Limitation of claims under the IBC: Final opportunity for creditors?

Bar & Bench October 26 2017

By Swaroop George

The Law of Limitation has sounded the death knell for many a claim by creditors at the very threshold, regardless of how strong the claim may have been on merits. While traditional legal systems for recovery of debts are bound by the provisions of the Limitation Act, 1963, the newly introduced Insolvency and Bankruptcy Code, 2016 (the Code) has, till date, not attracted the full rigour of the Limitation Act, 1963.

The issue of applicability of the Limitation Act, 1963 to the working of the Code was considered by the National Company Appellate Tribunal (NCLAT) in the matter of Neelkanth Township and Construction Pvt. Ltd. vs. Urban Infrastructure Trustee Ltd., numbered as Company Appeal (AT) (Insolvency) No.44 of 2017. In the aforesaid case, the NCLAT had categorically held that the provisions of the Limitation Act, 1963 would not apply to the Code. The relevant findings of the NCLAT are as follows:

“The next ground taken on behalf of the appellant is that the claim of the respondent is barred by limitation, as the Debentures were matured between the year 2011 – 2013 is not based on Law. 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.”

However, subsequently in appeal, the Supreme Court in Neelkanth Township and Construction Pvt. Ltd. vs. Urban Infrastructure Trustee Ltd., numbered as Civil Appeal No.10711 of 2017, kept the question of the applicability of the Limitation Act, 1963 to the Code, open, while proceeding to dismiss the appeal.

Post the aforesaid development, the NCLAT has had the opportunity to consider once again, the question of applicability of the Law of Limitation in the judgment in Black Pearl Hotels Pvt. Ltd. vs. Planet M Retail Ltd., numbered as Company Appeal (AT) (Insolvency) No.91 of 2017, decided on 17th October, 2017. The aforesaid appeal stems from the decision of the National Company Law Tribunal, Mumbai, rejecting an application for initiation of insolvency proceedings by an operational creditor on the ground that the debt was barred by limitation.

The NCLAT did not expressly deal with the issue of whether the Limitation Act, 1963 does or does not apply to the Code. However, the NCLAT ruled that even if it is assumed that the Limitation Act, 1963 does apply to the Code, then the period of limitation with regard to the Code, would only start running from 1st December, 2016. The rationale given by the NCLAT is that the Insolvency and Bankruptcy Code, 2016 came into force with effect from 1st December, 2016 and as a consequence the right to apply under the Code, accrues only on or after 1st December, 2016 and not before the said date.

Such a ruling implies that for all debts, a fresh period of limitation starts running from the date of coming into force of the Code, with regard to proceedings under the Code. Thereby, regardless of the applicability of the Limitation Act, 1963 to the Code, all debts can be acted upon under the Code till the coming to an end of the limitation period as accounted from 1st December, 2016. Creditors have until 1st December, 2019 to initiate proceedings under the Insolvency and Bankruptcy Code, 2016, in terms of the judgment of the NCLAT. This right will accrue to creditors regardless of the applicability of the Limitation Act, 1963 to the Code.

The relevant finding of the NCLAT is as follows:

“Insolvency and Bankruptcy Code, 2016 has come into force with effect from 1st December, 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 1st December, 2016, the application filed much prior to three years, the said application cannot be held to be barred by limitation.”

The latest ruling by the NCLAT has seemingly afforded one final opportunity for creditors who would have otherwise have had no hope of enforcing their debts because of a delay in enforcing their rights. This window of opportunity has been left open to creditors regardless of whether the Limitation Act, 1963 is held to apply to the proceedings under the Code.

Swaroop George is an independent advocate practicing at New Delhi

(Read the Judgement)

Black Pearls Hotels Judgment

 

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