India: Application Of Limitation Act On Bankruptcy Code

The Insolvency & Bankruptcy Code was enacted in the year 2016. Since then there have been divergent views regarding the application of the Limitation Act, 1963, to the proceedings under the Insolvency & Bankruptcy Code, 2016 (Code). The provisions of the Code are used by the financial creditors as a tool to claim their debts. The creditors invoke the provisions of Code by filing application to initiate Corporate Insolvency Resolution Process (CIRP), even if the claims are more than three years old i.e. after the period of limitation has elapsed to recover the said debt by approaching a Civil Court. The Code did not provide (prior to 6.6.2018) that the provisions of the Limitation Act will be applicable on the proceedings under the Code.

Different Benches of National Company Law Tribunal (NCLT) have divergent views on the issue of applicability of the Limitation Act to the proceedings under the Code. In the case titled M/s Deem Roll-Tech Limited vs. R.L. Steel and Energy Limited and Sanjay Bagrodia vs. Satyam Green Power Limited, the NCLT was of the view that the period of limitation will be applicable to the proceedings under the Code. However, in a subsequent judgment titled Machhar Polymer Ltd. vs. Sabre Helmets Pvt. Ltd., the Tribunal was of the view that the Limitation Act would not be applicable to the proceedings under the Code. In the case of Neelkanth Township & Construction Pvt. Ltd. vs. Urban Infrastructure Trustees Limited, the National Company Law Appellate Tribunal (NCLAT), after considering the provisions of the Limitation Act and the Code, held that in the absence of any specific provisions in the Code, the Limitation Act would not be applicable to initiate Corporate Insolvency Resolution Process. The Appellate Tribunal was of the view that the object of the Code is related to commencement of Corporate Insolvency Resolution Process and not for recovery of money. Thus, the judgment passed by the Appellate Tribunal in Neelkanth Township case (supra), allows a party to commence Corporate Insolvency Resolution Process based on even time-barred debts which could not have been recovered due to expiry of stipulated period of limitation. Section 433 of the Companies Act, 2013, provides that Limitation Act is applicable to the proceedings before NCLT and NCLAT. In another judgment rendered by the Appellate Tribunal, in the case titled Speculum Plast Pvt. Ltd. vs. PTC Technologies Pvt. Ltd., wherein the Appellate Tribunal was pleased to hold that Limitation Act is not applicable for initiation of Corporate Insolvency Resolution Process. The Appellate Tribunal held 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 of the Code can be entertained after long delays amounting to latches and thereby the person forfeited his claim. The Appellate Tribunal held that if an application under Section 7 or Section 9 of the Code has been filed after long delay, the Adjudicating Authority may give opportunity to the applicant to explain the delay to find out whether there are latches on the part of the applicant. However, the said judgment in the Speculum case (supra) had been stayed by the Hon'ble Supreme Court.

Due to confusion with regard to the applicability of Limitation Act, Insolvency Law Committee, deliberated on the above issue and agreed that the intent of the Code is not to give a time barred debt a new lease of life and recommended that a particular provision should be inserted in the Code about the application of Limitation Act to the Code. Thereafter, to rest the controversy, Section 238-A was inserted by the Insolvency & Bankruptcy Code (Second Amendment) Act, 2018, with effect from 06/06/2018 which reads as hereunder:

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

Section 238-A of the Code provides that the provisions of Limitation Act, 1963, shall apply to the proceedings for appeal before the Adjudicating Authority, the National Company Law Appellate Tribunal, the Debt Recovery Tribunal or the Debt Recovery Appellate Tribunal.

The Hon'ble Supreme Court in the case titled "B.K. Educational Services Pvt. Ltd. vs. Parag Gupta & Associates" (Civil Appeal No. 23988 of 2017) considered as to whether the provisions of Limitation Act would apply in the proceedings under Section 7 or Section 9 of the Code filed during the period from 01/12/2016 (from the commencement of the Code) till 06/06/2018 (when Section 238-A was inserted in the Code).

The Hon'ble Supreme Court held that the provisions of Limitation Act would apply to the proceedings under Section 7 or Section 9 of the Code filed during the period 01/12/2016 till 06/06/2018. Thus, after the pronouncement of the judgment in B.K. Educational case, a creditor cannot invoke the provisions of the Code for initiating CIRP based on a time-barred debt. The Hon'ble Supreme Court held that Limitation Act is applicable from the inception of the Code i.e. December 01, 2016. Thus, the right to sue accrues when a default occurs. When the default has occurred over three years prior to the date of filing of the application, the application would be barred under Section 137 of the Limitation Act, save and except, in those cases, where Section 5 of the Limitation Act may be invoked for condoning the delay in filing such application.

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