Supreme Court on the Applicability of the Limitation Act to Insolvency Proceedings

[Surbhi Jaju and Pulkit Chaturvedi are associates at Lakshmikumaran and Sridharan Attorneys]

Introduction

The conundrum of whether the Limitation Act, 1963 (‘Limitation Act’) applies to the proceedings initiated under the Insolvency and Bankruptcy Code, 2016 (‘Code’) has confused the stakeholders since the inception of the Code. The Code was formulated primarily to provide a mechanism to creditors who have been unable to recover their debts and to resolve the procedural and systematic inefficiencies pertaining to the insolvency process in India. The insolvency resolution in the pre-Code era dealt with challenges of delay, inadequacy and ineffectiveness. The objective laid down in the preamble of the Code primarily indicated towards settling these concerns and constituting a robust mechanism for recovery of debts and balancing the interests of all stakeholders. However, the issue with respect to the applicability of the Limitation Act on Code has been well debated and has now been settled by the Supreme Court through its judgment in BK Educational Services Private Limited v. Parag Gupta and Associates.

The confusion on the issue has been caused due to various conflicting decisions of National Company Law Tribunal (“NCLT”) and the National Company Law Appellate Tribunal (“NCLAT”) that had led to contrasting views. In order to elucidate and ascertain the role of the Limitation Act in matters of Code and to clear the prevailing confusion, the Insolvency and Bankruptcy (Second Amendment) Act, 2018 expressly made the Limitation Act applicable to the proceedings or appeals before the NCLT, NCLAT, Debt Recovery Tribunal and the Debt Recovery Appellate Tribunal by introducing section 238A to the Code. This stance has now been further reaffirmed by the Supreme Court in BK Educational where, while deliberating on this issue, the Court affirmed the application of the Limitation Act along with providing it retrospective application.

The Supreme Court observed that from the commencement of Code the legislature intended to apply limitation period on applications instituted under sections 7 and 9 of the Code. It interpreted clarificatory intention from the 2018 amendment that expressly made the Limitation Act applicable to the Code, which meant that debts which have become time barred cannot be claimed afresh through the insolvency route. The Court issued this ruling while relying upon and discussing the provisions of the Companies Act 2013 (‘Companies Act’) and the Insolvency Law Committee’s Report (‘Report’) apart from section 238A of the Code constituting the basis of its finding.

The Companies Act, 2013

In the judgment authored by R.F. Nariman J, the Supreme Court pointed out that the Companies Act makes the Limitation Act applicable to the NCLT and the NCLAT under section 433. The adjudicating authority, i.e., the NCLT and the NCLAT are established to discharge such powers and functions that are conferred on it not merely under the Companies Act but also under any other law for the time being in force. Additionally, section 434(1)(c) of the Companies Act provided that all the proceedings pending under the Act before various High Courts and District Courts including winding up proceedings pending immediately before such date shall be transferred to the NCLT. Hence, section 433 read together with section 434 of the Companies Act implied that the Limitation Act is applicable to all winding up cases which moved from various High Courts to NCLTs after the Code came into force. It also connoted that the Limitation Act shall be applicable to all the cases instituted under the Code as the forum for adjudication under the Code is NCLT.  

Insolvency Law Committee’s Report

Relying on the Insolvency Law Committees Report, Nariman, J observed that the intent behind formulating Code was not to provide new lease to time barred debts, but instead to provide mechanisms to recover and settle the debts that have become ‘due and payable’. The Report discusses at length the nature of debts and reiterates the point that when a debt is barred by time, the right to remedy is also time barred (Punjab National Bank and others v. Surendra Prasad Sinha AIR 1992 SC 1815). The Report also laid down the issues that non-application of the Limitation Act creates and observed the following problems that arise

