Introduction
In the intricate landscape of insolvency and bankruptcy, the interplay between the Insolvency and Bankruptcy Code (IBC) and other legal provisions can often dictate the course of proceedings. One critical aspect of this interaction revolves around the limitations imposed by Article 137 of the Limitation Act and the formidable Section 238 of the IBC. These legal elements govern the timing and viability of applications and appeals in insolvency matters. Understanding their dynamics is essential for all stakeholders in the insolvency arena.
Section 238 of the IBC
Section 238 of the Insolvency and Bankruptcy Code (IBC) establishes that the rules and regulations outlined within the IBC take precedence over any conflicting provisions in other existing laws or legal instruments.[1] This provision confers ultimate authority to the IBC in cases of inconsistency. While the IBC serves as a comprehensive framework for addressing insolvency and bankruptcy issues, it’s important to note that other relevant laws remain applicable for all non-insolvency-related matters. In numerous statutes, modifications have been introduced to specify that specific or all provisions within those statutes are subject to the regulations outlined in the IBC.
In the initial instance of commencing proceedings for the Corporate Insolvency Resolution Process (CIRP), as evidenced in the case of Innovative Industries Ltd v ICICI Bank & Another[2] under the Insolvency and Bankruptcy Code (IBC), the Supreme Court grappled with the question of whether a financial creditor could initiate insolvency proceedings under the IBC when the Corporate Debtor (CD) was immune from debt repayment due to the Maharashtra Relief Undertaking (Special Provisions) Act, 1958 (MRUA). The Supreme Court’s ruling established that the MRUA and the IBC conflicted. The MRUA conferred upon the state government the authority to take control of the undertaking’s management and impose a moratorium, which closely mirrored the provisions within the IBC. Implementing the MRUA would directly impede the potential plans or schemes that could be adopted under the IBC, resulting in a direct clash between the moratoriums prescribed by these two statutes. In this scenario, the non-obstante clause within the IBC held precedence over the non-obstante clause in the MRUA. This occurred because, under the non-obstante clause in the IBC, no rights of the Corporate Debtor under any other legal framework could hinder the application of the IBC.
In the case of Pr. Commissioner of Income Tax v. Monnet Ispat And Energy Ltd[3], the Supreme Court unequivocally asserted the importance of the Insolvency and Bankruptcy Code (IBC) over any conflicting provisions in other statutes, including the Income Tax Act of 1961.
Similarly, in the case of M/s Embassy Property Developments Pvt. Ltd. v. State of Karnataka & Others [4], the Supreme Court emphasized that the IBC is a self-contained and comprehensive legal framework. The Court acknowledged it as a meticulous set of regulations governing insolvency matters, encompassing corporate entities and other stakeholders. The IBC was meticulously crafted as a unified and all-encompassing code, addressing all facets of insolvency resolution within defined timelines.
However, while recognizing the all-inclusive nature of the IBC, the Supreme Court also scrutinized the jurisdiction of the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT). The Court affirmed that, in conformity with the statutory framework, if a Corporate Debtor (CD) needs to exercise a right beyond the purview of the IBC, particularly in matters pertaining to public law, it cannot circumvent the established legal procedures. Instead, the CD must engage the proper legal channels and approach the NCLT through the Resolution Professional (RP) to enforce such rights.
Applicability of the Limitation Act to 238A
The introduction of Section 238A into the Insolvency and Bankruptcy Code (IBC) was brought about by the Insolvency and Bankruptcy (Amendment) Ordinance 2018, which was later replaced by the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018. [5]This amendment aimed to extend the applicability of the Limitation Act 1963 to proceedings or appeals before various bodies, including the AA (Adjudicating Authority), the NCLAT (National Company Law Appellate Tribunal), the Debt Recovery Tribunal, and the Debt Recovery Appellate Tribunal.
As a result, applications filed under sections 7, 9, or 10 of the IBC cannot be accepted if they pertain to debts that have exceeded their statute of limitations.
