Applicability of Limitation Act to Insolvency and Bankruptcy Code, 2016

Insolvency and Bankruptcy Code, 2016 (“Code”) provides the manner in which the creditor or the Corporate Debtor shall approach the Adjudicating Authority, National Company Law Tribunal (“Tribunal”), for the initiation of corporate insolvency resolution process (“CIRP”) or liquidation process. Any party aggrieved by the decision of the Tribunal may approach the Appellate Authority, National Company Law Appellate Tribunal (“Appellate Tribunal”).

The law in order to have a profound impact must lay strong and pristine fundamentals to govern the nation, subject to amendments yearned in accordance with the needs of the society. After a year and a half of the passing of the Code, the Tribunals are taking into account the pragmatic approach to the implementation of the Code. One of the paramount consideration for filing an application by an applicant is whether the application will be entertained being the debt a time barred debt. The chronology depicting the applicability or otherwise of the Limitation Act, 1963 is being examined hereunder in the light of judgements pronounced by the Tribunals and Appellate Tribunal.

At the nascent stages of implementation of the Insolvency and Bankruptcy Code, 2016, it was observed by various tribunals that being a time-barred debt the application filed cannot be entertained pursuant to the applicability of the Limitation Act. In International Road Dynamics South Asia Pvt. Ltd. Vs Reliance Infrastructure Ltd.[1], one of the grounds for rejection of an application was the time barred debt. Similar rejections have been made by the Tribunals in innumerable cases. The first case wherein the applicability of Limitation Act was repudiated was Neelkanth Township and Construction Pvt. Ltd. Vs. Urban Infrastructure Trustees Ltd.[2], wherein the Tribunal observed that “….The I & B, 2016 is not an act for the recovery of money claim, it relates to initiation of CIRP. If there is a debt which includes interest and there is default of debt and having continuous course of action, the argument that the claim of money by respondent is barred by Limitation cannot be accepted.” The decisions of the Tribunal and Appellate Tribunal in the instant case was challenged by the Petitioner which concluded at the Supreme Court of India wherein the Apex Court kept the question of law open and leaving the scope for a precedent. The applicability of the Limitation Act has also been discussed by the Tribunals in various cases affirming that the Limitation Act is not applicable to the Code including Machhar Polymer Pvt. Ltd. v. Sabre Helmets Pvt. Ltd.[3] and PCI Ltd. Vs. Ashimori India Pvt. Ltd.[4] wherein the Tribunal also observed that the delay and laches have to be accounted for.

The question of law whether Limitation Act is applicable to the Code has also been looked upon by the Appellate Tribunal and the cardinal cases are exhibited hereunder.

In Black Pearl Hotels Pvt. Ltd. Vs Planet M Retail Ltd.[5], the Appellate Tribunal considered the dual position of law when the Limitation Act is not applicable as held in Neelkanth Township and Construction Pvt. Ltd. Vs. Urban Infrastructure Trustees Ltd. (supra) and even if it is made applicable Article 137 of the Limitation Act comes into play providing relief to the applicant for a period of three years which begins to run only when the right to apply accrues i.e. 28.05.2016, the date when the Act was notified by the Government. Although, this plea may be taken up in the current scenario but shall not hold valid for a prolonged period as it demarcates the time period to three years. The relevant excerpt of the judgement is reproduced below:

“11. In this case even if it is accepted that the Limitation Act, 1963 is applicable for initiation of Corporate Insolvency Resolution Process, in such case Article 137 of the Limitation Act, 1963 will be applicable, which is quoted below:

“Description of application: Any other application for which no period of limitation is provided elsewhere in this division.

 Period of Limitation: Three years

Time from which period begins to run: When the right to apply accrues.”

12. Insolvency and Bankruptcy Code, 2016 has come into force with effect from 1st December, 2016. Therefore, the right to apply under I&B Code accrues only on or after 1st December, 2016 and not before the said date (1st December, 2016). As the right to apply under section 9 of I&B Code accrued to appellant since 1st December, 2016, the application filed much prior to three years, the said application cannot be held to be barred by limitation.”

