[Mihir Modi is an Associate with PSL Advocates and Solicitors in Mumbai]
According to the Limitation Act 1963 (‘the Limitation Act’), there is a set time limit for filing appeals and instituting lawsuits in various courts. The Limitation Act is based on the idea that there must be a strict time limit for bringing appropriate actions in the courts. In doing so, it protects only the diligent litigants, not those careless about their rights. The court does not show indulgence if a creditor seeks redress from the court after the stipulated statutory period of limitation has passed. Debt is covered by the Limitation Act, and after the prescribed limitation period has passed, the debt becomes time-barred. However, there are several situations where time-barred debt shall still remain active. Time-barred debts become active upon a promise to pay them, if certain conditions are met. This article discusses those conditions and the effect of acknowledgment of time-barred debts.
What is a Time-Barred Debt?
Debt is defined under section 3(11) of the Insolvency and Bankruptcy Code 2016 as, “a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt.” Thus, debt is a liability or an obligation that a person owes to another person and which is claimed by that person. This includes both financial debt as well as operational debt. Time-barred debt means a debt for which the time period prescribed in the applicable statute of limitations has expired.
Section 18 of the Limitation Act, 1963
As per plethora of decisions passed by courts and tribunals, any application for initiating insolvency against a debtor is time-barred as per article 137 of the Limitation Act, where the default has occurred more than three years prior to the filing of such proceedings. But in the cases where the debtor makes an acknowledgement of their liability towards the creditor, during the limitation period, it gives rise to a fresh limitation period to the creditor from the date of such acknowledgement. This is encompassed under Section 18 of the Limitation Act.
Section 25(3) of the Indian Contract Act, 1872
In the cases where there is no acknowledgement of debt by the debtor within the prescribed period and the debt becomes time-barred, such debt cannot be claimed by the creditor. However, it is equally open to the debtor to renounce or waive the right conferred on them by the law of limitation, and bind or obligate themselves afresh to discharge the debt incurred, irrespective of the fact that the debts had become barred by limitation on the date when a fresh undertaking is given to the creditor to pay off the debt. section 25 of the Indian Contract Act, 1872 (‘the Contract Act’), titled ‘Agreement without consideration, void, unless it is in writing and registered, or is a promise to compensate for something done or is a promise to pay a debt barred by limitation law’, provides under sub-section (3), that an agreement made without consideration is void, unless “it is a promise, made in writing and signed by the person to be charged therewith, or by his agent generally or specially authorized in that behalf, to pay wholly or in part a debt of which the creditor might have enforced payment but for the law for the limitation of suits. In any of these cases, such an agreement is a contract.” It is pertinent to note that the illustration (e) to the corresponding section is as follows: “(e) A owes B Rs. 1,000, but the debt is barred by the Limitation Act. A signs a written promise to pay B Rs. 500 on account of the debt. This is a contract.”
The legislative intent behind adding exception to section 25 has been discussed by S. Swaminathan in the article titled ‘Eclipsed by Orthodoxy: The Vanishing Point of Consideration and the Forgotten Ingenuity of the Indian Contract Act, 1872’ (Asian Journal of Comparative Law, 12 (2017), pp. 141–165). A bare perusal of Section 25 of the Contract Act shows that each of the sub-sections refer to an agreement which constitutes a contract and thus, a creditor can enforce such a contract against the debtor for claiming the amounts agreed to be paid by the debtor under the contract.
The conditions, which are necessary to constitute a promise under section 25(3), have been laid down in Kasturchand Jiwaji v. Manekchand Devchand, which read that “the conditions necessary to make it a promise within section 25(3) of the Contract Act are that it should be made in writing; be signed by the persons to be charged therewith; and be a promise to pay wholly or in part a debt, of which the creditor might have enforced payment but for the law for the limitation of suits. He does not say that the writing itself must purport to pay such a debt, if in fact the writing was passed for the payment of such debt.”
The enforceability of the contractual obligation under this provision has also been a subject matter of several judgements. To avoid prolixity, one may refer to Kishen Lal v. Gohi (AIR 1938 Lah 757), where it was held that when a promise falls under section 25(3) of the Contract Act, it constitutes a valid agreement for the purpose of enforcing the right accruing under it, whether or not the debts covered are within limitation.
