Standards for Application of the Limitation Act to the IBC

[Karan Kamath is an Advocate practicing at Mumbai]

In the short span of existence of the Insolvency and Bankruptcy Code (“Code”), the Supreme Court has been called upon on a considerable number of occasions to decide whether the Limitation Act, 1963 (“Act”) is applicable to proceedings under the Code. On March 22, 2021, in another of such decisions, the Supreme Court inched towards settling the extent of applicability of the Act to the Code. The moot point in Sesh Nath Singh v. Baidyabati Sheoraphuli Coop. Bank Ltd. was whether a financial creditor could have initiated proceedings under the Code seven years after the debt had become due, when the delay was on account of previous proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (“SARFAESI Act”). The National Company Law Appellate Tribunal (“NCLAT”) had held that the proceedings were not barred by limitation, effectively condoning the delay under section 14 of the Act. The Court approved the NCLAT’s order, holding that the SARFAESI proceedings had been correctly excluded by justified application of the Act.

The Court’s judgment is indeed akin to other disputes relating to the applicability of limitation that had previously reached the Supreme Court. But, in addition to reiterating the Act’s applicability, Sesh Nath Singh moves ahead to try and establish the nature of that application. It could be argued that the judgment has effectively set the interpretational standards for future references.

The Act and the Code

The applicability of the Act to the Code is a tumultuous story. Although intended to be and promoted as a ‘complete code’, the Code was enacted without any provisions on limitation. A few benches of the National Company Law Tribunal (“NCLT”) initially opined that the Act applied to the Code proceedings, as such application had not been expressly excluded anywhere in the Code’s text. However, the NCLAT took the contrary view that, being a ‘self-contained’ ‘complete code’, the Code excluded the Act’s application. This was not an exceptional view to take, for ‘self-contained’ statutes have been previously held as free from the Act’s application. But, with respect to the Code, the Insolvency Law Committee and the Parliament deemed that enabling the Act’s application was desirable. To nullify the NCLAT’s interpretation’s effect, a clarificatory amendment soon followed in 2018, introducing section 238A to the Code. The provision stated that ‘as far as may be’ the Act applied to proceedings under the Code.

As a few Supreme Court judgments following the amendment note, the NCLAT had interpreted section 238A so widely that otherwise unjustifiable delays had been effectively condoned by it. For example, in Sagar Sharma v. Phoenix ARC Pvt. Ltd. and Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Pvt. Ltd., it had condoned delays as long as 12 years, based on the peculiar interpretation that the three-year limitation period commenced when the Code came into effect in 2016, irrespective of when the debt became due. Similarly, in Radha Exports (India) Pvt. Ltd. v. K. P. Jayaram, the NCLAT had refused to entertain a plea that the proceedings were barred, on the oracular ground that limitation cannot be argued in the alternative.

It is noteworthy that in Sesh Nath Singh a ground of appeal contended that the NCLAT order was contrary to a five-member decision of the NCLAT in Ishrat Ali v. Cosmos Cooperative Bank Ltd. This decision had held post-amendment that a proceeding under the SARFAESI Act was not a ‘civil proceeding’ and, therefore, could not be excluded while calculating the period of limitation. Contestably, the phrase ‘civil proceeding’ has a wide meaning and it undoubtedly includes all proceedings that effect civil rights and are not otherwise criminal in nature. Save for the fact that it excludes an otherwise live claim on limitation grounds instead of vice versa, the order in Ishrat Ali is as enigmatic as the others aforementioned.

‘As far as may be’

Like the Court’s previous judgments, apart from holding the NCLAT’s view (in Ishrat Ali) unsustainable in law and reemphasising the mere presence of section 238A, Sesh Nath Singh moves forward to interpret the provision in detail. As aforesaid, it makes the Act provisions ‘as far as may be’ applicable to the Code. The phrase similarly occurs in the Companies Act, 2013, where section 433 makes the Act ‘as far as may be’ to tribunal proceedings. In Bengal Chemists and Druggists Association v. Kalyan Chowdhury, this has been constructed to mean ‘to the extent possible’, which in that case meant enforceable unless expressly barred.

In Sesh Nath Singh, the Court similarly concludes that all provisions of the Act apply to the Code ‘to the extent feasible’. The Code does not contain any categorical bar on the application of section 14 and, therefore, it would necessarily apply to proceedings under the Code. In a way, this conclusion reiterates the opinions expressed by some NCLT benches in the early days of the Code. Obiter observations in Sesh Nath Singh further note that the Code does not prohibit application of sections 6 and 18 of the Act which, therefore, are squarely applicable. Nonetheless, the Act should not apply in toto to Code proceedings. The Court correctly contemplates that the phrase ‘as far as may be’ showcases some reluctance to apply the Act verbatim. The application is limited by the considerations of harmonious interpretation between the statutes and of the Parliament’s object in introducing section 238A.

This interpretation has two noteworthy characteristics: firstly, as the Court puts it, the provisions of the Act do not apply if they are ‘patently inconsistent’ with the Code; and secondly, when they do apply, they are not constrained by the Act itself – a judge is enabled to contextually, purposively, and liberally interpret the provision while applying it. The only constraint in such circumstances is that the principles of the concerned provision ought to be widely followed. For example, SARFAESI proceedings are ‘civil proceedings’ but, even if they were not so, a court would be justified in excluding time spent in pursuing the same because the broad purpose of section 14 is to eliminate calculation of period exhausted in bona fide prosecution of some tangible remedy.

An interpretational standard?

In summation, Sesh Nath Singh substantially deals with the interpretation of section 238A, as much as it underscores its bare application. Moving forward from the NCLAT’s absurd interpretations in the provision’s inaugural stage, the Court has moved on to dealing with its constructional intricacies. The basic principles that the Act is broadly applicable as long as it is not ‘patently inconsistent’ with the Code, and that such application is not governed by the stringencies of the Act’s text but only by the underlying section’s objective, open the gates for creative judicial interpretation in the future. The precise nature and extent of applicability of the Act’s provisions will have to be settled by future courts, but they will find the broad principles in Sesh Nath Singh to be instructive.

Karan Kamath

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1 comment

  • Purpose of the IBC act is to Reorganize failed or about to fail businesses!!
    Once the need is recognized by perimeters given in the act are satisfied, Technicalities should give way to objectives.
    Thus if need to Reorganize exist, Reorganization should be order and Not exceptions to it!!
    Payments defaults should stare at Promoters and their Paradise should end and Someone else have an opportunity to try its hands failing which Liquadation shall be Respectable way out and not to be sneered upon!!

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