In Ashlay Infrastructure Pvt. Ltd. v LDS Engineers Pvt. Ltd.[6], the Appellate Tribunal held that Limitation Act is not applicable. However, the Tribunal may consider Doctrine of Limitation and Prescription in Section 7 and Section 9 cases. The judgement given in the instant case is comprehensive, cogent and incisive. The Appellate Tribunal gave a succinct view to delineate that the Code is complete by itself while referring to the Innoventive Industries Ltd. case decided by the Apex Court. An insight into the erstwhile laws dealing with Insolvency has been dealt with wherein the Limitation Act has been expressly provided under the law. For example, Presidency-Towns Insolvency Act, 1909 and Provincial Insolvency Act, 1920 made Section 4 and Section 12 of the Limitation Act applicable. Thus, the intention of the legislature can be drawn, and is clear, to preclude other sections of the Act. In order to shun the inconsistency of Companies Act and the Code, the applicability of Section 433 of the Companies Act, 2013 to the Code has been rejected. The fundamentals have been derived from the Code itself as the Code contains the precise sections in the Eleventh Schedule which deals with the amendments made to the Companies Act in pursuance of the Code. The Appellate Tribunal while holding the applicability of Limitation Law also considered an obverse perspective that if the applicant is not in a position to pay its debt and the default under the Code has occurred, it would not be right to bar the applicant on the ground of time barred debt under Section 10 of the Code.  Also, instances of a company being sick or not in business for three years or more resulting in depreciation of the value of its assets for time to come was aptly considered against the statement and object of the Code. Further, claims made to the Interim Resolution Professional or upon consideration for the Committee of Creditors cannot be denied being it barred by limitation. The intention of the Appellate Tribunal was to safeguard and preserve the genuine transactions. Before comprehending further it is necessary to understand the Doctrine of Limitation and Prescription. The Law of Limitation confines the time within which a suit or proceeding may be instituted. Although it bars the judicial remedy but it does not have an impact upon the extrajudicial remedies or the substantive right.  On the contrary, the Law of Prescriptions restricts the time period on expiry of which not only the judicial remedy is barred but a substantive right is acquired or extinguished. Getting a grasp at the literal terms makes the understanding simple. Doctrine of Limitation and Prescription has been made applicable, by virtue of this case and unless challenged to the Supreme Court, to Section 7 and Section 9 cases on account of laches and thereby the claim being forfeited. It provided further that the delay can be explained by the applicant if there are no laches and the period of limitation of three years has also expired. A corporate debtor making an application under Section 10 is outside the ambit of the application of Doctrine of Limitation and Prescription.

The pertinent extract of the judgement has been elucidated hereunder howbeit the language of the Section has not been reproduced:

 ‘’25. The aforesaid ‘principles driving the design’ shows that the Code has been framed to facilitate the assessment of viability of the enterprise at a very early stage; to enable symmetry of information between creditors and debtors; to ensure a time-bound process to better preserve economic value; to ensure a collective process; to respect the rights of all creditors equally; to ensure that when the negotiations fail to establish viability; the outcome of bankruptcy must be binding and to ensure clarity of priority, and that the rights of all stakeholders are upheld in resolving bankruptcy.

 ‘’32. To examine the legislative intent to decide whether the ‘I&B Code’ excludes the operation of the Limitation Act, 1963, it is desirable to refer the previous Acts on Insolvency, namely the ‘Presidency-Towns Insolvency Act, 1909’ and the ‘Provincial Insolvency Act, 1920’.

….

37. Though the aforesaid two Acts have been repealed, in the ‘I&B Code’, the Legislature did not choose to prescribe any separate provisions of ‘limitation’ as was made in Section 101 of the ‘Presidency-Towns Insolvency Act, 1909’ or sub-section (1) of Section 78 of the ‘Provincial Insolvency Act, 1920’ whereunder provisions of Sections 5 and 12 of the ‘Indian Limitation Act, 1908’ were made applicable to appeals and applications under the aforesaid Acts and the decision under the provisions was treated to be decree.

38. However, the provision of computing the period of limitation prescribed for any suit or other legal proceeding, as ordered to be excluded in Section 101A of the ‘Presidency-Towns Insolvency Act, 1909’ and sub-section (2) of Section 78 of the ‘Provincial Insolvency Act, 1920’ has been retained with appropriate modification under sub-section (6) of Section 60 of the ‘I&B Code’, as quoted-below….

39. The aforesaid provisions, makes clear the intent of the Legislature which necessarily excluded the provisions of Sections 4 to 24 of the Limitation Act, 1963.

…

46. From the aforesaid provision, we find that the scheme of the ‘Special Act’ i.e. the ‘l&B Code’, and the nature of the remedy provided therein are such that the Legislature intended it to be a complete code by itself which alone should govern the several matters provided by it.

47. In so far as, the application under Section 433 of the Companies Act, 2013 is concerned, we are of the view that the said provision is not applicable for the following reasons: –

Under Section 255 of the ‘I&B Code’, certain provisions of the Companies Act, 2013 have been amended in the manner specified in the Eleventh Schedule of the ‘I&B Code’. Thereunder Section 424 of the Companies Act, 2013 has been made part of the ‘I&B Code’ for the purpose of following procedural or principles of natural justice…. However, Section 433 of the Companies Act, 2013 has not been amended to make it as a part of the ‘I&B Code’, therefore, we hold that Section 433 which relates to limitation of the Companies Act, 2013, ipso facto will not be applicable to ‘I&B Code’.

…

54. On the other hand, the Committee by its report suggested to frame law for ‘Insolvency Resolution Process’ to facilitate the assessment of viability of the enterprise at a very early stage; to enable symmetry of information between creditors and debtors; to ensure a time-bound process to better preserve economic value; to ensure a collective process; to respect the rights of all creditors equally; to ensure that when the negotiations fail to establish viability, the outcome of bankruptcy must be binding and to ensure clarity of priority, and that the rights of all stakeholders are upheld in resolving bankruptcy, as noticed above.

