Retrospective Operation of the Limitation Act: Impact on Insolvency Proceedings

[Vaidehi Soni and Pulkit Khare are 4th year B.A., LL.B. (Hons.) students at The National University of Advanced Legal Studies, Kochi]

Background

The Insolvency Bankruptcy Code, 2016 (“Code”) allows creditors to approach the adjudicating authority, being the National Company Law Tribunal (“NCLT”), to seek a collective procedure for insolvency resolution. However, there were rising concerns before the NCLT and its appellate authority the National Company Law Appellate Tribunal (“NCLAT”) since January 2018 as to whether a debt owed to a creditor was ‘due and payable’ or not, in view of the application of the Limitation Act, 1963 (“Limitation Act”) on the Code. The Limitation Act would bar applications where default in payment of debt by the debtor was not agitated by the creditor through initiation of necessary action. The creditor would, therefore, lose the right to recovery of a time-barred debt through courts which nonetheless will remain payable.

Interestingly the Code was amended by Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 which inserted section 238A to the Code with effect from 6 June 2018. Section 238A extended the provisions of the Limitation Act to proceedings or appeals before NCLT and NCLAT.

Issue

The Code is deemed to be complete and any express or necessary exclusion of the Limitation Act should be respected.[1] Hence the omission of the Limitation Act to applications under the Code since its inception until the amendment led to a fundamental question in B.K. Educational Services Private Limited v. Parag Gupta and Associates as to whether section 238A could be given retrospective operation to the applications made under sections 7 or 9 of the Code on and from its commencement rather than the date from which section 238A took effect.[2]

 Applicability of Limitation Act to the Code prior to the Amendment?

The Supreme Court considered that the NCLT has a dual jurisdiction, which is provided under both the Companies Act, 2013 and the Code. But that led to a contentious issue of whether application of jurisdiction exercised by NCLT under the Companies Act can be extended to prevalent matters relating to the Code. The Court opined that the Companies Act to be cognate to the Code and its provisions shall be applicable to the insolvency proceedings. The Court in this light considered the limitation provision under section 433 of the Companies Act.

433. Limitation. —The provisions of the Limitation Act, 1963 (36 of 1963) shall, as far as may be, apply to proceedings or appeals before the Tribunal or the Appellate Tribunal, as the case may be.”

(emphasis supplied)               

On a perusal of section 433 it could be safely deduced that the Limitation Act was applicable to the proceedings before the tribunal. Such proceedings shall be governed by the procedure as contemplated under the Companies Act.  Section 424 of the Companies Act provides for the procedure of exercise of power and functions before the tribunals (inclusive of NCLAT) which is not only limited to the Companies Act but also extends to the Code. Accordingly, the limitation provision of the Companies Act would be applicable to the insolvency proceedings before the tribunal.

Additionally, section 434(1)(c) of the Companies Act provides that all proceedings relating to compromise, arrangement, reconstruction and winding up of the companies that were pending before the District Court or the High Court shall be transferred to the tribunal. Since prior to the stage of transfer winding up proceedings were “proceedings before the Courts”, each of them was directly governed by the Limitation Act and upon transfer of such proceedings from courts to the tribunal, it would be asinine to not apply the Limitation Act through implication. Therefore, rule 5 of the Companies (Transfer of Pending Proceedings) Rules, 2016 stipulates that the parties shall be given additional time[3] for submitting fresh application or documents according to sections 7, 8, or 9 of the Code for transferring pending proceedings for application of the Code to proceedings before the tribunal.

Role of Section 238A: Clarificatory and Retrospective?

The Apex Court in B.K. Educational Services considered the issue whether the law of limitation was procedural and could be given retrospective effect. For this the Court relied on Thirumalai Chemicals Ltd. v. Union of India (2011) wherein it held that Limitation Act was procedural in nature and a statute merely procedural shall be construed as retrospective. The Thirumalai decision nonetheless added a rider to the retrospective operation that the new law of limitation cannot revive a dead remedy.

Reliance can also be placed on the Insolvency Law Committee Report on its reasons as to why section 238A was necessitated under the Code:

Given that the intent was not to package the Code as a fresh opportunity for creditors and claimants who did not exercise their remedy under existing laws within the prescribed limitation period, the Committee thought it fit to insert a specific section applying the Limitation Act to the Code.

The Committee emphasized that when a debt is barred by time, the right to a remedy is time-barred[4] and therefore it is in line with the objective of introduction of section 238A of the Code which is not to enliven the dead/ stale claims that have been lost by a party’s own inaction, negligence or laches.[5] Therefore, the insertion of section 238A would not serve its end unless it is construed as being retrospective in nature.

“Debt should be due and payable” Triggering the Code

The definition of “default” in section 3(12) of the Code uses the expression “due and payable” in relation to the whole or part of a debt that is not paid by the corporate debtor. While analyzing when a debt has become ‘due’, the Court relied on State of Kerala v. V.R. Kalliyanikutty (1999), which held that the exact meaning of the word “due” will depend upon the context in which that word appears. The Court observed that an expression ‘due and payable’ under section 3(12) of the Code refers to a ‘default’ arising out on non-payment of a debt which is due in law.

Accordingly, the Court considered the definitions of “financial debt” and “operational debt” upon default of which section 7 or 9 of the Code could be triggered respectively. The Court relied on its judgment in Innoventive Industries Ltd v. ICICI Bank Ltd (2017) which observed in the context of section 7 of the Code that a debt may not be due if it is not payable in law or in fact. As regards section 8 or 9, section 8(2)(a) provides that the corporate debtor on receipt of demand notice shall bring to the notice of operational creditor the existence of any dispute. In such a case, the “dispute” or “pendency of a suit or arbitration proceedings” would necessarily bring in the Limitation Act, for if a suit or arbitration proceeding is time-barred no claim will be enforceable through the courts or tribunals.

Therefore, for triggering an application under section 7 or 9 of the Code, a default on any financial debt or operational debt respectively shall be due and payable in law. Otherwise triggering the Code through any debt not payable in law i.e. time-barred debt would lead to absurdity.

Concluding Remarks

The Supreme Court in its ruling in B.K. Educational Services has clarified that the claims of the creditors being time-barred will not be resurrected under the Code. Spelling out the objective of the Limitation Act, it held that non-agitation of claim within a time frame i.e. three years stipulated under article 137 of the schedule to the Limitation Act will bar the remedy alone and not destroy the right. However, to come to this conclusion the Court went behind the intention of section 238A in the Code and apprised the application of the Limitation Act to the Code. The scope of section 238A, although retrospective, was indeed an issue which sought immediate redressal since the triggering of the Code through any time-barred debt would have led to a colourable exercise for recovery of stale debt claims.

Vaidehi Soni & Pulkit Khare

[1] See Ravula Subba Rao and another v. The Commissioner of Income Tax, Madras, (1956) S.C.R. 577.

[2] Since 01.12.2016 till 06.06.2018

[3] So that the Claims are not barred by Limitation Act, 1963.

[4] See Punjab National Bank and others v. Surendra Prasad Sinha, AIR 1992 SC 1815.

[5] See Rajinder Singh v. Santa Singh, AIR 1973 SC 2537.

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