Applicability of the Limitation Act to Insolvency Proceedings: A Critical Analysis

[Madhumitha Srinivasan is an Associate at Advaya Legal and practising in the Bombay High Court. The views expressed are personal.

An earlier post on the topic is available here]

In a decision passed by the National Company Law Appellate Tribunal (NCLAT) in Black Pearl Hotels Pvt. Ltd. vs. Planet M Retail Ltd. (judgment dated 17 October 2017), it has been observed that the right to apply under the Insolvency and Bankruptcy Code, 2016 (the Code) would accrue only on 1 December, 2016 when the Code came into force. The NCLAT has referred to Article 137 of the Schedule to the Limitation Act, 1963 to arrive at the conclusion that the limitation for filing applications under the Code would commence only from December 2016 and therefore the debt could not have been barred by limitation.

Facts in brief

In Black Pearl Hotels Pvt. Ltd., the National Company Law Tribunal (NCLT), Mumbai (judgment dated 4 May 2017) observed that the claims covered debit notes raised from November 2011 to March 2012; and the Arbitration Application filed by the Operational Creditor under section 11 of the Arbitration and Conciliation Act, 1996 having been dismissed on 4 March 2014 without any liberty, the debts were time barred.

The NCLAT, while setting aside the Judgment of the NCLT, observed that in the event the Limitation Act was held to be applicable to proceedings under the Insolvency Code, by virtue of Article 137, the same would commence only from December 2016. On this basis, the NCLAT proceeded to hold that the application was filed within limitation and remitted the case back to the NCLT for admission.

Views of the Tribunals

The question of applicability of limitation period to proceedings under the Code arose in various proceedings before the NCLT, some of which are as follows:

(a)  In Prowess International Private Limited vs. Action Ispat and Power Private Limited (judgment dated 15 March 2017, NCLT Principal Bench), though the Operational Creditor was able to show that the audited financial statements of the Corporate Debtor reflected outstanding dues, there was nothing on record to suggest that the debts due for supplies made in the year 2012 were admitted and / or acknowledged by the corporate debtor in its balance sheet. Therefore, the petition was dismissed on the ground that the claim was time barred.

(b) The Ahmedabad Bench of the NCLT also seems to favour the view that insolvency proceedings cannot be initiated on the basis of a claim which is not legally recoverable as on such date, as observed in the case of State Bank of India, Columbo vs. Western Refrigeration Private Limited (judgment dated 26 May 2017).

(c) The Mumbai Bench of the NCLT, in the widely discussed case of Urban Infrastructure Trustee Limited vs. Neelkanth Township and Construction Private Limited (judgment dated 21 April 2017) observed that an acknowledgement of debt in the financial statements of the corporate debtor (though a qualified admission that the debt was in dispute) was sufficient to trigger a fresh period of limitation from the date of such acknowledgment.

The judgment was thereafter challenged before the NCLAT, which categorically held in its judgment dated 11 August 2017, that the Limitation Act was inapplicable to proceedings under the Code. The reasoning of the NCLAT was that proceedings under the Code were not for recovery of claims and that if there was a default in repayment of debt including interest, having continuous course of action, the claim cannot be said to be barred by limitation.

An appeal before the Supreme Court was disposed off by way of an order dated 23 August 2017 leaving open the question of applicability of a limitation period to the Code.

(d) It is interesting to note that in a more recent judgment of the Mumbai Bench of the NCLT in Machhar Polymer Pvt. Ltd. vs. Sabre Helmets Pvt. Ltd. (judgment dated 3 October 2017) the question that arose for determination was whether an application could be admitted when one of the invoices was time barred at the time of preferring such application. The NCLT, referring to the observations made by the NCLAT in Neelkanth Township, observed that the cause of action under the Code was the existence of a debt and the occurrence of a default. A further reference was made to section 433 of the Companies Act, 2013 which makes the Limitation Act applicable to proceedings before the NCLT and NCLAT. It also observed that winding up proceedings under the erstwhile Companies Act, 1956 could not be filed on the basis of time barred debts.

Critical Analysis

Though the Code does not make any direct reference to the Limitation Act, section 60(6) of the Code, which excludes applicability of the Limitation Act during moratorium, seems to indicate that it was always the intent of the legislature to make the Limitation Act applicable to proceedings under the Code.

Section 433 of the Companies Act, 2013 makes the Limitation Act applicable to proceedings before the NCLT/NCLAT. The adjudicating authority for the purpose of initiating corporate insolvency resolution process under the Code is the NCLT, with the NCLAT being the appellate authority. Therefore, it can be safely concluded that the NCLT and the NCLAT are expressly bound by the provisions of the Limitation Act for adjudicating proceedings initiated under the Code.

Further, as rightly observed in the case of Machhar Polymers, the courts have in a catena of decisions reiterated that a claim which is time barred cannot be made cause of action for initiating winding up proceedings, although such proceedings are not for recovery of debt (Interactive Media and Communication Solution Private Limited vs. Go Airlines Limited 2014 SCC OnLine Del 6862).

It is submitted that inapplicability of Limitation Act to insolvency proceedings would frustrate the very object of the Code and open floodgates for petitions under the Code. Though it is true that Limitation Act does not take away the right but only bars the remedy, it is also true that a litigant cannot sleep over his rights and enforce the same belatedly, in a manner that is prejudicial to the rights of the other party. Therefore, a claim that is otherwise not enforceable in law for reason of it being time barred cannot be a cause of action for initiating insolvency resolution process under the Code.

– Madhumitha Srinivasan

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