BK Educational Services v. Parag Gupta and Associates: A critical study of the law laid down by the Supreme Court

Bar & Bench February 13 2019

Dormaan Dalal

The Supreme Court in BK Educational Services Private Limited v. Parag Gupta and Associates (BK Educational), while interpreting Section 238A of the Insolvency and Bankruptcy Code, 2016 (the Code), held that provisions of the Limitation Act, 1963 are applicable to applications filed by financial and operational creditors under Sections 7 and 9 of the Code from the “inception of the Code”.

While the author does not dispute the fact that the Limitation Act would now apply to the Code, the author respectfully disagrees with the ultimate conclusion of the Court, namely

(1) “The right to sue” under Section 7 and 9 of the Code accrues when a default occurs;

(2) Save and except those cases where Section 5 of the Limitation Act is applicable, “If the default has occurred over three years prior to the date of filing of the application, the application would be barred under Article 137 of the Limitation Act…”

The Issue before the Supreme Court

The Supreme Court was dealing with Section 238A, which was inserted into the Code by an amendment which states that the Limitation Act “shall, as far as may be,” apply to the proceedings before the National Company Law Tribunal (NCLT). The issue that arose before the Supreme Court was whether the Limitation Act is applicable to applications that are made under Section 7 and/or Section 9 of the Code from its commencement on December 1, 2016 till June 6, 2018 i.e. the date on which the Amendment Act came into force.

Finding of the Supreme Court

The Court came to the conclusion that the Limitation Act would apply to NCLT proceedings. As for Section 238A, the Court said that it should be applied retrospectively, “otherwise, applications seeking to resurrect time-barred claims would have to be allowed, not being governed by the law of limitation.”

The Court further stated,

“The Code cannot be triggered in the year 2017 for a debt which was time-barred, say, in 1990, as that would lead to the absurd and extreme consequence of the Code being triggered by a stale or dead claim….”

It was held that “since the Limitation Act is applicable to applications filed under Sections 7 and 9 of the Code from the inception of the Code, Article 137 of the Limitation Act gets attracted.” In effect, the Court held that Section 238A of the Act would apply to applications filed under Section 7 and/or Section 9 of the Code from its commencement on December 1, 2016. Up to this point, there is no difficulty with the verdict.

However, the Court further states, “the right to sue”, therefore, accrues when a default occurs. If the default has occurred over three years prior to the date of filing of the application, the application would be barred under Article 137 of the Limitation Act, save and except in those cases where, in the facts of the case, Section 5 of the Limitation Act may be applied to condone the delay in filing such application.

Right to Sue

The use of the expression “the right to sue” is at odds with Article 137 of the Limitation Act, because this expression is nowhere mentioned in the Article. The expression used in Article 137 is “the right to apply”. The expression “the right to sue” finds place in Article 113 of the Limitation Act. Both are residuary articles, providing for a limitation period of three years.

However, Article 113 applies only to “Suits” and not to any other legal proceeding. The “right to sue” arises when the “cause of action” arises i.e. “the right to prosecute to obtain relief by legal means.” Article 137, on the other hand, is a residuary article for applications or petitions which can be filed within three years “when the right to apply accrues.”

Article 137 applies to any petition or application filed under CPC as well as Special Laws. Article 137 applies only to “applications” and not “suits”. The time to make an application under Article 137 begins to run from the moment the applicant first had the right to make the said application. It is “this right under to make an application” under Article 137 that has been interpreted by two recent judgments of the NCLAT.

In Shankar Vardharajan v. Dewachand Ramsaran Corporation Pvt. Ltd. and others, the appellant, while relying on the judgment of the Supreme Court in BK Educational, contended that the claim of the respondent was time-barred as it arose in the year 2014. The NCLAT, while referring to BK Educational, held that the right to apply under Section 9 accrued to the eespondent “since December 1, 2016 when the I&B Code came into force.”

