Application of the Limitation Act to the resolution process under the Insolvency and Bankruptcy Code

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The liquidity of the Indian banking sector has experienced a drastic drop due to the threat of an increase in non-performing assets (‘ZIP’). The promulgation of the Insolvency and Bankruptcy Code, 2016 (‘IBC “http://161.35.220.217/” Code ‘) breathe new life into the resolution of stressed workers. However, there have been conflicting views on how the Limitation Act, 1963 (‘THE’) could be invoked against the IBC.

When the IBC came into effect in 2016, there was no provision in the LA for filing corporate insolvency resolution process requests under Sections 7, 9, and 10 of the Code. The LA has also not been made applicable to the IBC. However, in 2017, the National Company Law Tribunal (‘NCLT ‘), the Delhi court had ruled that the provisions of LA applied to proceedings instituted therein.[1] The National Company Appeal Tribunal (NCLAT ‘), in an appeal on the same question of law, reversed this position and held that if there was a debt and there was a default of debt having a continuing course of action, the claim would not be statute-barred[2] and IBC being a complete code had deliberately ignored the applicability of the LA[3]. This NCLAT decision resulted in an increase in several debt claims that were otherwise time-barred.

?? APPLICABILITY OF THE:

The conflict over the applicability of the LA has been considered by the Honorable Supreme Court (‘SC ‘) and he has dealt with this question extensively in 2 landmark cases – BK Educational Services v. Parag Gupta & Associates[4] and Babulal Vardharji Gurjar v Veer Gurjar Aluminum Industries Pvt. Ltd. & Anr[5]. In these cases, the CS mainly provided the nuances for the applicability of the LA.

At the same time, the Insolvency Law Committee in its report[6] of March 2018 recommended an amendment to the IBC. Article 238A has been inserted[7] to the CIB which provided that the LA applied to proceedings / appeals before the NCLT / Contracting authority / NCLAT / Debt collection court (‘DRT ‘) / Appeals tribunal for debt collection.

In BK Educational Services (Supra) the SC addressed 2 main questions – first, whether the LA applied to proceedings under article 7/9 since the entry into force of the Code? And second, if the LA is triggered at the start of the IBC or on the date of the default?

Addressing the first issue, the SC considered that LA would be applicable to courts while deciding proceedings under Article 7/9 of the IBC, as it also applies to proceedings before NCLT / NCLAT under l ‘section 433 of the Companies Act 2013 (‘CALIFORNIA’). He clarified that Section 238A of the IBC was retrospective in nature and that the intent of the Code was not to breathe new life into prescribed debts. If a default had occurred more than three years before the filing date of the claim, the claim would be time barred under section 137 of the LA, except and except in cases where, having regard to the facts of the case , Section 5 of the LA may be requested as an excuse for the delay.

On the second question, the SC analyzed the terms “debt due”, “by default”, “due and payable” and considered that the LA is triggered from the date of default and that the date of execution of the ‘IBC is absolutely irrelevant to trigger the limitation. period. he reasoned that the Code could not be triggered in 2017 for a debt that was prescribed much earlier and that the expression “past due debt” defined in the Code referred to debts that were “due and payable” in law, that is, that is, debts that were not time-barred. The “right to sue” therefore accrued when a default arose.

?? SCOPE AND EXTENT OF THE APPLICABILITY OF ARTICLE 18 OF THE (“SEC. 18”) ON IBC PROCEDURES:

The SC in Babulal Vardharji Gurjar (Supra) held that on the facts of the case, Sec. 18 did not apply to a request under Article 7 of the IBC.

The knot of Sec. 18 is that an acknowledgment of liability has the effect of causing a new limitation period to run from the date on which the acknowledgment was so signed. This acknowledgment of receipt, if applicable, must be prior to the expiry of the time limit prescribed for the lodging of the complaint. In other words, if the limitation has already expired, it would not be reinstated under this section.

It is relevant to note that there is nothing in the new Sec. 238A of the IBC which suggests that Sec. 18 is excluded.

?? IS A BALANCE SHEET OF A COMPANY CONSIDERED AS A VALID RECOGNITION UNDER THE SEC. 18?

It is an established law, as has always been maintained by the SC and various Hautes Courts, that the entries made in the company’s balance sheet should be treated as an IOU for the purposes of Sec. 18. The balance sheet is a material document attached with inviolability which is submitted to the registrar of companies (‘Ground floor‘) and is used to obtain loans / investments.

In addition, the newly inserted provisions of the CA, also provide that a company cannot reopen its books of accounts / financial statements without the order issued by a court of jurisdiction / competent tribunal. Documents filed with the RoC are admissible in any proceeding without proof or production of the original. The recognition of liability contained in a company’s balance sheet provides a new starting point for limitation. The SC in n Mahabir cold storage v. CIT[8] that the records of a company are At first glance evidence.

The High Court of Calcutta in Bengal Silk Mills Co.[9] and the Delhi High Court in Southeast Asia Industries Pvt. Ltd.[10] have also ruled that the sole reason that the balance sheet of a company is established under the constraint of the law or in the fulfillment of a legal obligation, it cannot be considered that it does not amount to a recognition of responsibility.

