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Jurisprudence emanating from Section 238-A of the Insolvency & Bankruptcy Code, 2016: B.K. Educational Services (P) Ltd. V/s Parag Gupta & Associates (2018)

 

Preface:

Section 238-A of the I&B Code, 2016 (hereinafter referred to as the ‘IBC’) was inserted by the Insolvency & Bankruptcy Code (Second Amendment) Act, 2018 with effect from 06.06.2018. Section 238-A of the IBC reads as under:

238-A. Limitation- 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 moot question that arose for adjudication in the matter of: B.K. Educational Services (P) Ltd. (Supra) was:

I.                Whether the Limitation Act, 1963 will apply to applications that are made under Section 7 and/or Section 9 of the IBC on and from its commencement on 01.12.2016 till 06.06.2018?

II.              Section 238-A of the IBC is prospective or retrospective in nature?

 

Reason for introduction of Section 238-A of the Insolvency & Bankruptcy Code, 2016 vide the Insolvency & Bankruptcy Code (Second Amendment) Act, 2018:

According to the Report of the Insolvency Law Committee of March, 2018, Section 238-A of the IBC was introduced for the following reasons among others-

i.                 The intent of the Code (IBC) was not to give a new lease of life to debts which are time-barred. It is settled law that when a debt is barred by time, the right to a remedy is time barred.

ii.               Non-application of the law on limitation creates the following problems:

(1) It re-opens the right of financial and operational creditors holding time-barred debts under the Limitation Act to file for corporate insolvency resolution process, the trigger for which is default on a debt above Rs. 1,00,000/-;

(2) The purpose of the law of limitation is “to prevent disturbance or deprivation of what may have been acquired in equity and justice by long enjoyment or what may have been lost by a party’s own inaction, negligence or latches” (See: Rajinder Singh V/s Santa Singh, AIR 1973 SC 2537);

(3) IBC is not a debt recovery law, the trigger being ‘default in payment of debt’ renders the exclusion of the law of limitation counter-intuitive; and,

(4) It re-opens the right of claimants (pursuant to issuance of a public notice) to file time-barred claims with the interim resolution professional or the resolution professional, which may potentially be a part of the resolution plan; such a resolution plan restructuring time-barred debts and claims may not be in compliance with the existing laws for the time being in force as per Section 30 (4) of the IBC which states that, the Committee of Creditors (COC) may approve a resolution plan by a vote of not less than 66 percent of voting share of the financial creditors, after considering its feasibility and viability and such other requirements as may be specified by the IBBI (Insolvency & Bankruptcy Board of India).

iii.             The intent of the legislature while enacting the IBC was not to package the Code (IBC) as a fresh opportunity for creditors and claimants who did not exercise their remedy under existing laws within the prescribed period of limitation.

iv.             The Limitation Act, 1963 is not to apply to applications of corporate applicants (Section 10 of the IBC), as these are initiated by the applicant for its own debts for the purpose of corporate insolvency resolution process and are not in the form of a creditor’s remedy.

 

Decision in the matter of: B.K. Educational Services (P) Ltd. (Supra):

1.     Section 238-A of the IBC being clarificatory of the law contained in IBC and being procedural in nature, must be held to be retrospective. The ‘law of limitation’ being procedural in nature, would ordinarily apply retrospectively, save and except that new law of limitation cannot revive a dead remedy; this can be said in the context of a new law of limitation providing for a longer period of limitation than what was provided earlier. Thus, an application (under Section 7 or Section 9 of the IBC) that is filed in 2016/ 2017, after the IBC has come into force, cannot suddenly revive a debt which is no longer due as it is ‘time-barred’.

2.     Section 238-A of the IBC would not serve its object unless it is construed as being retrospective, as otherwise, applications seeking to resurrect time-barred claims would have to be allowed, not being governed by the law of limitation.

3.     The IBC cannot be triggered in the year 2017 for a debt which was time-barred, say, in 1990, as that would lead to absurd and extreme consequences of the IBC being triggered by a stale or dead claim, leading to drastic consequences of instant removal of the present Board of Directors of the corporate debtor permanently, which may ultimately lead to liquidation and, therefore, corporate death. The expression ‘debt due’ regards being had to Section 3 (11) of the IBC, refers to debts ‘due and payable’ in law, that is, the debts that are not time-barred.

4.     A debt may not be due if it is not payable in law or in fact. (See: Innoventive Industries Ltd. V/s ICICI Bank & Anr., (2018) 1 SCC 407)

5.     In the matter of Innoventive Industries Ltd. (Supra) it was held as follows:

30. … in the case of a corporate debtor who commits a default of a financial debt, the adjudicating authority has merely to see the records of the information utility or other evidence produced by the financial creditor to satisfy itself that a default has occurred. It is of no matter that the debt is disputed so long as the debt is “due” i.e. payable unless interdicted by some law or has not yet become due in the sense that it is payable at some future date. It is only when this is proved to the satisfaction of the adjudicating authority that the adjudicating authority may reject an application and not otherwise…

Thus, a debt is considered to be “due” if it is not interdicted by some law; this will include the Limitation Act, 1963. A time barred debt is a debt interdicted by the Limitation Act, 1963.