In the case of B. K. Educational Services[6], the Supreme Court cautioned against interpreting Section 238 of the Code to disregard the Limitation Act 1963 provisions. They used the expression “baby [being thrown] out with the bathwater” to underscore the potential negative consequences of such an interpretation.
The Supreme Court noted that the lawmakers had always intended to apply the Limitation Act of 1963 to the NCLT and the NCLAT when dealing with applications filed under section 7 and section 9 of the IBC and appeals. The relevant section of the Limitation Act is section 137. It’s important to acknowledge that the right to initiate legal action arises when a default occurs. However, if the default occurred more than three years before the application was filed, it would be time-barred under section 137, unless the delay could be justified under section 5 of the Limitation Act.
The Court also affirmed that section 238A of the Code should apply the provisions of the Limitation Act “as far as may be.” Consequently, when specific time limits are stipulated within the IBC, they take precedence, regardless of any conflicting provisions within the Limitation Act.
In the legal case of Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries Private Limited & Another [7], the Supreme Court examined the timeframe within which section 7 applications could be filed and made the following observations:
- The timeframe for initiating a Corporate Insolvency Resolution Process (CIRP) under section 7 of the Insolvency and Bankruptcy Code (IBC) is dictated by article 137 of the Limitation Act, which amounts to a three-year window from the point when the right to file the application becomes applicable.
- The right to submit an application under the IBC becomes applicable at the moment the default occurs. If the default transpired more than three years before the application was lodged, it would be considered time-barred unless there are circumstances that justify extending the filing deadline.
- It’s important to note that an application under section 7 of the IBC is not aimed at enforcing mortgage liability, and thus, article 62 of the Limitation Act does not pertain to such applications.
- Furthermore, the date of the IBC’s implementation on December 1, 2016, does not bear relevance to the initiation of any limitation period concerning the IBC.
In this specific instance, the Court noticed that the Financial Creditor (FC) had not put forth any arguments beyond simply indicating the date of default as “08.07.2011” in their application. As a result, no legitimate grounds existed for extending the limitation period. Essentially, even if one were to consider the applicability of section 18 of the Limitation Act, which allows for the extension of the limitation period if the debtor acknowledges the debt and its associated principles, they would not be relevant to the particular application under examination due to the absence of any additional statements or acknowledgments concerning the default.
As a result, the Court invalidated the insolvency proceedings, reasoning that since the FC’s application was barred by limitation, all proceedings initiated after the admission order held no legal effect.
Conclusion: In navigating the complex realm of insolvency, the dichotomy between Article 137 of the Limitation Act and Section 238 of the IBC becomes paramount. The IBC, fortified by Section 238, establishes its supremacy in insolvency, ensuring that its provisions prevail over conflicting elements of other laws. However, this does not negate the importance of adhering to statutory limitations, as highlighted by the recent introduction of Section 238A. As demonstrated by various legal precedents, including the pivotal cases of Monnet Ispat, Embassy Property Developments, and Babulal Vardharji Gurjar, the timing of applications under the IBC is a meticulous process governed by the Limitation Act. In essence, the clock is ticking, and adherence to both statutory limitations and the overriding authority of the IBC is essential for the smooth functioning of insolvency proceedings in India.
[1] The Insolvency and Bankruptcy Code 2016, s 238
[2] Innovative Industries Ltd v ICICI Bank & Another [2017] SC Civil Appeal No 8337-8338 of 2017
[3] Pr Commissioner of Income Tax v Monnet Ispat And Energy Ltd [2018] SLP No 6483
[4] M/s Embassy Property Developments Pvt Ltd v State of Karnataka & Others [2019] SCC Online SC 1542
[5] The Insolvency and Bankruptcy Code(Second Amendment) Act 2018, s 34
[6] BK Educational Services Private Limited v Parag Gupta and Associates [2019] 11 SCC 633
[7] Babulal Vardharji Gurjar . Veer Gurjar Aluminium Industries Private Limited & Another [2019] Civil Appeal No 6347 of 2019
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