Applicability of the Limitation Act to the IBC: The Curious Case of Veer Gurjar

[Yashika Gupta is a 5th year B.A., LL.B. (Hons.) student at Hidayatullah National Law University, Raipur]

On 14 August 2020, the Supreme Court (“SC”), yet again, cleared the air on the applicability of the Limitation Act, 1963 (“Limitation Act”) to the Insolvency & Bankruptcy Code, 2016 (“the Code”). In Babulal Varsharji Gurjar v. Veer Gurjar Aluminium Industries Pvt. Ltd., it categorically ‘disapproved’ the National Company Law Appellate Tribunal’s (“NCLAT”) judgment and ruled in favor of the Corporate Debtor (“CD”) holding the application filed by the Financial Creditor to be time-barred under Article 137 of the Schedule to the Limitation Act.

In this post, the author argues that the decision rendered by the SC fails to determine whether entries of liability drawn in balance sheet amounts to acknowledgment of debt in order to revive the limitation period under section 18 of the Limitation Act. The author also points out the divergent opinions of the NCLAT in similar cases that have contributed to the existing inconsistencies manifold.

Facts of the case

In the present case, the CD entered into various credit facilities agreement with different banks in the year 2007 and subsequently secured the loans in favor of the lenders by way of mortgage. Unable to repay the debt obligations, the company’s loan account was rendered Non Performing Asset (“NPA”) by the Corporation Bank and Indian Overseas Bank on 8 July 2011 and on 5 August 2011 respectively. Thereafter, on 30 March 2013, the corporation bank assigned the bad debts to JM Financial Assets Reconstruction Company Ltd (“ARC”) who then filed an application under section 7 of the Code on 21 March 2018, being subsequently admitted by the National Company Law Tribunal (“NCLT”).

The order of NCLT was then challenged before the NCLAT on the ground of the debt being time-barred under Article 137 of the Schedule to the Limitation Act. However, NCLAT by its impugned order dated 14 May 2019, refused to uphold this contention, mainly, on two grounds. First, the right to sue accrues from the date of commencement of the Code, i.e. 1 December 2016. Second, the limitation period for enforcement of mortgage liability is twelve years by virtue of Article 61(b) of the Schedule to the Limitation Act. This decision of NCLAT was then appealed before the SC.

At this point, it is important to highlight the NCLAT’s contrasting views in order to have a better understanding of the SC’s ruling.

NCLAT’s contrasting views

At the outset, it is interesting to note that the NCLAT seemingly contradicted itself in the present case. On the one hand, the NCLAT endorsed its own decision in Binani Industries Limited v. Bank of Baroda wherein it observed the non-applicability of the first division of the Limitation Act on the IBC proceedings, while on the other hand, it went ahead to apply Article 61(b) (falling under the first division) on a section 7 application.

Moreover, the two-fold rationale given by the NCLAT is not in congruity with the earlier decisions of the SC. The pattern of rendering divergent views can be traced back to the NCLAT decisions in Gaurav Hargovindbhai Dave v. Asset Reconstruction Company (India) Ltd. (2019), Jignesh Shah v. Union of India (2019) and later in Sagar Sharma v. Phoenix Arc Pvt. Ltd. (2019), wherein it consistently applied the same reasoning, as in the present case, to treat the applications and the debts within the limitation period. However, all these decisions were subsequently overruled by the SC.

Supreme Court’s ruling

However, a similar situation arose in the present case where the SC, in an attempt to bring further clarity and maintain congruity in future cases, gave an elaborative judgment by reiterating its concrete stance on the below-mentioned issues:

The ‘right to sue’ accrues from the date of ‘default’

The SC rendered the NCLAT’s view of calculating the limitation period from the date of commencement of the Code as irrelevant. It referred to the case of Jignesh Shah, wherein it held that the Code could not be used to resuscitate the time-barred claims. It further referred to a catena of decisions starting from the foundational case of B.K. Educational Services Private Limited v. Parag Gupta And Associates(2018) till the very recent case of Sagar Sharma, wherein a clear principle of law has culminated that the limitation period commences from the date of default for the applications filed under section 7 and section 9 of the Code.