It is, no doubt, true that the Limitation Act provides a certain period during which alone a creditor is entitled to institute action against the debtor for recovery of the debt, and if the creditor fails to institute the action within the time allowed to the creditor by law, the debtor gets a vested right and is afforded opportunity to resist the action of the creditor on the ground that the claim is barred by limitation.
Though a debt might have become time-barred on the date when a debtor entered into a fresh obligation with the creditor to pay the liability, the said obligation, if it satisfies the conditions laid down in section 25(3) of the Contract Act, will amount to a fresh contract in the eye of law, and can certainly be made the basis of an action for recovering the amount promised and acknowledged therein by the debtor. While section 18 of the Limitation Act deals with an acknowledgment, made by a debtor within the period of Limitation, the contractual obligation which a debtor enters into under the terms of section 25(3) of the Contract Act has no reference whatsoever to the acknowledged debt being within time or not. In that sense, the provision contained in section 25(3) is far wider in scope than the acknowledgment contemplated in section 18 of the Limitation Act. The contract entered into under section 25(3) of the Contract Act is an independent and enforceable contract and has no reference to the debt acknowledged under the contract being a live one, in the sense that it had not become barred under the law of limitation.
Applicability of Section 25(3) of the Contract Act
Recently, the interplay between section 25(3) of the Contract Act and section 18(1) of the Limitation Act came up for consideration before the Supreme Court in the case of Kotak Mahindra Bank Limited v. Kew Precision Parts Private Limited, wherein the Court laid down the conditions which must be satisfied to invoke section 25(3) of the Contract Act. The conditions laid down were as follows: first, it must refer to a debt, which the creditor, but for the period of limitation, might have enforced; second, there must be a distinct promise to pay such debt, fully or in part; finally, the promise must be in writing, and signed by the debtor or his duly appointed agent.
The Court further observed that under section 25(3) of the Contract Act, a debtor can enter into an agreement in writing, to pay the whole or part of a debt, which the creditor might have enforced, but for the limitation of a suit in law. A written promise to pay the barred debt is a valid contract. Such a promise constitutes novation and can form the basis of a suit independent of the original debt, “for it is well settled that the debt is not extinguished, the remedy gets barred by passage of time” as held by the Supreme Court in Bombay Dyeing & Mfg. Co. Ltd. v. State of Bombay.
Relying on Kotak Mahindra Bank Limited v. Kew Precision Parts Private Limited (supra), in Manju Aggarwal v. Prayag Polytech Private Limited Delhi High Court held that a written promise to pay a time barred debt is a valid contract in law and such a promise can form an independent basis for a suit. It was further observed that the settlement agreement between the parties in that case qualified as an agreement under Section 25(3) of the Contract Act inasmuch as it was a clear and unconditional promise on behalf of the defendants to pay a certain sum of money to the plaintiff. On the face of it, the agreement was signed by all the defendants wherein they had admitted their liability to pay the loan amount to the plaintiff.
Section 25(3) of the Contract Act applies only where the debt is one which would be enforceable against the debtor, but for the law of limitation. Where a debt is not binding on the debtor for other reasons, and consequentially not enforceable against the debtor, there is no question of applicability of Section 25(3). There exists a distinction between acknowledgment under Section 18 of the Limitation Act, 1963, and a promise within the meaning of Section 25 of the Contract Act. Both, the acknowledgment and the promise, respectively, in writing and signed by a party or their authorised agents, have the effect of resetting the clock of limitation. In the case of Sri Kapaleswarar Temple v. T. Tirunavukarasu is was observed that there is, however, a distinction between the nature of acknowledgement by a debtor under the respective provisions, inasmuch as, while both have the effect of giving a fresh lease of life to the enforceability of debt, an acknowledgement under Section 18 of the Limitation Act must be made on or before the date of expiry of the limitation period, whereas by its very nature a promise under Section 25(3) of the Contract Act will only be made after expiry of limitation period. In other words, a promise under Section 25(3) of the ICA made after the limitation period expires, would give a cause of action to the creditor to enforce the claim, notwithstanding the initial period of limitation, and the debt cannot be said to be barred.
– Mihir Modi