• Karan Kamath

Applicability of Limitation Act to the Insolvency and Bankruptcy Code: Enactments, Interpretations,

– Karan Kamath†

limitation


Two separate judgments in insolvency appeals from the National Company Law Appellate Tribunal (“NCLAT”) came to be delivered by the Supreme Court in August 2020. Although the facts differed, both appeals involved outdated claims being entertained by NCLAT without any proper adjudication on limitation issues. The law on applicability of the Limitation Act, 1963 to proceedings under the Insolvency and Bankruptcy Code, 2016 (“Code”) is settled. Both judgments reiterate this settled law and reach a congruent conclusion that NCLAT had erroneously admitted time-barred claims. In the light of these decisions, it is incumbent to revisit the law on limitation vis-à-vis the Code, and the NCLAT’s response to it.


Limitation and IBC

The Code was enacted to consolidate and reorganize insolvency laws in the country, with an aim to maximise the value of assets under resolution, and to balance interests of resolution stakeholders. Intended to be a ‘complete code’, it nonetheless had no limitation provision in its original text, apart from Sections 60(6) and 179(3), which merely exclude the duration of moratorium ordered from the computation of limitation. That is, in separate future disputes involving the corporate debtor, the Code moratorium may be excluded while deciding limitation therein.

Initially, several benches of the National Company Law Tribunal opined that the Limitation Act applied to Code proceedings as its application had not been expressly excluded.[1] Contrastingly, the NCLAT in Speculum Plast Pvt. Ltd. held that the Code was a ‘self-contained law’, a ‘complete code’ and therefore, Limitation Act could not be applied unless its application was expressly included. Although it allowed time-barred debts to be adjudicated under the Code, it also provided that Applicants must be asked to substantiate the causes of delay, and stale claims ‘normally should not be entertained’ unless they reasonably explain the cause for delay.

Understandably, in its March 2018 Report, the Insolvency Law Committee (“Committee”) distanced itself from this rationale of reviving zombified claims. It laid emphasis on the Code’s intent, which was not to act ‘as a fresh opportunity for creditors and claimants who did not exercise their remedy under existing laws within the prescribed limitation period’, and recommended that the Code be amended to make Limitation Act applicable to insolvency proceedings. Consequently, the law was amended in August 2018 by adding Section 238A.

An immediate challenge to Section 238A was rejected by the Supreme Court in B. K. Educational Service Pvt. Ltd. v. Parag Gupta. The Court held that the Code’s nature as a ‘complete code’ cannot by itself be a restriction against the applicability of limitation. Secondly, although the Code is not a debt recovery law, the trigger for its application is a default in repayment of a debt, i.e. “debt due and payable”. Because time-barred debts are excluded from this, it would be ‘counter-intuitive’ to not apply the Limitation Act. The Committee’s aforesaid observations were justified in that context and Limitation Act applied to proceedings under the Code throughout its existence. Therefore, Section 238A was clarificatory in nature and its intent would be frustrated unless it was applied retrospectively.

Such ex post facto application of limitation law has two constraints. As the Court explained inThirumalai Chemicals Ltd. v. Union of India, it would be applicable to all legal proceedings brought to enforce pre-enactment causes of action, but it cannot (a) revive claims which are already time-barred; nor (b) extinguish claims that are subsisting on the date of enactment.

Apart from these two exceptions, the Limitation Act applies to the Code. As applications under the Code are not provided for in the Schedule to the Limitation Act, Article 137 would apply providing a limitation period of three years, from ‘when the right to apply accrues’. Unless and until the concerned ‘default has occurred’ within three years before ‘the date of filing of the application’, it is time-barred.

This decision in B. K. Educational Services has been reiterated and confirmed by subsequent decisions. The legal principles for applying limitation law to the Code are therefore settled: The Code is not intended to give new leases of life to barred claims; Section 238A is merely explanatory and retrospectively applies to all Code proceedings; and only the residual Article 137 of the Limitation Act applies to those proceedings.


NCLAT’s rulings post B. K. Educational Society

Although the law is statutorily and judicially settled, NCLAT has ruled cryptically on limitation issues even after the ruling in B. K. Educational Society. Both the aforesaid Supreme Court judgments delivered in August – Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Pvt. Ltd. andRadha Exports (India) Pvt. Ltd. v. K. P. Jayaram were appeals from such orders.

The NCLAT order in Gurjar allowed insolvency proceedings for a debt that had occurred in 2011, on the basis that: (a) the Code came into effect on December 01, 2016, and a right to apply under the Code, therefore, accrues on that date; and (b) the debt was secured inter alia by a mortgage, the limitation period for recovery of which is 12 years. On appeal, the Supreme Court set aside the order, holding that the Code was not legislated to renew outdated claims, and therefore, the right to apply did not arise on December 01, 2016. Moreover, Article 137 applied to Code proceedings, to the exclusion of other provisions, including that for recovery of the mortgaged property. Similarly, two weeks later, the Court set aside the NCLAT order in Radha Exports. Therein, the corporate debtor took a defence that the debt amount had been repaid and, in the alternate, the claim was barred by limitation. NCLAT had refused to entertain a defence in the alternate despite the same being permissible in law.

Several other NCLAT orders include rejection of limitation pleas on such grounds. For example, inSagar Sharma v. Phoenix ARC Private Limited, it deemed a proceeding valid, holding that the right to apply had accrued on commencement of the Code in 2016. The Supreme Court had to direct the matter for fresh consideration, holding that B. K. Educational Society had clarified that date of the Code’s commencement: ‘does not and cannot form a trigger point of limitation for applications filed under the Code’. It cautioned the NCLAT that: ‘Article 141 of the Constitution of India mandates that our judgments are followed in letter and spirit’.