Therefore, in the NCLAT’s opinion, the Section 9 application was filed on time. It is pertinent to note that though in the facts of the case, the NCLAT found that there was a continuous cause of action, in the NCLAT’s view, the right to apply under Section 9 accrued from the date on which the Code came into force i.e. from December 1, 2016.

It is submitted that this view of the NCLAT is directly contrary to the law laid down in BK Educational, which states that the “right to sue” accrues when a default occurs and if the default occurred over three years prior to the date of filing of the application, the application would be barred by Article 137. The same view was also taken in another judgment delivered by the NCLAT in Pushpa Shah and Ors. v. IL & FS Financial Services Limited and Ors.

Critical Analysis

In the author's opinion, the view of the NCLAT appears to be correct for the following reasons:

  1. The right to file applications under Section 7 and 9 only accrued with the commencement of the Code on December 1, 2016 and not prior to that. The Supreme Court in Innoventive Industries Limited v. ICICI Bank and another has held that the Code is a Parliamentary law that is “an exhaustive code on the subject matter of insolvency in relation to corporate entities.” This view has further been supplemented by the NCLAT in Randhiraj Thakur v. M/s Jindal Saxena Financial Services and another which holds that the Code is a “self-contained Code”. Therefore, if the Code is exhaustive and self-contained, insolvency resolution proceedings can be initiated only under the Code and no other law. This is evident from Section 231 of the Code that bars the jurisdiction of the Civil Court in respect of any matter which the Adjudicating Authority (NCLT) is empowered to pass an order and is further evident from Section 238 of the Code which states that the Code will override all other laws. Therefore, it would not be correct to say that the “right to sue” occurs when a default occurs, as there is no “right to sue” but there is a “right to apply” under Section 7 and 9 to initiate corporate insolvency proceedings from the commencement of the Code on December 1, 2016.
  2. Section 5 of the Limitation Act cannot be applied to insolvency proceedings initiated within a period of three years from the commencement of the Code, namely from December 1, 2016 to November 30, 2019 for the simple reason that the right to file an application under Section 7 or Section 9 only accrued on December 1, 2016. Section 5 presupposes that there is an existing statutory right to file an application but for certain bona fide reasons such application could not be filed within time.
  3. Neither Sections 6, 7, 8 or 9 of the Code prescribe a time limit within which insolvency proceedings need to be initiated.
  4. Lastly, by using the expression “right to sue” instead of “right to apply”, the Court in BK Educational has through implication substituted the words used in Article 137 (“right to apply”) with the words used in Article 113 (“right to sue”) and has applied the expression “right to sue” to Article 137 of the Limitation Act. This is contrary to the well-settled principle of interpretation that courts cannot add or substitute words in a statute.

Concluding Comments and Suggestions

It appears that the intention behind the Amendment Act was to prevent “delayed” and “dead” claims from being agitated under the Code. However, in light of the recent decisions of the NCLAT mentioned above, it would be advisable for the Legislature to amend the Limitation Act in the following manner:

  1. By adding a proviso or an explanation to Article 137 of the Limitation Act that states that for the purposes of proceedings initiated under Sections 7 and 9 of the Code, the “right to apply” under Article 137 would mean “the right to apply when the default arose” or when “the debt became due and payable”. This would ensure that claims that became due three years prior to the commencement of the Code would be barred by limitation.
  2. By adding a proviso or an explanation to Section 5 of the Limitation Act stating that it would apply to applications made under Sections 7 and 9 of the Code when the default occurs three years prior to the commencement of the Code. This would ensure that in case of a delay, this section can be applied if “sufficient cause” is shown.

In the author's view, the above-mentioned suggestions would obviate any ambiguity while filing Corporate Insolvency Resolution Proceedings and would ensure that stale, time-barred, or dead claims cannot be revived or re-agitated.

The author is an independent practitioner in the Bombay High Court. He can be contacted at dormaandalal@gmail.com

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