Applicability of the Limitation Act to the Insolvency and Bankruptcy Code

[Vivek Kumar is a Legal Manager at Alchemist Asset Reconstruction Company Limited and Akshay Sharma a 5th year law student at the National University for Study and Research of Law, Ranchi]

The applicability of the Limitation Act, 1963 has been a well-traversed issue since the inception of the Insolvency and Bankruptcy Code, 2016 (IBC). The IBC was introduced as a complete code, with the object of reorganisation and resolution of corporate persons, partnership firms and individuals in a time bound manner for the maximization of value of assets of such persons and to promote entrepreneurship, availability of credit and to balance the interests of all the stakeholders.

Limitation and IBC

The issue of applicability of the Limitation Act to proceedings under the IBC emerged as a moot point. The same was initially dealt with by the National Company Law Appellate Tribunal (NCLAT) in Speculum Plast Private Limited v. PTC Techno Private Limited and in Neelkanth Township and Construction Pvt. Ltd. v. Urban Infrastructure Trustees Ltd wherein it was held that the Limitation Act will not be applicable to proceedings under the IBC. However, this position left litigants with many unanswered queries. Furthermore, having realized the ambiguity with respect to the applicability of the Limitation Act upon proceedings under the IBC, the Parliament inserted section 238A to the IBC through the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 that took effect on 6 June 2018. This states that the provisions of the Limitation Act will apply to proceedings under the IBC.

Furthermore, the Supreme Court in of B.K. Educational Services Private Limited v. Parag Gupta and Associates clarified the applicability of the Limitation Act and held:

27…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, 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. [emphasis added]

Conflicting Views

The Supreme Court in Gaurav Hargovindbhai Dave v. Asset Reconstruction Company (India) Ltd. held that the proceedings under section 7 of the IBC are “an application” and not “suits”; thus they would fall within the residuary article 137 of the Limitation Act and the right to apply will arise from the date of default. It was again reiterated by the Supreme Court in Jignesh Shah v Union of India that the right to apply under the IBC will be from date of default and not from the date of enactment of the IBC, i.e., 1 December 2016.

While the abovementioned judgments were pronounced by the Supreme Court on 18 September 2019 and 25 September 2019 respectively, the NCLAT has once again stoked uncertainty by passing a judgment on 26 September 2019, whereby in B. Prashanth Hegde v. SBI it applied article 137 and held that the right to apply under section 7 of IBC will accrue on 1 December 2016, i.e., when IBC was enacted. The NCLAT also held that since the banks have initiated proceedings under provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act), the period of limitation will also be governed by articles 61 and 62 of the Limitation Act. However, this reasoning of the NCLAT is contrary to the observation of the Supreme Court in Jignesh Shah, wherein the Court stated that only the date of default will be relevant for the purpose of winding up proceedings (and, by extension, to IBC applications). Having noticed the divergent view of the NCLAT, the Supreme Court in Sagar Sharma v. Phoenix ARC Pvt. Ltd. has made it loud and clear that the judgment passed by the Supreme Court should be taken in letter as well as spirit and hence NCLAT cannot, time and again, apply article 62 to the applications made under the IBC.

However, even after such remarks from the Supreme Court, as recently as on 3 December 2019, the NCLAT in Sesh Nath Singh v. Baidyabati Sheoraphuli Cooperative Bank Ltd held that time spent in proceedings under the SARFAESI Act can be condoned by the virtue of section 14 of the Limitation Act for the purpose of filing an application under the IBC. It is pertinent to mention here that under section 14 only such time can be condoned that was spent in bona fide proceedings due to defect of jurisdiction. The NCLAT failed to notice that proceedings under the SARFAESI Act before the enactment of IBC are not without defect of jurisdiction and, therefore, the same cannot be used to condone the delay for filing a petition under IBC.

Interpretation regarding Art.137, Limitation Act

Only when an application is not covered by any other section will article 137 of the Limitation Act apply. In addition, with regard to the applicability of article 137 to arbitration proceedings, the Supreme Court held that the right to apply will emanate from date on which the cause of action or the claim which is sought to be arbitrated first arises. Furthermore, the NCLAT in Smruti Shreyans Shah v. Lok Prakashan Limited itself held that unless there is a continuing cause of action, the right to apply will have to be construed as having accrued when the first violation of right occurs or is discovered.

Therefore, it can be concluded that the right to apply under article 137 will be from the date of default rather the date of enactment of the statute. Applying article 137 from the date of enactment of the IBC will amount to reversing the existing jurisprudence regarding the applicability of article 137 as the enactment of a code cannot led to the revival of the lost rights.

Conclusion

In view of the catena of judgements passed by the NCLAT and Supreme Court, it can be ascertained that article 137 will apply to proceedings filed under the IBC. However, the only point that  arises for the consideration is the interpretation of the term “when the right to apply accrues”, since the Supreme Court and NCLAT have adopted opposite views regarding the same. However, the Supreme Court has affirmed that the right to apply accrues from the first date of default irrespective of the fact that the IBC was enacted in 2016. It is also pertinent to mention that the Supreme Court in the abovementioned judgments set aside the decision of the NCLAT on the applicability of article 137 from the date of enactment of IBC, but yet the NCLAT is applying and referring to different provisions of Limitation Act such as section 14 and article 61 to effectively bypass the ruling of the Supreme Court one way or another.

– Vivek Kumar & Akshay Sharma

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