Period of limitation for the application filed under section 7 and section 9 will be governed by Article 137

The SC, while referring to B.K. Educational Services, maintained that Article 137 being the residuary provision for “other applications” would govern the applications filed under section 7 or section 9 of the Code.  Further, in Gaurav Hargovindbhai Dave, the SC ruled out the applicability of Article 62 of the Schedule to the Limitation Act to section 7 application as it only applies to ‘suit’ and not to ‘application’. Going a step further, in Sagar Sharma, the Court specifically pointed out that “an application under section 7 of the Code does not purport to be an application to enforce any mortgage liability.”

Lack of observations on balance sheet as an acknowledgment of debt: A missed opportunity

The Limitation Act does not extinguish the right but only makes it unenforceable in a court of law. Section 18 of the Limitation Act aims at restoring such remedial rights of the party which were barred due to the lapse of time. It provides for an extension of the limitation period from such date on which the opposite party makes an acknowledgement of liability. The acknowledgment must be written, signed and made before the expiry of the original limitation period. By simultaneous reading of section 18 with the established principle that the limitation clock starts to tick in for a period of three years from the date of default, it can be concluded that section 18 of the Limitation Act would apply to section 7 of the Code only when acknowledgment of liability is made and signed by the debtor within three years from the date of default.

In the present case, the financial creditor claimed the revival of the limitation period on account of the acknowledgment of the loan amount continually being made by the directors in their balance sheets and annual returns from 2011 till 2017. Nonetheless, the SC refused to give the benefit of section 18 to the financial creditor, firstly, for their failure of not having made any averments or explicit suggestions regarding the acknowledgment of debts in their insolvency application and secondly, by bringing the contention at a later stage of the process. 

At this juncture, it is important to highlight that the Court, while giving its extensive judgment, failed to make any observations on whether debt amount mentioned in a duly signed balance sheet or annual returns could be taken as an acknowledgment of liability in order to revive a fresh period of limitation under section 18 of the Limitation Act.

It is worthwhile to note that, in common law countries like England[1] and Australia, the balance sheets and annual returns constitute a relevant document to trigger the acknowledgment of debt. However, the position is still quite unsettled in India due to the contrary opinions that have been canvassed by different judicial forums on the subject matter.

The SC in Mahabir Cold Storage v. CIT, Patna (1990), held that the entries in books of accounts would amount to acknowledgment, resulting in the extension of the limitation period. However, in A V Murthy v. B S Nagabasavanna (2020), the SC, without expressing any final opinion, observed that the debt amount shown in the balance sheet may amount to acknowledgment under section 18. Thus, the SC, instead of laying any concrete view, left the question open-ended, paving the way for divergent views in future cases.

Drawing the entries of debt in the balance sheet and its consequent effect was further discussed by various High Courts. The Delhi High Court in Sheetal Fabrics v. Coir Cushions Ltd. and Shahi Exports (P) Ltd. v. CMD Buildtech (P) Ltd. (2013), and the Punjab and Haryana High Court in Dainik Finance and Chit Fund Co. P. Ltd. v. Agricultural Industries (1986)  considered entries of liabilities in the balance sheet as an acknowledgment of debt under section 18.

However, the NCLAT in  Sh. G Eswara Rao v. Stressed Assets Stabilisation Fund (2020) and later in V. Padmakumar v. Stressed Assets Stabilisation Fund (SASF), dated 12 March 2020, held that drawing entries in the balance sheet or annual returns by the directors is an act of compulsion, imposed by section 92 of the Companies Act, 2013 and thus cannot be disguised as a voluntary acknowledgment of liability. While delivering these judgments, the NCLAT  did not take into account Bengal Silk Mills Co. v. Ismail Golam Hossain Ariff (1962), wherein the Calcutta High Court, addressing the similar issue, held  that “the admissions do not, cease to be acknowledgments of liability merely on the ground that they were made in discharge of a statutory duty.”

Conclusion

The absence of any clarity on considering the balance sheet as acknowledgment of debt for revival or extension of the limitation period, along with the rising NPAs, may compel the creditors to open the floodgates of litigation in order to save their claims without offering a second chance to the genuine debtors. Therefore, it becomes imperative for the SC to set an authoritative precedent to smoothen out the interplay of the Limitation Act with the Code.

Yashika Gupta



[1] Jones v. Bellgrove Properties Ltd. [1949] 2 K.B. 700

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