and concluded that it would be futile if the purpose for which Section 238A is inserted in the code is not fulfilled; hence the limitation act shall apply retrospectively to proceedings under IBC. The court further states that:

1. The Limitation Act is applicable from the inception of the code.
2. The limitation period in IBC proceedings filed under Section 7 and Section 9 of the code shall be according to the Limitation Act.
3. The limitation period in IBC matters shall be governed by Article 137 of the Limitation Act.
4. If the default has occurred over 3 years before the date of filing of the application, then it would become time-barred.

Further, looking at the applicability of Section 18 of the limitation act on the IBC Code, the court in Laxmi Pat Surana vs Union Bank of India & Anr., 2021, held that intent of the IBC was not to reopen the time-barred debt instead the initiation of a fresh limitation period is already mentioned under Section 18 limitation act. The court further states that when the principal borrower admits and acknowledges the liability, a fresh limitation period will start from the date the principal borrower enters the acknowledgement, provided the acknowledgement is entered before the expiration of the prescribed period of limitation. Therefore, the court does not find any reason to exclude the applicability of Section 18 to the proceedings under IBC.

Conclusion

From the plain reading of judicial pronouncements, it can be concluded that the limitation period applies in IBC matters, including the application made under sections 7 and 9 of the code. The limitation act will further apply retrospectively, which means that the limitation period in IBC matters shall apply from the commencement of the code. Further, the Hon’ble Supreme Court, in the landmark judgement of B.K. Educational Services Private Limited vs Parag Gupta and Associate has upheld that theapplication made under Section 7 or 9 for initiating proceedings under IBC shall be guided by Article 137 of the Limitation Act. Hence, any application filed after 3 years from the date of occurrence of default shall be barred. However, the period of 3 years shall be condoned provided that the court or authority granted the condonation under Section 5 of the Limitation Act, 1963.

Read Our Article: Sale of Going Concern under IBC