LIMITATION PERIOD UNDER THE IBC CODE

[Dr. Sanjiv Agarwal]

The Code is a special law that deals with the entirety of insolvency and bankruptcy law of the country and hence it does prevail over other laws. The IBC Code holds within it a non obstante clause, i.e., Section 238 read with Section 14 of the Code that speaks of a moratorium being widely applicable have made the intent of the legislation clear in the sense of it superseding over all other legislations.

Non-Obstante Clause

Section 238 of the IBC Code reads as follows:

“The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.”

Ever since the Code has sprouted into existence, there have been multiple clashes with other legislations. The conflicts ranged from there being inconsistencies with State Acts or there being inconsistencies with the Central Acts. For deciding of matters where there are conflicts between State Acts and the Code if the subject matter of both legislations is common. In such scenarios the doctrine of implied repeal shall be applicable.

In the case of M/S. INNOVENTIVE INDUSTRIES LTD. VERSUS ICICI BANK & ANR. - 2017 (9) TMI 58 - SUPREME COURT, the Apex court while discussing the prevalence of the Code over other state legislations held that, “if the subject matter of the State legislation or part thereof is identical with that of the Parliamentary legislation, so that they cannot both stand together, then the State legislation will be said to be repugnant to the Parliamentary legislation. However, if the State legislation or part thereof deals not with the matters which formed the subject matter of Parliamentary legislation but with other and distinct matters though of a cognate and allied nature, there is no repugnancy.”

This was reiterated in the matter of DUNCANS INDUSTRIES LTD. VERSUS A.J. AGROCHEM - 2019 (10) TMI 301 - SUPREME COURT wherein Hon’ble Supreme Court was considering the issue of prevalence of the Code over the Tea Act, 1953. In the matter, initiation of insolvency proceedings were disputed on the ground that under the Tea Act, all organisations governed by it must obtain consent from the Central Government before winding up would be initiated. The issue in the instant case was whether consent of the Central Government under the Tea Act was required before initiation of proceedings under section 9 of the IBC Code. The Apex Court in the matter had upheld the supremacy of the Code over the special legislation as it was analysed that the same would be in line with the legislative intent of the IBC Code.

In POWER GRID CORPORATION OF INDIA LTD VERSUS JYOTI STRUCTURES LTD. - 2017 (12) TMI 1660 - DELHI HIGH COURT,  Delhi High Court held that the proceedings under Section 34 of the Arbitration and Conciliation Act, 1996 for setting aside the arbitral award in favour of the Corporate Debtor will not be set aside merely because moratorium declared by the Adjudicating Authority under section 14 of the IBC Code. Discussing the legislative intent of the Code once again, Delhi High Court found that the moratorium would not apply to proceedings that would be in favour of the Corporate Debtor. In the matter, if the arbitral award was stayed, the Corporate Debtor would be at a loss for not having recovered their dues. This matter brought to light a differing view on the interpretation of the non obstante clause wherein it held that the interpretation of Section 238 should be beneficial to the Corporate Debtor and not strict, such that it does not hamper recovery of dues and enhances the maximisation of assets.

Limitation under IBC Code

Section 238A of the IBC Code reads as follows:

 “The provisions of the Limitation Act, 1963 (36 of 1963) shall, as far as may be, apply to the proceedings or appeals before the Adjudicating Authority, the National Company Law Appellate Tribunal, the Debt Recovery Tribunal or the Debt Recovery Appellate Tribunal, as the case may be”

The provision was inserted by virtue of the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018. This in simple terms would mean that insolvency petitions cannot be admitted for time barred debts. On a plain reading of the provision, it is clear Section 238A of the Code should apply the provisions of the Limitation Act, “as far as may be.” Therefore, where periods of limitation have been laid down in the Code itself, they will apply notwithstanding anything to the contrary contained in the Limitation Act.In the matter of SESH NATH SINGH & ANR. VERSUS BAIDYABATI SHEORAPHULI CO-OPERATIVE BANK LTD AND ANR. - 2021 (3) TMI 1183 - SUPREME COURT the Apex Court has already addressed this interpretation by holding that the phrase ‘as far as may be’ means that the provisions of the Act would apply mutatis mutandis to proceedings under the Code in the Adjudicating Authority.

