Applicability of provisions of Limitation Act, 1963 ("Limitation Act") to the applications filed for initiation of corporate insolvency resolution process under Part II of the Insolvency & Bankruptcy Code, 2016 ("IBC") has been a controversial issue since the enactment of IBC. Various benches of National Company Law Tribunal ("Adjudicating Authority") have had divergent views on the applicability of Limitation Act to IBC proceedings. However, National Company Law Appellate Tribunal ("NCLAT") in judgments such as Neelkanth Township & Construction1 held that the provisions of Limitation Act were not applicable to IBC.
The entire issue revolving around applicability of Limitation Act to IBC proceedings was subsequently put to rest through insertion of Section 238A in IBC, vide amendment dated June 6, 20182, which provided for the applicability of provisions of Limitation Act to the proceedings or appeals before the Adjudicating Authority, NCLAT, Debt Recovery Tribunal (Adjudicating Authority under Part III of IBC) or Debt Recovery Appellate Tribunal.
The Hon'ble Supreme Court of India ("Supreme Court") in the matter of B.K. Educational Services3, while dealing with the issue of applicability of Limitation Act to applications filed under Sections 7 and 9 of IBC between December 1, 2016 (date of commencement of IBC) and June 6, 2018 (date when section 238A became effective), held as follows:
"It is thus clear that since the Limitation Act is applicable to applications filed under Sections 7 and 9 of the Code from the inception of the Code (IBC), Article 137 of the Limitation Act gets attracted. "The right to sue", therefore, accrues when a default occurs. If the default has occurred over three years prior to the date of filing of the application, the application would be barred under Article 137 of the Limitation Act, save and 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".
This issue was further clarified by the Supreme Court in Sagar Sharma4 that the date on which IBC came into force, i.e. December 1, 2016, is wholly irrelevant to the trigger of any limitation period for the purposes of the Code. The Supreme Court rulings in B.K. Educational Services and Sagar Sharma clarified that the Limitation Act would have retrospective application from the date of inception of IBC.
The Supreme Court in Jignesh Shah5 had the occasion to deal with the issue of admission of a winding up petition, filed earlier under the Companies Act, 1956 before the Bombay High Court, which was subsequently transferred to the Adjudicating Authority, Mumbai Bench and heard as Section 7 application under IBC. The Supreme Court set aside the admission order in Section 7 application on the basis that the winding up petition, having been filed beyond the three-year period mentioned in Article 137 of the Limitation Act6, was time-barred and hence could not be proceeded with any further. Jignesh Shah further made it crystal clear that the limitation for the purpose of filing a winding-up petition of a company triggers from date of default. Hence, "date of default" became the most important factor for the purposes of calculating limitation period for filing Section 7 and 9 applications under IBC.
In the matter of Gaurav Hargovindbhai Dave7, the Supreme Court set aside the admission order of the Adjudicating Authority, Mumbai Bench, which had also been upheld by NCLAT, observing that Article 62 of the Limitation Act8 (period of limitation is twelve years from date of default in case of money secured by mortgage) is applicable to suits only and not an application filed under Sections 7 and/or 9 of IBC which would be squarely covered within the residuary Article 137 of the Limitation Act.
Taking cognizance of the aforesaid judgments of the Supreme Court, NCLAT in the matter of V Hotels Ltd.9 held that the period of limitation commences from the date of default. NCLAT further held that for the purpose of filing a suit or application in respect of any property or right, the acknowledgment of liability as per Section 18 of the Limitation Act10 has to be made in writing and duly signed by the party, against whom such property or right is claimed, prior to the expiration of the prescribed period for filing the suit. Accordingly, the application under section 7 of the IBC in the said case was found to be not maintainable, being barred by the limitation.
In C. Shivakumar Reddy11, NCLAT set aside the admission order of Adjudicating Authority, Bengaluru bench on the ground of non-acknowledgement of debt within three years of "date of default" or from the date when the loan account(s) of the corporate debtor became a non performing asset. NCLAT further observed that if any acknowledgment for any dues payable is made after expiry of three years of limitation period, the same cannot be taken into consideration for the purpose of deriving conclusion under Section 18 of the Limitation Act.
In view of the judicial precedents discussed hereinabove, the legal position on the applicability of Limitation Act to the application(s) filed under Section 7 and/or 9 of IBC is unambiguous and well-defined. However, it remains to be seen how the default under the restructured accounts (whether retained by the banks/FIs or assigned to asset reconstruction companies) are treated by the Supreme Court for calculating the period of three years under the Limitation Act.
1. Neelkanth Township and Construction Pvt. Ltd. vs. Urban Infrastructure Trustee Ltd., (Company Appeal (AT) (Insolvency) No.44 of 2017) vide order dated August 11, 2017
2. Inserted by Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 (Act 26 of 2018) (w.r.e.f. 6-6-2018)
3. B.K. Educational Services Private Limited v Parag Gupta And Associates (Civil Appeal No. 23988 of 2017) vide order dated October 11, 2018
4. Sagar Sharma & Anr v. Phoenix ARC Pvt. Ltd. & Anr. (Civil Appeal No. 7636 of 2019) vide order dated September 30, 2019
5. Jignesh Shah v. Union of India (Writ Petition (Civil) No.455 of 2019) vide order dated September 25, 2019
6. Article 137 of Limitation Act pertains to any other application for which no period of limitation is provided elsewhere in this Division.
7. Gaurav Hargovindbhai Dave v. Asset Reconstruction Company (India) Ltd. & Anr. (Civil Appeal No. 4952 of 2019) vide order dated September 18, 2019
8. Article 62 of Limitation Act pertains to enforcement of payment of money secured by a mortgage or otherwise charged upon immovable property.
9. V. Hotels Ltd. v. Asset Reconstruction Company (India) Ltd. (Company Appeal (AT) (Insolvency) No. 525 of 2019) vide order dated December 11, 2019
10. Section 18 – Effect of acknowledgement in writing
11. C. Shivakumar Reddy v. Dena Bank (Company Appeal (AT) (Insolvency) No. 407 of 2019) vide order dated December 18, 2019
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