As the Gurjar judgment specifically notes, several other contemporary orders[2] delivered by NCLAT after B. K. Educational Services use the commencement date reasoning, akin to Sagar Sharma. It appears that some of these orders also employ a twelve-year limitation period likeGurjar, because the debt is secured by mortgage, despite Article 137 being repeatedly held as the sole applicable provision. These orders now fall within three distinct classes: Cases that have been appealed to and appropriately rectified by the Supreme Court, likeSagar Sharma, Gurjar, or Radha Exports, or cases that have been appealed to the Court and are yet to be decided; Cases that have been appealed to the Supreme Court but determined on some other point, without the commencement issue being discussed, like Duncans Industries Ltd. v. A. J. Agrochem; and Cases that have not been appealed to the Supreme Court and the erroneous determination of limitation issues have led to the initiation or continuation of Corporate Insolvency Resolution Process (“CIRP”).


CIRP and barred claims

The judgment in B. K. Educational Services categorically cautioned against long-dead claims being revived, noting that doing so would be ‘absurd and extreme’ considering the ‘drastic consequences’ that the Code entails, including resultant removal of the board of directors, moratorium on property transfer, and eventual liquidation or corporate death.

Limitation issues go to the heart of a matter. Section 3 of the Limitation Act provides that barred matters: ‘shall be dismissed although limitation has not been set up as a defence’. It is imperative for courts to dismiss such claims. When a court fails to do so, it is indeed an error of law, as the court does not have jurisdiction. But, if not appealed appropriately, such a decree nonetheless acquires finality. The jurisdiction to decide a matter includes the jurisdiction to decide it wrongly. Thus, as held by a four-judge bench in Ittavira Mathai v. Varkey Varkey, a decree passed in a time-barred matter cannot be subsequently challenged on the grounds of nullity, provided that the court otherwise had jurisdiction over the matter.

The aforesaid claims have been admitted, CIRP commenced, and if the orders not appealed, have attracted the warned ‘drastic consequences’. Apart from the ruling in Mathai, there are several considerations justifying why these consequences ought not to be undone. Firstly, the debtors did not elect to appeal, while themselves being bound by the temporal window for appeals to the Supreme Court under Section 62 of the Code. The Court must adhere to the statutory timeline for insolvency process completion, which includes strictly adhering to forty-five days (extendable by fifteen days) limitation in Section 62. Secondly, when a person allows a situation to turn irreversible, by necessary implication she disentitles herself from equitable relief. The debtor companies will be under resolution – either sold to third parties as going concerns or liquidated. In either case, the nature of the property would have changed irreversibly. Civil courts are duty-bound to take into consideration such irreversible changes to property while determining final relief. When the debtor company ceases to exist, there is little that the court can grant to recompense. Even if the corporate debtor has been sold as a going concern, a court cannot restore its ownership. As limitation bars the remedy, not the right, creditors are entitled to repayment of the underlying debt, which has been properly and lawfully discharged by the CIRP, and the creditor has not unjustly enriched itself.

The CIRPs in the aforementioned time-barred matters have thus acquired validity, force of law, and irreversibility. Nonetheless, it would be improper to neglect that they were based on an incorrect reading of limitation law, ignorance of a Supreme Court precedent, and should not have been permitted in the first place.


Conclusion

The limitation issues vis-à-vis the Code have experienced several tumultuations in the four years of the Code’s existence. Preliminarily, a ‘complete code’ was drafted without much reference to something as important as limitation. This caused the NCLAT and its lower tribunal to indulge in an interpretational exercise, which was avoidable in the first place. When a construction impervious to reason was resorted to, the legislative amendment ought to have settled issues. But law begets law. The Supreme Court had to authoritatively iterate, clarify, and settle it. Then, the appellate tribunal commenced passing of cryptic orders, which seemingly contradicted law settled by the Court and may have resulted in unwarranted liquidations. From the way our laws are drafted to the way tribunals interpret them, the aforesaid experience has considerable lessons for the future.

The NCLAT was established as a specialised tribunal to hasten resolution of business law matters, and the Code was introduced as a panacea for hitherto enervated insolvency law. But the life of the law is its experience. The demarcated objectives of both the NCLAT and the Code are achievable, as long as there is some insistence on learning from their failings.


Karan Kamath is a 2020 BA LLB (Hons) graduate from Symbiosis Law School, Pune.


[1] For example, see Prowess International Pvt. Ltd. v. Action Ispat and Power Pvt. Ltd. (Principal Bench); State Bank of India, Colombo v. Western Refrigeration Pvt. Ltd. (Ahmedabad Bench);Macchar Polymer Pvt. Ltd. v. Sabre Helmets Pvt. Ltd. (Mumbai Bench) – the latter was delivered after NCLAT’s decision in Speculum Plast

[2] For example, see Om Prakash Pandey v. SBI; B. Prashanth Hegde v. SBI; Devanathan Ranganathan v. IDBI Bank Ltd.; A. J. Agrochem v. Duncans Industries Ltd.; and Rajen Amrit Lal Parikh v. Asset Reconstruction Company (In the latter, the limitation issue was framed specifically in the context of B. K. Educational Services)

Image source: https://blog.ipleaders.in/entry-balance-sheet-acknowledgement-section-18-limitation-act/

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