Over the years, the Supreme Court has laid to rest a lot of uncertainties emanating from the inception and interpretation of the Code. One of the major issues that has been landed is that of applicability of Limitation. The judgment of B.K. EDUCATIONAL SERVICES PRIVATE LIMITED VERSUS PARAG GUPTA AND ASSOCIATES - 2018 (10) TMI 777 - SUPREME COURT and VASHDEO R BHOJWANI VERSUS ABHYUDAYA CO-OPERATIVE BANK LTD AND ANR. - 2019 (9) TMI 711 - SUPREME COURT have contributed majorly to laying to rest these concerns.  In the B.K. Educational Services (P) Ltd. case the Apex Court held that if the default had occurred more than three years prior to the date of filing of application for initiation of insolvency, it would be barred under Article 137 of the Limitation Act, 1963. This would not be applicable to cases where Section 5 of the Limitation Act would be applicable leading to condonation of delay. This matter also clarified that Section 238A though procedural in nature, would have a retrospective effect.

In the case of BABULAL VARDHARJI GURJAR VERSUS VEER GURJAR ALUMINIUM INDUSTRIES PVT. LTD. & ANR. - 2020 (8) TMI 345 - SUPREME COURT, the Hon’ble Supreme Court while mentioning that the date that the IBC Code came into force, i.e., on 01.12.2016, is irrelevant to the triggering of any limitation period for the purposes of the Code, held that the right to apply under the IBC accrues on the date when the default occurs. If the default had occurred over three years prior to the date of filing the application, the application would be time-barred, save and except in those cases where, on facts, the delay in filing may be condoned. The case also mentioned the extent to which Limitation Act, 1963 would apply to the IBC Code wherein it held that an application under section 7 of the IBC is not for enforcing mortgage liability and therefore Article 62 of the Limitation Act would not apply to this application.

The above-mentioned pronouncements decided on the issues of whether the Limitation Act, 1963 is applicable to the IBC Code, the extent to which the Act will be applicable to the Code, whether continuous default of the debt amounts to continuing period of Limitation, whether the applicability will have a retrospective or a prospective effect on the Code.

On the applicability of Section 18 of the Limitation Act to the IBC Code, Section 18 of the Limitation Act, 1963 states as follows:

“18. Effect of acknowledgment in writing.-

(1) Where, before the expiration of the prescribed period for a suit of application in respect of any property or right, an acknowledgment of liability in respect of such property or right has been made in writing signed by the party against whom such property or right is claimed, or by any person through whom he derives his title or liability, a fresh period of limitation shall be computed from the time when the acknowledgment was so signed.

(2) Where the writing containing the acknowledgment is undated, oral evidence may be given of the time when it was signed; but subject to the provisions of the Indian Evidence Act, 1872 (1 of 1872), oral evidence of its contents shall not be received.”

The Apex Court in LAXMI PAT SURANA VERSUS UNION BANK OF INDIA & ANR. - 2021 (3) TMI 1179 - SUPREME COURT decided in March 2021 held that Section 18 of the Limitation Act will be applicable to the Code. The Apex Court also went on to say how entries in a balance sheet may amount to an acknowledgment of debt for the purposes of section 18 of the Limitation Act. Apex Court directed that a fresh period of limitation be computed from the date of acknowledgment of a debt by the principal borrower and/or the corporate guarantor, including the last communication dated December 8, 2018. Resultantly, the application of the FC under section 7 of the IBC was found to be within the limitation by granting the benefit of exclusion of time under section 18 of the Act.

Recently, on 22 March 2021, the Supreme Court in SESH NATH SINGH & ANR. VERSUS BAIDYABATI SHEORAPHULI CO-OPERATIVE BANK LTD AND ANR. - 2021 (3) TMI 1183 - SUPREME COURT whether a financial creditor could have initiated proceedings under the Code seven years after the debt become due, when the delay was justified under previous proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act 2002 (SARFAESI). In this instance, the application of provisions of Section 14 of the Limitation Act to the Code was discussed. Section 14 of Limitation Act talks of exclusion of the time spent in bona fideproceeding in a court without jurisdiction, for the purpose of computing the limitation period. This matter answered two fold concerns, i.e., one being of applicability of Section 14 of Limitation Act to Section 7 proceedings under the Code and the other being whether the proceedings under SARFAESI would be considered to be civil proceedings to attract the applicability of said Section 14.

