APPLICABILITY OF LIMITATION LAW UNDER INSOLVENCY AND BANKRUPTCY CODE (IBC)

Background:

When the Insolvency and Bankruptcy Code (“IBC” or “Code”) was introduced, it was not prescribed that what will be the applicability of limitation law on IBC matters.

The law of limitation revolves around the basic concept of barring legal actions beyond a prescribed period. The concept of limitation law widely acknowledged, in India and is governed by the Limitation Act, 1963.

Initially this issue of applicability of the Limitation Act, 1963 was 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 Private Limited v. Urban Infrastructure Trustees Limited, wherein it was held that the Limitation Act will not be applicable to proceedings under the IBC.

Amendment to substantiate applicability of Limitation Act and to remove ambiguity:

However, still the ambiguity of the applicability of limitation law in its true sense was not resolved and in light of the confusion of an explicit provision and 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 06 June 2018. This states that the provisions of the Limitation Act will apply to proceedings under the IBC.

“238A. Limitation:

The provisions of the Limitation Act, 1963 shall, as far as may be, apply to the proceedings or Appeals before the Adjudicating Authority, the National Company aw Appellate Tribunal, the Debt Recovery Appellate Tribunal, as the case may be.”

Hence, it was substantiated in clear words that the Limitation Act, 1963 is applicable to the Insolvency and Bankruptcy Code, 2016.

Whether retrospective applicability:

Now, when it is clear that the Limitation Act, 1963 is applicable, question arises that what would be the date from which this limitation period was to be determined.

Since, it has been over 3 years since the Insolvency & Bankruptcy Code, 2016 (Code) was introduced. The various amendments have made it evident that the Code is still in evolving stage. The Code aims to achieve revival of a distressed company in a time bound manner. Hence, the timeline plays a very important role in the whole process under IBC.

The Limitation Act constitutes a residuary Article, i.e., Article 137 which states that any other application for which no period of limitation is provided elsewhere in the Act, the said limitation will be considered as three years from the date when the right to apply accrues.

In many matters, the Hon’ble NCLAT held that the Act does not apply to applications made under the Code from the date of commencement (i.e. 01 December 2016) till the date on which section 238A was inserted (i.e. 06 June 2018).

This burning issue gave rise to the landmark judgment of the Hon’ble Supreme Court in the matter of B.K. Educational Services (P.) Ltd. v. Parag Gupta & AssociatesCivil Appeal No. 23988 of 2017, wherein the Apex Court held that the Limitation Act will apply to the Code on and from its very commencement i.e. 01 December 2016.

In the said matter, the Apex court (SC) appreciated that the very insertion of section 238A would be rendered fruitless unless it was construed as being retrospective. It further referred to the Insolvency Committee Report of March, 2018, and stated that:

“the Insolvency Law Committee Report of March, 2018, the legislature did not contemplate enabling a creditor who has allowed the period of limitation to set in to allow such delayed claims through the mechanism of the Code. The Code cannot be triggered in the year 2017 for a debt which was time barred, say, in 1990, as that would lead to the absurd and extreme consequence of the Code being triggered by a stale or dead claim, leading to the drastic consequence of instant removal of the present Board of Directors of the corporate debtor permanently, and which may ultimately lead to liquidation and, therefore, corporate death. This being the case, the expression “debt due” in the definition sections of the Code would obviously only refer to debts that are “due and payable” in law, i.e., the debts that are not time-barred. That this is the case has already been held by us in the Innoventive Industries Limited v. ICICI Bank Limited ……

Further, in a recent judgement given by Honorable NCLT Hyderabad in the case of S.S.V. Fab Industries Private Limited v. SNS Starch Limited (2020), it was held that Limitation to file petition would start after expiry of date of payment given in last invoice or date of default mentioned in the invoice or executed agreement between the parties.

The brief facts of the case are given below:

As per the purchase order (PO) and invoice terms, payments was to be made within 60 days from the date of raising of invoices. The contention of the Learned Chartered Accountant that last invoice was dated 11 June 2016 and as per the PO terms, payment ought to have been made by 10 August 2016 which is the time allowed i.e. 60 days from the date of invoice and limitation starts thereafter. It is true, the last invoice, even according to Corporate Debtor, was on 11 June 2016 and time for payment is 60 days which would expire by 10 August 2016 and this Petition was filed on 24 July 2019 and therefore Petition is not barred by limitation and it is well within 3 years from the expiry date of payment including the grace period allowed as per invoice. The last invoice is on 11 June 2016. Therefore, limitation to start after expiry of 60 days i.e. 10 August 2016. The petition is filed on 24 July 2019 is therefore, within the period of limitation and liable to be admitted.”

Conclusion:

As it is evident that the purpose of IBC is to revive the ill managed corporates by providing a resolution plan and keeping the company a going concern for the betterment of all, therefore,  the incorporation of section 238A in the IBC is a positive thing in achieving this objective of IBC. This will also reduce the burden of cases on the NCLT and the National Company Law Appellate Tribunal and also encouraging the aggrieved to be more alert with respect to their dues.

It may also be noted that, now this process would be quicker as applications for insolvency would be filed faster to the concerned authorities to avoid the lapse of limitation period of 3 years.