India: Applicability Of Limitation To The Insolvency And Banruptcy Code, 2016

The Law of Limitation has been on the talks in context to whether it shall be applicable to the Insolvency and Bankruptcy Code, 2016 ("IBC, 2016") since its very beginning. Though the previous debt recovery laws such as the Recovery of Debt and Bankruptcy Act, 1993 and the SARFEASI Act, 2002 were bound by the provisions of the Limitation Act, 1963. The Hon'ble National Company Law Appellate Tribunal ("NCLAT") has pronounced various judgments discussing the applicability of the Limitation Act, 1963 to the IBC, 2016.

The issue of applicability of the Limitation Act, 1963 to the IBC, 2016 was considered by the National Company Appellate Tribunal (NCLAT) in the first matter of Neelkanth Township and Construction Pvt. Ltd. vs. Urban Infrastructure Trustee Ltd., [Company Appeal (AT) (Insolvency) No.44 of 2017]. In the aforesaid case, the NCLAT explicitly held that the provisions of the Limitation Act, 1963 would not apply to the IBC, 2016. The relevant extracts of the judgment are reiterated below:

"The next ground taken on behalf of the appellant is that the claim of the respondent is barred by limitation, as the Debentures were matured between the year 2011 – 2013 is not based on Law. There is nothing on the record that Limitation Act, 2013 is applicable to I&B Code. Learned Counsel for the appellant also failed to lay hand on any of the provision of I&B Code to suggest that the Law of Limitation Act, 1963 is applicable. The I&B Code, 2016 is not an Act for recovery of money claim, it relates to initiation of Corporate Insolvency Resolution Process. If there is a debt which includes interest and there is default of debt and having continuous course of action, the argument that the claim of money by Respondent is barred by Limitation cannot be accepted."

However, subsequently the aforementioned matter went in appeal to the Hon'ble Supreme Court in Neelkanth Township and Construction Pvt. Ltd. vs. Urban Infrastructure Trustee Ltd., [Civil Appeal No.10711 of 2017], wherein the question of the applicability of the Limitation Act, 1963 to the IBC, 2016 was kept open, while the appeal was dismissed.

Thereafter consequently, the NCLAT considered the question of applicability of the Limitation Act, 1963 in the judgment in Black Pearl Hotels Pvt. Ltd. vs. Planet M Retail Ltd., [Company Appeal (AT) (Insolvency) No.91 of 2017], decided on 17th October, 2017. The aforesaid appeal arises from the decision of the National Company Law Tribunal, Mumbai, rejecting an application for initiation of insolvency proceedings by an operational creditor on the ground that the debt was barred by limitation.

The NCLAT did not explicitly deal with the issue of whether the Limitation Act, 1963 does or does not apply to the IBC, 2016. However, the NCLAT opined that even if it is assumed that the Limitation Act, 1963 does apply to the IBC, 2016, then the period of limitation would only start running from 1st December, 2016, the date when the IBC, 2016 came into effect. The relevant extracts of the judgment are reiterated below:

"Insolvency and Bankruptcy Code, 2016 has come into force with effect from 1st December, 2016. Therefore, the right to apply under I&B Code accrues only on or after 1st December, 2016 and not before the said date (1st December, 2016). As the right to apply under section 9 of I&B Code accrued to appellant since 1st December, 2016, the application filed much prior to three years, the said application cannot be held to be barred by limitation."

Recently, the NCLAT has given a detailed judgment on the applicability of the Law of Limitation to the IBC, 2016 in its recent judgment in Speculum Plast Pvt. Ltd. vs. PTC Techno Pvt. Ltd., [Company Appeal (AT) (Insolvency) No. 47 of 2017]. In the above mentioned case, the NCLAT held that the Limitation Act, 1963 is not applicable for initiation of Corporate Insolvency Resolution Process, though the doctrine of Limitation and Prescription is necessary to be looked into for determining the question that whether an application under section 7 or section 9 can be entertained after a long delay, amounting to laches.

Further, the NCLAT was of the opinion that if such an application (as mentioned above) is filed before the Adjudicating Authority after a long delay of more than three years, the Adjudicating Authority may give an opportunity to the applicant to explain the delay within a reasonable period and on the failure to explain the delay the application shall normally not be entertained. The relevant extracts of the judgment are reiterated below:

"In view of the settled principle, while we hold that the Limitation Act, 1963 is not applicable for initiation of 'Corporate Insolvency Resolution Process', we further hold that the Doctrine of Limitation and Prescription is necessary to be looked into for determining the question whether the application under Section 7 or Section 9 can be entertained after long delay, amounting to laches and thereby the person forfeited his claim.

If there is a delay of more than three years from the date of cause of action and no laches on the part of the Applicant, the Applicant can explain the delay. Where there is a continuing cause of action, the question of rejecting any application on the ground of delay does not arise.

Therefore, if it comes to the notice of the Adjudicating Authority that the application for initiation of 'Corporate Insolvency Resolution Process' under section 7 or Section 9 has been filed after long delay, the Adjudicating Authority may give opportunity to the Applicant to explain the delay within a reasonable period to find out whether there are any laches on the part of the Applicant. The stale claim of dues without explaining delay, normally should not be entertained for triggering 'Corporate Insolvency Resolution Process' under Section 7 and 9 of the 'I&B Code'."

Apart from the above, the NCLAT also mentioned explicitly that the aforementioned principles for determining the Limitation cannot be made applicable to an application under section 10 of the IBC, 2016 as the Corporate Applicant does not claim money but prays for initiation of the Corporate Insolvency Resolution Process against itself.

The NCLAT also addressed the issue in relation to applicability of the above mentioned principles for Limitation on filing of claims before the Insolvency Resolution Professional. The NCLAT opined that in case of a stale claim, after a long delay and in absence of any continuous cause of action, it shall be open for the Insolvency Resolution Professional to decide whether to accept or reject the claim. Though, later on the creditor aggrieved from the decision of the Insolvency Resolution Professional can file objections before the Adjudicating Authority for necessary actions.

The aforesaid pronouncement implies that the debt which is time barred can be accepted for an application under the IBC, 2016 amounting to laches, if a reasonable explanation is provided to the Adjudicating Authority for such delay. Though it shall be interesting to see further the interpretation and application of the aforementioned observations of the NCLAT by the various benches of the National Company Law Tribunals while entertaining applications under the IBC, 2016.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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