India: Enforceability Of Time-Barred Claims Vis-A-Vis The Insolvency And Bankruptcy Code – A Critical Analysis

Last Updated: 24 October 2017
Article by Sachin Mandlik, Pranav Sampat and Shayan Dasgupta

Most Read Contributor in India, October 2017

Introduction

Recently, in Neelkanth Township and Construction Pvt. Ltd. v. Urban Infrastructure Trustees Ltd, Company Appeal (AT) (Insolvency) No. 44 of 2017 (Neelkanth Township), the National Company Law Appellate Tribunal (NCLAT) addressed several issues with regard to the Insolvency and Bankruptcy Code, 2016 (IBC).

Most importantly, the NCLAT held that debts which were otherwise not recoverable by virtue of having become time barred, could now be made a basis for initiating insolvency proceedings. In other words, the NCLAT held that the provisions of the Limitation Act, 1963 (Limitation Act) would not be applicable to the IBC, while enforcing a "debt" under the IBC.

Facts and Judgment

The judgment in Neelkanth Township was pursuant to an appeal filed by a corporate debtor, i.e., Neelkanth Township & Construction Pvt. Ltd. (Neelkanth), against the order of the Hon'ble National Company Law Tribunal (NCLT) allowing commencement of insolvency proceedings on the action of a financial creditor, i.e. Urban Infrastructure Trustees Ltd. (Urban Infrastructure).

Urban Infrastructure had subscribed to optionally convertible debentures (OCDs) issued by Neelkanth. These OCDs matured in the years 2011, 2012 and 2013. However, the application for insolvency of Neelkanth was made in 2017, i.e. after expiry of a period of 3 (three) years from the date of maturity of the said OCDs. The NCLT, however, proceeded to admit the insolvency application on 21 April 2017, stating that since there had been an express admission that the debtor had defaulted in repayment of principal towards the money received by issuing the debentures, the debt cannot be said to have become time barred.

The order of the NCLT was challenged by Neelkanth on the following grounds:

  1. Given that the OCDs matured in the years 2011, 2012 and 2013, the petition for initiation of corporate insolvency resolution process filed in 2017 is barred by the law of limitation. In other words, the cause of action to recover the said debts had arisen in the years 2011, 2012 and 2013 respectively and, having failed to enforce the said debt within the statutory period of 3 (three) years, proceedings could not now be initiated under the IBC.
  2. The application of Urban Infrastructure before the NCLT was not complete, as it did not contain a specific document prescribed under Section 7(3)(a) of the IBC.
  3. Urban Infrastructure was actually an investor and not a "financial creditor", as defined under the IBC.

With respect to the first ground as aforementioned, the NCLAT held that there was nothing on record to show that the Limitation Act is applicable to the IBC and therefore it cannot be held that the claim of money in the insolvency application is barred by limitation.

The NCLAT reasoned that the IBC was not an Act for recovery of money claims, but an Act relating to the institution of corporate insolvency resolution process. Resultantly, if a debt were to arise, which included interest and there was a default on repayment of such debt having a continuous course of action, the argument that the claim of the financial debtor stood barred by limitation could not be accepted.

Further, with respect to the second issue in consideration, NCLAT rejected the contention that the application filed by Urban Infrastructure was incomplete as it did not contain a record of default as recorded with an information utility (as required under Section 7(3)(a) of the IBC). NCLAT reasoned that a mere procedural requirement could not be allowed to frustrate the substantive provision of law.

Finally, with respect to the question of whether OCDs were to be considered as "financial debt", NCLAT relied on Section 5(8)(c) of the IBC and held that the amounts owed on maturity of debentures would be considered as financial debt under the IBC.

Critical Analysis

With respect to the question of applicability of the Limitation Act to the IBC, the judgment in the case at hand is in stark contradiction to several previous judgments and orders of various benches of the NCLT.

In this context, two judgments of the Principal Bench of the NCLT are relevant.