• It reopens the right of financial and operational creditors holding time barred debts under the Limitation Act to file for corporate insolvency resolution process which is triggered when the default on debt is above INR one lakh. The purpose of law of limitation is toprevent disturbance or deprivation of what may have been acquired in equity and justice by long enjoyment or what may have been lost by a party’s own inaction, negligence or latches (Rajinder Singh v. Santa Singh AIR 1973 SC 2537). Though Code is not a debt recovery law, the process of corporate insolvency is triggered on ‘default in payment of debt’ and thus non-application of limitation law acts in adversity to the general law; and
• It reopens the rights of claimants to file time barred debts as a part of the resolution plan. Such resolution plan restructuring time barred debt is against the essence of Code and non-compliant to existing laws.          

The Report further noted that although the Limitation Act should be made applicable to section 7 and section 9 applications under the Code and relevant entry under the Limitation Act shall be decided on case to case basis. Section 10 applications initiated by the corporate debtor itself under the Code are outside the purview of the application of the Limitation Act as these are initiated by the applicant for its own debts.

Retrospective Application of Section 238A

In BK Educational, the Supreme Court, when confronted with the question of whether section 238A pertaining to limitation introduced in the 2018 amendment to the Code has retrospective applicability, deliberated extensively on the views adopted by NCLT and NCLAT and the arguments put forward by counsel for the parties.

Counsel appearing on behalf of the appellants argued that the law of limitation pertaining to the domain of procedure must be held to apply retrospectively in any case. To substantiate their arguments, counsel relied upon several judgments of the Supreme Court (Allied Motors (P) Limited v.CIT (1997) 3 SCC 472; MP Steel Corporation v.CCE (2015) 7 SCC 58; SBI v. V Ramakrishnan (2018) SCC Online SC 963). It was argued that it could never have been the intention of the legislature to resuscitate stale and dead claims that were barred by limitation leading to taking over the management of the corporate debtor which might ultimately result in winding of the company. For the introduction of section 238A in the Code to serve its purpose, retrospective application was necessary as otherwise applications to resurrect time barred claims would have to be allowed as not being governed by law of limitation.

On the other hand, counsel appearing on behalf of the respondents argued that the Code should also prescribe to the general norms. The general law is that every statute is prospective unless it is expressly or by necessary implication made to have retrospective application.

The Supreme Court held that limitation law being procedural in nature should be applied retrospectively except where law of limitation revives a dead remedy. The context of the exception is that the new law of limitation should not provide for a longer period of limitation than what was provided earlier before amendment. Nariman, J observed that if the retrospective applicability of the Act is not applied, a creditor can trigger the Code for a debt that is time barred which cannot be the intention of the legislature. He further observed that the expression ‘debt due’ used in the Code would obviously only refer to debts that are not time barred and which has already been held in the case of Innoventive Industries v. ICICI Bank & Anr.  

Conclusion

The Supreme Court arrived at the conclusion that the Limitation Act is applicable to applications that are filed under sections 7 and 9 of the Code and that too from the inception of the Code, i.e. from 2016. The Court observed that article 137 of the schedule to the Limitation Act would therefore be immediately attracted and the ‘right to sue’ will accrue when a default occurs. If the default occurs three years prior to the date of filing of the application by the financial or operational creditor, such application would be barred under article 137 of the schedule to the Limitation Act, except in those cases wherein, through the applicability of section 5 of the Limitation Act, such delay can be condoned.

In our view, the Supreme Court in BK Educationalhas further pronounced the already laid down common law maxim “vigilantibus et non dormientibus jura subveniunt”, which means the law helps those who are vigilant and not those who sleep over their rights. Through the judgment, it is clearly laid down that a creditor that has slept over its rights and has allowed the limitation period to lapse cannot rely upon the Code to recover its time barred, dead and stale debts. This judgment and reasoning of the Supreme Court is important as it clears the prevailing confusion regarding applicability of Limitation Act and authoritatively lays a precedent that is binding on the NCLT and NCLAT. 

– Surbhi Jaju & Pulkit Chaturvedi