Whether LIMITATION ACT APPLICABLE ON INSOLVENCY & BANKRUPTCY CODE, 2016

Whether LIMITATION ACT APPLICABLE ON INSOLVENCY & BANKRUPTCY CODE, 2016

Short Summary:

In this flash tabloid, the writer initiates by speak of the provisions of Insolvency & Bankruptcy Code, 2016 (hereafter referred as “IBC”) in relation to Applicability of Limitation Act on IBC,2016.

The main drive of the broadsheet, on the other hand, is upon the “Whether provisions of Limitation Act applicable on Private Limited Companies ?”

            This is article no. 288 of the series of editorials written by the author on corporate laws

{Including Companies Act, 2013, SEBI, RBI Regulations, IBC, LLP Act, 2008 etc.}.

Introduction:

Insolvency and Bankruptcy Code, 2016 (the, “Code”) is a crucial legislation passed by the Parliament which has the potential to be a game changer in the insolvency and bankruptcy regime in India.

Since this Code came into existence, all the professionals / Corporate has several questions in mind, one of them about the “Applicability of the provisions of Limitation act on the Code/ Whether application u/s 9 or 7 is time barred” for an example; if any payment is pending older than 3 year or any loan is not repaid by the corporate debtor which is older than 3 year. Whether Operational Creditor / Financial creditor can file application under IBC, 2016. Many cases filed before many benches of the NCLT which falls under the provisions of Limitation.

Provision of Limitation Act:

Article 137 of the Limitation Act, 1963 is as follow:

Description of Application	Period of Limitation	Time from which period begins to run
Any other application for which no period of limitation is provided elsewhere in this  division.	Three Years	When the right to apply accrues

CASE DETAILS:

For very first time, the issue on applicability of Limitation Act, 1963 to the Insolvency and Bankruptcy Code was considered by NCLAT in the matter of Neelkanth Township and Construction Pvt. Ltd. vs. Urban Infrastructure Trustee Ltd. and it was held that the provisions of the Limitation Act, 1963 would not apply to the Insolvency and Bankruptcy Code

A.  Factual Background:

I.            an appeal filed by a corporate debtor (Neelkanth Township & Construction Pvt. Ltd.) against the order of the National Company Law Tribunal (“NCLT”) allowing commencement of insolvency proceedings on the action of the financial creditor (Urban Infrastructure Trustees Ltd.)

II.            The financial creditor had subscribed to optionally convertible debentures (“OCDs”) issued by the corporate debtor. OCDs carried nil or 1% p.a. interest rate and matured in years 2011, 2012 and 2013.

III.            The order of the NCLT was challenged by the corporate debtor, on many grounds, one of the grounds was :

v  Given that the debentures matured in years 2011, 2012 and 2013, the petition for initiation of corporate insolvency resolution process filed in year 2017 is time barred.

IV.            The Learned Counsel for the Appellant contended that the claim of Respondent is completed time barred as the Debenture Certificates were due for redemption as far back as in the years 2011, 2012 and 2013 respectively; consequently, the application filed in the year 2017 is hopelessly time barred.

Findings of the NCLAT Bench: 

The NCLAT held that that in the absence of any provision in IBC, the Limitation Act, 1963 would not be applicable to initiation of Corporate Insolvency Resolution Process. The NCLAT further observed:

“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.”

This suggests that NCLAT treated the cause of action arising from non-payment of debt which includes interest as a continuing one. Thereby holding that limitation period could not have expired.

There is nothing on the record that Limitation Act, 2013 is applicable to I&B Code. Learned Counsel for the appellant also failed to lay hand on any of the provision of I&B Code to suggest that the Law of Limitation Act, 1963 is applicable. 

The I&B Code, 2016 is not an Act for recovery of money claim, it relates to initiation of Corporate Insolvency Resolution Process. 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.”

In the above Judgment NCLAT mentioned that “Cause of action arising from non-payment of debt which includes interest as a continuing one, therefore, limitation period could not have expired.

But still one question arises if debt which doesn’t include interest weather Limitation Period applies on such debt or not?

CASE DETAILS:

Case Name	Black Pearl Hotels Pvt Ltd. V/s Planet M Retail Ltd.
Operational Creditor (Petitioner)	Black Pearl Hotels Pvt Ltd
Corporate Debtor (Respondent)	Planet M Retail Ltd
Bench Name	NATIONAL COMPANY LAW APPEALAT TRIBUNAL
Order No.	C.P. No.464/I&BP/NCLT/MAH/2017
Date	October  17, 2017

 

B.  Factual Background:

I.      The appellant who claimed to be OC, engage in operation a retail store in a building, entered into a business conduct agreement with CD. The CD continued to pay Rs. 7 Lakh per month from April, 201 to Sep 2011. Thereafter, since October, 2011 the CD failed to pay the conducting fee and, therefore, the OC terminated the business conduct agreement.

II.      The OC issued the notice u/s 8 of IBC to CD. In reply CD denied the claim on the ground that OC has not performed its duty in terms of agreement.

III.      After waiting for 10 days oc file the case before Mumbai Bench of NCLT.

IV.      The adjudicating authority by impugned order dated 4^th May, 2017 dismissed the application u/s 9 on one of the grounds that the application was barred by Limitation.

V.      NCLT states that, it is to be noted that after the last payment September, 2011, neither there was an acknowledgement of liability nor any payment by the corporate debtor. In this claim the whole debit as claimed by the Financial Creditor is time barred.

Question Arise:

VI.       Whether the application preferred by appellant – Operational Creditor is barred by Limitation?

Findings of the NCLAT Bench: 

The NCLAT ruled that 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 where the period of limitation is three years and it begins when the right to apply accrues.

NCLAT in its order states that “Insolvency and Bankruptcy Code, 2016 has come into force with effect from 1stDecember, 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 1stDecember, 2016, the application filed much prior to three years, the said application cannot be held to be Barred by limitation.”

CONCLUSION:

In effect, the NCLAT has held that debts which were otherwise not recoverable due to being time barred, can now be basis for initiating insolvency proceedings. This is a stark change from the earlier position and paves way for initiation of multiple insolvency proceedings on debts which could earlier not be recovered.