  1. In the landmark decision in Sanjay Bagrodia v. Sathyam Green Power Pvt. Ltd, Company Petition No. (I.B.) 108/PB/2017, a default had occurred in respect of non-payment of salary for the period between October 2012 to September 2013 and the insolvency application was brought before the Principal Bench of the NCLT on 12 May 2017, i.e. long after the expiry of the limitation period of 3 (three) years. It was the contention of the operational creditor that, in the absence of any provision in the IBC incorporating the provisions or the applicability of the Limitation Act, no such provision could be implicitly read into the IBC. In this regard, NCLT relied upon Section 60(6) of the IBC to hold that this provision excluding the applicability of the Limitation Act during the continuance of moratorium was, in itself, a broad indication implicit in the IBC for otherwise making the Limitation Act applicable to it. Thereby, it was concluded that it was always the intention of the legislature to make the Limitation Act applicable to the provisions of the IBC.
  2. In another decision of the Principal Bench, NCLT, M/s. Deem Roll-Tech Limited v. M/s. R.L. Steel & Energy Ltd, Company Application No. (I.B.) 24/PB/2017, the NCLT took a view that the provisions of the Limitation Act would be applicable to the claims made by an operational creditor. Therein, it was held that by operation of Section 255 of the IBC, read with the 11th Schedule to the IBC, several provisions of the Companies Act, 2013 (Companies Act) had been amended.  However, Section 433 of the Companies Act, which provided for the applicability of the Limitation Act to proceedings before the NCLT and/or NCLAT, as the case may be, had not been amended. Therefore, it was held that in the absence of any provision in the IBC specifically barring the applicability of the Limitation Act, an inference could be safely drawn that it was never the intention of the Legislature to make the Limitation Act inapplicable to proceedings arising under the IBC.

Therefore, it appears to us that the judgment in Neelkanth Township (supra) excluding the applicability of the Limitation Act to the IBC is an incorrect interpretation of law.

Further, in our view, even if one were to argue that the non-obstante clause contained in Section 238 of the IBC would override the provisions of any other Act in force, including the Limitation Act itself, the said argument would not be sustainable as an inherent prerequisite for Section 238 of the IBC to apply would be "conflict" between the IBC and provision(s) of any other law in force. Since, in the instant scenario, in determining the question of applicability of the Limitation Act to the IBC, there would be no conflict between the two Acts as aforementioned, Section 238 would not apply.

In any event, by virtue of Section 433 of the Companies Act, 2013, NCLT/ NCALT is expressly bound by the provisions of the Limitation Act. It would, therefore, be absurd to contend that merely because NCLT/ NCLAT exercises or draws its powers from the IBC, it is not bound by Section 433 of the Companies Act, 2013. The said view is further strengthened by Section 5(1) of IBC, which defines "Adjudicating Authority" to mean NCLT which is constituted under Section 408 of the Companies Act, 2013. Thus, it can be said that NCLT / NCLAT has been provided with an additional power to adjudicate disputes arising out of the provisions of IBC and the same is not de hors the provisions of the statute constituting the same i.e. Companies Act, 2013.

Further, making the Limitation Act inapplicable to the IBC would frustrate the very purpose of enactment of the Limitation Act itself, which is based on the doctrine of "visilantibus non dormientibus jura subveniunt", i.e. the parties who seek to uphold their legal right cannot sleep over the matter and at a later stage seek to enforce their rights which is likely to cause prejudice to the other parties. While it is true that Limitation Act does not take away the right but only bars the remedy, it is also true that a litigant cannot sleep over his rights and then choose to enforce the same at his convenience, prejudicing the rights of the opposite party.

Comment

It would be pertinent to note here that an appeal was preferred by the corporate debtor against the aforementioned order of the NCLAT before the Hon'ble Supreme Court of India. In the said appeal, while the Hon'ble Apex Court refused to interfere with the judgment of the NCLAT on merits, it expressly kept the question of applicability of the Limitation Act "open".

Therefore, in our view, as it now stands, the Limitation Act shall be applicable to the IBC and, resultantly, any debt which is barred by limitation cannot be made a basis for invocation of proceedings under the IBC.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at legalalerts@khaitanco.com

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