India: Supreme Court Of India Puts Limitation On Insolvency And Bankruptcy Code, 2016: No Zombie Claims Allowed

Last Updated: 12 October 2018
Article by Piyush Joshi and Telma Raju

On 11.10.2018,  a division bench of the Hon'ble Supreme Court of India comprising of Justice R.F. Nariman and Justice Navin Sinha in the matter of B.K. Educational Services Private Limited v Parag Gupta And Associates, Civil Appeal No. 23988 of 2017 ("Judgment"), have held that the Limitation Act, 19631 ("the Limitation Act") will apply to applications that are made under s. 7 and s. 9 of the Insolvency and Bankruptcy Code, 2016 ("IBC") on and from the commencement of IBC on 01.12.2016.2 The Supreme Court has through this judgment clarified that IBC proceedings cannot be initiated based on time barred claims.

The case  of B.K. Educational Services Private Limited v Parag Gupta And Associates arose from a batch of matters in which the National Company Law Appellate Tribunal ("NCLAT") had held that the Limitation Act does not apply to applications made under s.7 and s. 9 of IBC from the date of commencement of IBC,( i.e., 01.12.2016) till the date on which IBC was amended to incorporate s. 238A, IBC i.e., 06.06.2018.3

S. 238A, IBC which was introduced vide amendment dated 06.06.2018 reads as follows:

"238-A. Limitation: The provisions of the Limitation Act, 1963 (36 of 1963) shall, as far as may be, apply to proceedings or appeals before the Adjudicating Authority, the National Company Law Appellate Tribunal, the Debt Recovery Appellate Tribunal, as the case may be."

Section 238 A has the same language as s. 433 Companies Act, 2013.

The NCLAT had held that even if it was to be assumed that Limitation Act is applicable to filing of an application to initiate insolvency proceedings under IBC, since IBC commenced on 01.12.2016 three years have not elapsed from the date when the right to apply accrued.

The Supreme Court in B.K. Educational Services Private Limited v Parag Gupta And Associates has held as follows:

  1. an application filed after the IBC came into force in 2016 cannot revive a debt which is no longer due as it is time- barred.4
  2. the amendment of s. 238A would not serve its object unless it is construed as being retrospective. Otherwise, applications seeking to resurrect time-barred claims would have to be allowed, not being governed by the law of limitation.5
  3. it is clear from a reference to the Insolvency Law Committee Report of March, 2018, that the legislature did not contemplate enabling a creditor who has allowed the period of limitation to set in to allow such delayed claims through the mechanism of IBC.6
  4. section 433 of the Companies Act, 2013 which makes the provisions of Limitation Act applicable to proceedings or appeals before the NCLT or NCLAT, was applicable from the very inception of IBC.7
  5. the expression "debt due" in the definition sections of IBC has already been interpreted by the Hon'ble Supreme Court to mean debts that are "due and payable" in law, i.e., the debts that are not time-barred.8 In this regard, the Hon'ble Supreme Court has referred to its judgment in Innoventive Industries Ltd. v. ICICI Bank & Anr., (2018) 1 SCC 407 wherein it had held that "a debt may not be due if it is not payable in law or in fact"9
  6. since the Limitation Act is applicable to applications filed under Sections 7 and 9 of IBC from the inception of IBC, Article 137 of the Limitation Act gets attracted. Article 137 of the Limitation Act provides the period of limitation in case of "any other application for which no period of limitation is provided elsewhere" as three years from the time when the right to apply accrues. "The right to sue", therefore, accrues when a default occurs. 10
  7. if the default has occurred over three years prior to the date of filing of application under IBC, the application would be barred under Article 137 of the Limitation Act, 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.11

With this judgment, it is hoped that now the IBC landscape will, hopefully, now be free of zombie debt.

Footnotes

1. The relevant provision of the Limitation Act is Article 137 of The Schedule to the Limitation Act which provides limitation in case of any application for which no period of limitation is provided elsewhere as three years from the date on which right to apply accrues

2. S. 7 and s. 9, IBC deals with application to initiate corporate insolvency resolution process by financial creditor and operational creditor, respectively. 

3. Para 2 of the Judgment

4. Para 12 of the Judgment

5. Para 15 of the Judgment

6. Para 21 of the Judgment

7. Para 24 of the Judgment

8. Para 21 of the Judgment

9. Para 28 of the judgment of the Hon'ble Supreme Court in Innoventive Industries Ltd. v. ICICI Bank & Anr., (2018) 1 SCC 407

10. Para 27 of the Judgment

11. Para 27 of the Judgment

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