While drawing parallels with Arbitration and Conciliation Act, 1996, the Apex Court reasoned that Section 238A of the Code provides for the application of the provisions of the Limitation Act, ‘as far as may be’, and in the absence of an express provision excluding the application of Section 14 of the Act to the Code, there is no reason why Section 14 must not be applicable to it. The Hon’ble Court while adopting the principle of harmonious interpretation between the object of the Code and its intent, concluded that any or all provisions of the Limitation Act shall apply to the proceedings before the Adjudicatory Authority under the Code only to the extent that they are not ‘patently inconsistent’ with the provisions and the intent of the Code. Following the same line of thought and reasoning where the intent of the legislation is granted supremacy over its literal interpretation, the Supreme Court held that the expression ‘court’ in Section 14(2) must be interpreted liberally, and would be deemed to be any forum for a civil proceeding including any tribunal or any forum under the SARFAESI.

In CHAND PRAKASH MEHRA VERSUS PRAVEEN BANSAL INTERIM RESOLUTION PROFESSIONAL OF SILVERTON SPINNERS LIMITED, STATE BANK OF INDIA - 2021 (9) TMI 930 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL , PRINCIPAL BENCH , NEW DELHI, it was held that CIRP application filed within three years of letter of corporate debtor clearly acknowledging its debt liability, was well within limitation period and not barred by limitation Act, 1963 The Appellate Tribunal observed that section 238 provides that the Code applies notwithstanding anything in-consistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law. Keeping this provision in view, section 7 of IBC which provides that financial creditor either by itself or jointly with other financial creditors or any other person on behalf of finance creditor as may be notified by the Central Bank may file an application for initiating corporate Insolvency Resolution Process against a corporate debtor before the Adjudicating Authority when a default has occurred.  Further, if the Lead Bank for any reason does not take steps or fails to take steps, the other Banks in the consortium cannot be left high and dry without any remedy, as Limitation Act does not differentiate on such count.

In BSE LIMITED VERSUS KCCL PLASTIC LIMITED, (EARLIER KNOWN AS KOSHA CUBIDOR CONTAINERS LIMITED) - 2021 (12) TMI 907 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL , PRINCIPAL BENCH , NEW DELHI, listing fee to Bombay stock exchange was due from corporate debtor. On the nature of dues, it was held that listing fees is a regulatory due and not an operational debt and cannot be recovered under ‘operational debt’. As per the Listing Agreement, the respondent was obliged to pay the requisite Annual Listing Fees on or before the 30^th day of April, every year. The Adjudicating Authority had given finding that debt fell due on 01.04.2015 as admitted by the petitioner, hence the application filed under section 9 is barred by limitation. It was held that listing fees comes under the ambit of ‘regulatory dues’ which SEBI is entitled to recover. The respondent being an entity registered under SEBI was under an obligation to follow the Regulations prescribed by SEBI for recovery of its dues. The dues so said are not ‘Operational Dues’ but ‘Regulatory Dues’. The Insolvency Law Committee suggests that Regulatory Dues are not to be recovered under ‘Operational Debt’.

End Note

The applicability of provisions of Limitation Act, 1963 to the IBC Code, 2016  is inverse to the objective of the Code to be a comprehensive piece of legislation. However, the insertion of Section 238A and the interpretation of the applicability in the aforementioned judgments has made it unequivocally clear that the provisions of Limitation Act will be attracted under applications made under the Code. However, the issues arising in the case-to-case basis, issues based on differing facts and circumstances of the case, issues of applicability of Section 19 and 14 of the Limitation Act, 1963 still being ambiguous, has made it clear that the interplay and the interpretation of the provisions of both Limitation Act and the Code, is far from over.