…

56. The matter can be looked at from another angle. If law of limitation prescribed under the Limitation Act, 1963 is made applicable, one may take a plea that default of debt is barred by limitation to initiate ‘Corporate Insolvency Resolution Process’ under Section 7 or Section 9 of the ‘l&B Code’. However, such stand cannot be taken, where a ‘Corporate Applicant’ applies for initiation of ‘Corporate Insolvency Resolution Process’ against itself (‘Corporate Debtor’), having no capacity to pay back the debt and default having occurred. The law of limitation cannot be made applicable for filing an application under section 10, which otherwise will render the provisions of Section 10 of the ‘I&B Code’ redundant as the ‘Corporate Applicants’, do not file application for money claim. This apart, there may be companies which are closed for more than three years and having failed to pay a debt, such sick companies will have to be allowed to continue resulting in depreciation of the value of its assets for time to come, which is against the statement and object of the ‘I&B Code’.

57. Similarly, in a case which is not barred by limitation, if application filed under Section 7 or Section 9 or Section 10 of the ‘I&B Code’ is admitted, pursuant to public notice under Section 15 of the ‘I&B Code’, the ‘Interim Resolution Professional’ is required to receive and collect all the claims as may be submitted by creditors to him, as stipulated in clause (b) of sub-section (1) of Section 18. In such case, once the creditors put their claim, the ‘Insolvency Resolution Professional’ cannot reject the claim on the ground that the claim is barred by limitation, as the provision of Limitation Act, 1963 will not be applicable for filing a claim before the ‘Interim Resolution Professional’. Similarly, the Committee of Creditors while deciding the resolution plan, cannot reject any such claim, on the ground that the same is barred by limitation though the Committee of Creditors may not make any provision in the resolution plan on the ground of unexplained delay.

58. Even if it is accepted that the Limitation Act, 1963 is applicable, though we have held otherwise, in that case also application under Section 7 or 9 or 10 cannot be rejected on the ground that the application is barred by limitation for being filed beyond three years for following reasons. (Article 137 discussed)

….

63. Now, the question arises, whether a person can claim any amount due from another, a ‘Corporate Debtor’ after long delay on the ground that Limitation Act, 1963 is not applicable?…

….

68. In view of the settled principle, while we hold that the Limitation Act, 1963 is not applicable for initiation of ‘Corporate Insolvency Resolution Process’, we further hold that the Doctrine of Limitation and Prescription is necessary to be looked into for determining the question whether the application under Section 7 or Section 9 can be entertained after long delay, amounting to laches and thereby the person forfeited his claim.

69. If there is a delay of more than three years from the date of cause of action and no laches on the part of the Applicant, the Applicant can explain the delay. Where there is a continuing cause of action, the question of rejecting any application on the ground of delay does not arise.

70. Therefore, if it comes to the notice of the Adjudicating Authority that the application for initiation of ‘Corporate Insolvency Resolution Process’ under section 7 or Section 9 has been filed after long delay, the Adjudicating Authority may give opportunity to the Applicant to explain the delay within a reasonable period to find out whether there are any laches on the part of the Applicant.

71. The stale claim of dues without explaining delay, normally should not be entertained for triggering ‘Corporate Insolvency Resolution Process’ under Section 7 and 9 of the ‘I&B Code’.

72. However, the aforesaid principle for triggering an application under Section 10 of the ‘I&B Code’ cannot be made applicable as the ‘Corporate Applicant’ does not claim money but prays for initiation of ‘Corporate Insolvency Resolution Process’ against itself, having defaulted to pay the dues of creditors.

 In so far it relates to filing of claim before the ‘Insolvency Resolution Professional’, in case of stale claim, long delay and in absence of any continuous cause of action, it is open to resolution applicant to decide whether such claim is to be accepted or not, and on submission of resolution plan, the Committee of Creditors may decide such question. If any adverse decision is taken in regard to any creditor disputing the claim on ground of delay and laches, it will be open to the aggrieved creditor to file objection before the Adjudicating Authority against resolution plan and for its necessary correction who may decide the same in accordance with the observations as made above.’’

An analysis of these judgements paves way for the creditors to approach the Tribunal whose debts have elapsed, which can be a proliferating figure. This is of paramount importance for the operational creditors against the financial creditors as a financial debt is a continuing one in majority of cases due to interest being accrued. Non-application of Limitation Act acts as a solace to the creditors and providing a suspiration of relief to them who are in distress, unable to claim the debt being it barred by Limitation. Also, recovery of money under the Code is easier than approaching the Tribunal under the Companies Act for winding up, as Section 433 of the Companies Act, 2013, makes the Limitation Act, 1963 applicable to proceedings before the Tribunal and Appellate Tribunal, which is also cumbersome and time consuming. The Code provides a remedy for initiation of the resolution process but the basis for filing an application substantiates on the ground of default of amount solely, thus widening the scope under the Code irrespective of the debt being a time barred one.

[1] Vide order dated 01.08.2017 in Company Appeal (AT) No. 72,77/2017

[2] Vide order dated 11.08.2017, NCLT New Delhi

[3] Vide Order dated 03.10.2017, NCLT Mumbai

[4] Vide Order dated 10.10.2017, NCLT New Delhi

[5] Vide order dated 17.10.2017, NCLAT

[6] Vide Order dated 07.11.2017, NCLAT