Applicability of the Limitation Act to Insolvency Proceedings

[Guest post by Ashish Virmani & Tanisha Khaitan, both lawyers based in New Delhi and graduates of National Law University Jodhpur]

The National Company Law Appellate Tribunal (“NCLAT”) in a recent judgement dated 11 August, 2017 in Neelkanth Township vs. Urban Infrastructure held that the Limitation Act, 1963 is not applicable to proceedings under the Insolvency and Bankruptcy Code, 2016 (the “Code”).

The NCLAT held that there is no provision in the Code which specifically makes the Limitation Act applicable to the Code. Further, it was held that since the Code is not a mechanism for recovery of money claims, but rather relates to the initiation of a corporate insolvency resolution process (“CIRP”), the Limitation Act would not apply thereto.

The decision of the NCLAT was rendered in the background of the facts where certain debenture holders (as financial creditors) approached the National Company Law Tribunal (“NCLT”) for initiating CIRP against the corporate debtor on account of a default on the part of the debtor in repaying amounts on debentures and interest thereon. Even as per the case of the applicants, the debentures had matured in 2011, 2012 and 2013 and the application to the NCLT was filed only in 2017.

An objection was raised by the corporate debtor that the debt was time barred. However, the application was admitted by the NCLT despite the objection. Aggrieved by the same, the debtor preferred an appeal to the NCLAT, which dismissed the appeal holding (among other things) that the Limitation Act did not apply to the Code.

While considering the application of the financial creditors in the matter, the NCLT had dealt with the issue of limitation in its judgment. The NCLT admitted the application on the ground that the debtor had acknowledged the debt in its financial statements, which had the effect of an acknowledgment of liability in writing under section 18 of the Limitation Act. However, while rendering its decision the NCLAT did not consider this reasoning of the NCLT.

Through this decision, the NCLAT has effectively overruled various decisions of the NCLT which have, by way of reasoned orders, held that the Limitation Act is applicable to the Code. Some of these judgments make a compelling case for the application of the Limitation Act to the Code. A few grounds considered by various benches of the NCLT are listed below:

1. Section 433 of the Companies Act, 2013 (the “2013 Act”) makes the Limitation Act applicable to proceedings before the NCLT: The NCLT Ahmedabad in SBI, Colombo v. Western Refrigeration (26 May 2017) and the NCLT Delhi in Deem Roll v. R. L. Steel (31 March 2017) held that although no provision of the Code makes the Limitation Act applicable to it, section 433 of the 2013 Act makes it applicable to proceedings before the NCLT. The Tribunal concluded that since NCLT was the Adjudicating Authority under the Code, the provisions of the parent statute of the tribunal would also apply to the proceedings under the Code. Accordingly, it was held that the Limitation Act would apply to proceedings under the Code.

It is pertinent to note that the NCLAT in Innoventive Industries v. ICICI Bank (15 May 2017) held that since section 424 of the 2013 Act provided for following principles of natural justice in all cases before the NCLT and the NCLAT, the same procedure would correspondingly be followed under the Code as well since the NCLT is a forum constituted under the 2013 Act.

Accordingly, following its own decision in Innoventive Industries, the NCLAT ought to have considered the applicability of section 433 of the 2013 Act (Applicability of Limitation Act to the NCLT) to the proceedings under the Code as well.

2. A ‘default’ occurs under the Code only when there is non-payment of a debt which is ‘due and payable’: The NCLT, Delhi in Prowess International v. Action Ispat (15 March 2017) considered the definitions of ‘debt’ and ‘default’ under the Code and held that for the trigger of ‘default’ to kick in, the debt must be ‘due and payable’. A debt which is not recoverable for a valid reason in law – including on account of limitation – ceases to be an amount due and payable. Accordingly, the Limitation Act was held applicable to the proceedings under the Code.
3. Limitation Act applicable to winding up proceedings under the Companies Act, 1956 (the “1956 Act”): Under the 1956 Act, the law of limitation was held applicable to winding up proceedings initiated under section 434 of the 1956 Act. The Delhi High Court in Interactive Media v. Go Airlines (4 February 2013) interpreted ‘debt’ under section 434 of the 1956 Act as a debt ‘due and payable’. It was held that winding up proceedings under the 1956 Act cannot be used as a mechanism to recover time barred debts. It was further held that it would be a somewhat incongruous situation if a creditor is permitted to sue a company for winding up on the basis of a time barred debt, but the same creditor is handicapped in suing for its money in civil proceedings on account of the debt being time barred.

The same test of the debt being ‘due and payable’ as under the 1956 Act has been expressly retained in the definitions of ‘debt’ and ‘default’ under the Code. Therefore, there appears no reason to deviate from the settled law on this aspect of the applicability of limitation to insolvency proceedings.

At the time of this writing, it appears that Neelkanth Township and Construction Pvt. Ltd. had approached the Supreme Court against the decision of the NCLAT and the appeal has been dismissed. Clarification on this issue by the Supreme Court will probably have to await another opportunity.

– Ashish Virmani & Tanisha Khaitan