India: NCLAT Settles The Issue Of The Applicability Of The Limitation Act To Insolvency Applications Under The Insolvency And Bankruptcy Code

Last Updated: 8 January 2018
Article by Chakrapani Misra, Ravitej Chilumuri and Akash Karmarkar

Most Read Contributor in India, December 2017

The National Company Law Appellate Tribunal, New Delhi (NCLAT) on 7 November 2017 passed a judgment in the case of M/s Speculum Plast Private Limited v. PTC Techno Private Limited, putting to rest the question of the applicability of the Limitation Act, 1963 (Limitation Act) to the corporate insolvency resolution process under the Insolvency and Bankruptcy Code, 2016 (IBC). The present judgment comes in the wake of the decision of the NCLAT in Neelkanth Township and Construction Pvt. Ltd. v. Urban Infrastructure Trustees Ltd (Neelkanth case) and the subsequent observations of the Supreme Court in an appeal against the said decision. The brevity of the observations in the Neelkanth case and the seemingly contradictory statements of the NCLAT and Supreme Court led to confusion among stakeholders. The present case provides some clarity on the issue, while raising certain new questions and problems.

In this case, the NCLAT has held that the Limitation Act shall not apply to the IBC, however, the National Company Law Tribunal (NCLT) may take into account the doctrine of laches while considering an application for initiating the insolvency process.

Arguments on behalf of the Appellants

  • IBC is a special Act and constitutes a 'self-contained code', independent of other laws, as borne out by the report of the Bankruptcy Law Reforms Committee. As such, in the absence of any specific provision incorporating the Limitation Act, it shall not be applicable.

Arguments on behalf of the Respondents

  • Sub-section 1 of Section 5 of the IBC states that the Adjudicating Authority under the IBC shall be the NCLT, which in turn has been constituted under Section 408 of the Companies Act, 2013 (Companies Act). Therefore, it was submitted that the provision of the Companies Act including Section 433 were applicable to the IBC, as the same were not in conflict with the IBC.
  • In the absence of any contrary provisions, IBC should be read with the provisions of the Companies Act including Section 433, which expressly makes the Limitation Act applicable to proceedings before the NCLT.
  • Similarly, other provisions of the Companies Act such as sections 424,425,434 and 430 also imply that the Limitation Act is applicable to the IBC.

Submissions of the Amicus Curiae

  • The purpose of the doctrine of limitation and prescription is to prevent a state of constant uncertainty, doubt and suspense. Having a time limit for litigation is based on public policy and having a life span for legal remedies promotes general welfare. (N.Balakrishnan V. M.A. Krishnamurthy, (1998) 7 SCC 12)
  • Since the bar of limitation applies to debts presented before the Hon'ble High Courts for the purpose of winding up under the Companies Act, 1956, and to subsequent claims presented before the Official Liquidator, limitation shall also apply to claims before the NCLT and the insolvency professional.
  • Section 60(6) of the IBC speaks about the interaction of IBC and the Limitation Act. Therefore, the Limitation Act must be applicable to IBC.
  • The use of the words 'National Company Law Tribunal' in Section 60(5) of IBC instead of 'Adjudicating Authority' indicates the intent of the Legislature to make Section 433 of the Companies Act and by extension, the Limitation Act applicable to IBC.
  • Even if the IBC is considered a self-contained code, Limitation Act can still apply unless it is expressly barred. (Girnar Traders v. State of Maharashtra & Ors. (2011)3SCC 1)

Reasoning of the Court

  • IBC is a complete code in itself. This is evident from the legislative intent, statutory framework, and 'principles driving the design' of IBC. (M/s. Innoventive Industries Ltd v. ICICI Bank & Anr, 2017 SCC OnLine Sc 10251.)
  • Since IBC is a special law and a complete code in itself, even in the absence of an express exclusion of the Limitation Act, courts may examine its provisions to assess whether the Limitation Act is necessarily excluded. (Hukumdev Narain Yadav v. Lalit Narain Mishra (1974) 2 SCC 133)
  • The provisions, design and framework of the IBC show the legislative intent to necessarily exclude the application of the Limitation Act, as under:
  • Section 243 repeals the Presidency-Towns Insolvency Act, 1909 and the Provincial Insolvency Act, 1920, without saving or incorporating provisions concerning the applicability of limitation contained in the aforesaid Acts.
  • Sections 7, 9, 12, 61, 62 and other such provisions of the IBC provide separate time periods for different stages in the insolvency process, which are different from the time prescribed under the Limitation Act.
  • Section 433 of the Companies Act is not applicable to the IBC since it has not been incorporated into the IBC under Section 255 read with the Eleventh Schedule.
  • The Limitation Act cannot be made applicable to a suo moto application for insolvency by a corporate applicant under Section 10, since in such applications there is no specific claim or debt.
  • Article 137 (Any other Application) of Part II of the Limitation Act prescribes a limitation period of 3 (three) years from the date that the right to apply accrues. Since the right to apply under the IBC accrued only on 1 December 2016, when the IBC came into force, all applications are within the period of limitation.
  • However, it is in the interest of public policy to prescribe a time limit for making legal claims. As such, although the Limitation Act is not applicable to the IBC, the "Doctrine of Limitation and Prescription" may still be applied, and laches on part of the applicant may be taken into consideration for rejecting a belated application.

Decision of the Court

  • The Limitation Act does not apply to insolvency applications under the IBC.
  • If the NCLT notices that the application under section 7 or 9 has been filed after a long delay, it may give opportunity to the Applicant to explain the delay within a reasonable period to ascertain whether there are any laches on the part of the Applicant. Stale claims of dues without explaining delays normally should not be entertained.
  • The aforesaid principle of laches cannot be applied to applications under Section 10 by a corporate applicant for initiating insolvency against itself.
  • Where there is a continuing cause of action, the question of rejecting an application on the ground of delay does not arise.
  • It is open for the Committee of Creditors to decide whether a claim made after long delay is acceptable. If a creditor is aggrieved by such a decision he may apply to the NCLT for relief.

Comment

This judgement seems to adopt an antithetical approach. On the one hand, it expands the scope of the IBC to permit time barred debts, while on the other hand imposes the restriction of laches on such claims. This, in effect, replaces the objective time limits under the Limitation Act, with the more subjective bar of the doctrine of laches. As such, whether or not a claim is belated can only be determined by the NCLT, on a case by case basis, after an application is made to it.

It appears that the judgment may lead to a substantial increase in insolvency applications to the NCLT, even in cases where there are inordinate and unexplainable delays. Further, there may also be a rise in appeals before the NCLAT from decisions of the NCLT dismissing applications on the ground of limitation. This judgment may also result in situations where debts that have accrued several years ago may be used to initiate the insolvency resolution process.

Therefore, whether a debt is belated is now a matter of argument and may be decided in favour of either party depending on the facts of the case. This gives greater scope to both the debtors and creditors to agitate their stands, and makes the arguments advanced by the counsel for the parties more relevant in deciding the issue of delay.

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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