?? BABULAL VARDHARJI GURJAR (SUPRA) JUDGMENT:

The main problem in this case was that a company’s balance sheet was not a valid IOU for benefit under Sec. 18. The SC considered that when a party requests the application of a particular provision for the extension or widening of the limitation period, the relevant facts must be pleaded and evidence must be produced. In this case, although the financial creditors mentioned the date of the default, no pleading on the recognition of debt on the balance sheets had been made.

The SC refused the benefit of Sec. 18 and held that no case of an extension of the limitation period was available for consideration and even though Sec. 18 was applicable, the same could not apply in the present case for lack of a statement by the financial creditors to this effect.

?? YOGESHKUMAR JASHWANTLAL THAKKAR v. INDIAN OVERSEAS BANK & ANR[11]:

In this case, NCLAT reconfirmed the applicability of Sec. 18 and found that a new limitation period had arisen because the CD had acknowledged the debt by issuing debt recovery / confirmation letters before the limitation period expired.

NCLAT, while distinguishing Babulal Vardharji Gurjar (Supra) as unenforceable, found that the present case was supported by relevant documents and that the acknowledgments were duly signed / stamped by the directors of the CD.

?? BISHAL JAISWAL v. ASSET RECONSTRUCTION COMPANY (INDIA) LTD. AND OTHERS[12]:

Bishal Jaiswal (‘Supra’) is a recent case in which NCLAT challenged the ruling by [13]V. Padmakumarv. Stabilization of stressed assets Fundcase on the point of validity of the non-acceptance of the balance sheet as valid proof of debt.

In V. Padmakumar (Supra), a formation of 5 members of the NCLAT had estimated that the filing of the bankruptcy each year being obligatory under the CA, it cannot be regarded as a recognition because this would be equivalent to the absence of limitation and lack of reasons. had been assigned for disagreeing with this view.

⮚ Expressing doubts about the correctness of this decision, a panel of 3 NCLAT judges in Bishal Jaiswal (Supra) stated that there is a consistent view from the SC and several High Courts that the balance sheet entries of a company should be treated as an IOU for the purposes of section 18. The bench referred the decision for reconsideration for the constitution of an appropriate bench interim president.

?? OUR VIEWS:

Advocacy issues: In our opinion, the verdict of the SC in Babulal Vardharji Gurjar (Supra) facilitated a positive reinforcement of the jurisprudence on the issue of limitation. The SC correctly held that if a party relies on the applicability of Sec. 18, the same should be argued at the filing stage and presented with appropriate evidence.

Accounting case law: An analysis by Bishwal Jaiswal (‘Supra’) reflects the opinion of NCLAT that “balance sheet entries do not constitute a valid acknowledgment of debt”, is not only contrary to established legal position, but also contrary to law. jurisprudence / principles of accounting and corporate law as applicable in India. The balance sheet is a document duly signed by a person authorized to acknowledge the debt of the company (as a liability) on an annual basis and filed / published no later than a particular date for various statutory compliance.

Review: NCLAT’s proactive judicial wisdom in Bishwal Jaiswal (‘Supra’) on the matter is significant as the bench has returned V. Padmakumar (Supra) for reconsideration. This referral is a positive step and could pave the way for lenders to restructure their debt without fear that their debt will become time-barred for collection by the courts.

(Vinita Hombalkar, Partner and Shruti S Sareen, Partner, Orbit Law Services)



[1] M / s Deem Roll Tech Limited v. RL Steel & Energy Ltd., Company Application No (IB) 24 / PB / 2017.

[2] Township of Neelkanth and Construction Pvt. Ltd. vs. Urban Infrastructure Trustees Limited [2017] 143 SCL 538.

[3] Speculum Plast Pvt. Ltd. and Ors v. PTC Techno Pvt. Ltd. and Ors. [2018] 142 CLA 165.

[4] BK Educational Services v. Parag Gupta & Associates, AIR 2018 SC 5601.

[5] Babulal Vardharji Gurjar v. Veer Gurjar Aluminum Industries Pvt. Ltd., [2020] 222 Comp Case 115 (SC).

[7] In force since 06.06.2018, the 2018 Insolvency and Bankruptcy Law (second amendment)

[8] Mahabir Cold Storage v. CIT, 1991 Supp (1) SCC 402.

[9] Bengal Silk Mills Co. v. Ismail Golam Hossain Ariff, AIR 1962 Cal 115.

[10] South Asia Industries (P) Ltd. vs. Krishna Shamsher Jung Bahadur Rana and Ors. MANU / DE / 0372/1972 (Delhi).

[11] Yogeshkumar Jashwantlal Thakkar v. Indian Overseas Bank, MANU / NL / 0341/2020.

[12] Bishal Jaiswal v. Asset Reconstruction Company (India) Ltd., [2020] 222 Comp Case 508.

[13] V. Padmakumar v. Stabilization fund for stressed assets, Company call (AT) (Ins) n ° 57 of 2020



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