6.     According to Section 3 (12) of the IBC: “default” means non-payment of debt when whole or any part or installment of the amount of debt has become due and payable and is not paid by the debtor or the corporate debtor, as the case may be.

The definition of “default” in Section 3 (12) of the IBC uses the expression “due and payable” followed by the expression “and is not paid by the debtor or the corporate debtor”. “Due and payable” in Section 3 (12) of the IBC, therefore, only refers to the whole or part of a debt, which when referring to the date on which it becomes “due and payable”, is not in fact paid by the corporate debtor. The context of this provision, Section 3 (12) of the IBC, is therefore the actual non-payment by the corporate debtor when a debt has become due and payable. Thus, the IBC cannot be employed as a means for granting fresh lease of life to time-barred debts/dues/claims.

7.     In case of an operational creditor, the IBC cannot be invoked if there is a ‘dispute’ already existing between the operational creditor and the corporate debtor. ‘Dispute’ as defined in Section 5 (6) of the IBC includes a suit or arbitration proceeding relating to certain matters. A perusal of Section 8 (2) (a) of the IBC would make it limpid that the corporate debtor has to within a period of 10 days of the receipt of the demand notice, bring to the notice of the operational creditor the existence of a “dispute”. Under Section 8 (2) (a) of the IBC, the corporate debtor can, in order to avoid the IBC proceedings, disclose the pendency of a suit or arbitration proceedings filed before the receipt of the demand notice. Therefore, at least in the case of an operational creditor, “default” must be non-payment of amounts that have become due and payable in law. Thus, the defense of ‘existence of dispute’ in case of operational creditors would be meritorious only if it is shown that the suit or arbitration proceeding pending between the operational creditor and the corporate debtor is not interdicted by the law of limitation (the Limitation Act, 1963).

8.     When the expression “due” and “due and payable” occur in Sections 3 (11) and 3 (12) of the IBC, they refer to a “default”, which is non-payment of a debt that is due in law, that is, such debt which is not barred by the law of limitation. The corporate insolvency resolution process against a corporate debtor can only be initiated either by a financial creditor or operational creditor in relation to debts which have not become time-barred.

9.     The Insolvency Law Committee Report of March, 2018 makes it clear that the object of the IBC from the very beginning was not to allow dead or stale claims to be resuscitated.

10.  Section 433 of the Companies Act, 2013 states as under:

433.Limitation- The provisions of the Limitation Act, 1963 (36 of 1963) shall, as far as may be, apply to proceedings or appeals before the Tribunal or the Appellate Tribunal, as the case may be.

Constitution of NCLT (Adjudicating Authority) can be traced from the language of Section 408 of the Companies Act, 2013. The language of Section 408 of the Companies Act, 2013 clearly states that, NCLT is set up to discharge such powers and functions that are conferred on it not merely under the Companies Act, 2013 but also under “any other law for the time being in force”, that is the Competition Act, 2003 and also the IBC. So even before Section 238-A of the IBC came into force, proceedings before NCLT (which include applications under Sections 7 and 9 of the IBC) were governed by the Limitation Act, 1963 by virtue of Section 433 of the Companies Act, 2013.

11.  Section 434 (1) (c) of the Companies Act, 2013 states that:

434.Transfer of certain pending proceedings-

(1)   On such date as may be notified by the Central Government in this behalf-

(a)   XXXXX

(b)   XXXXX

(c)   All proceedings under the Companies Act, 1956 (1 of 1956), including proceedings relating to arbitration, compromise, arrangements and reconstruction and winding up of companies, pending immediately before such date before any District Court or High Court, shall stand transferred to the Tribunal and the Tribunal may proceed to deal with such proceedings from the stage before their transfer;

(d)   XXXXX

(2)   XXXXX

That by virtue of Section 434 (1) (c) of the Companies Act, 2013 winding proceedings that were erstwhile pending before any District Court or the High Court, as the case may be, were to be transferred to the NCLT. When the winding up proceedings were pending before the District Court or the High Court, as the case may be, necessarily the Limitation Act, 1963 was applicable to those proceedings. But, upon the transfer of the winding up proceedings to the NCLT, it cannot be stated that because these proceedings are now before the NCLT and are to be governed by the provisions of the IBC, the Limitation Act, 1963 will cease to apply because for the period from 01.12.2016 to 06.06.2018 that is, before the enactment of Section 238-A of the IBC, the Limitation Act, 1963 was not applicable to proceedings under the IBC (especially in context of proceedings under Sections 7 and 9 of the IBC).

It is important to note that, Rule 5 of the Companies (Transfer of Pending Proceedings) Rules, 2016, made Section 433 of the Companies Act, 2013 applicable to the proceedings which were transferred from the High Court/ District Court, as the case may be, to the NCLT for adjudication. It is of no consequence whether the proceedings which got transferred and thereby got listed before the NCLT were in the nature of Section 7 or Section 9 of the IBC. Notwithstanding the fact that Section 238-A of the IBC came into force by virtue of the Insolvency & Bankruptcy Code (Second Amendment) Act, 2018 (which superseded the Insolvency & Bankruptcy Code (Amendment) Ordinance, 2018), the provisions of the Limitation Act, 1963 have been applicable to the proceedings under the IBC right from the inception of the IBC although there wasn’t any express provision in that regard in the IBC before the coming into force of the Insolvency & Bankruptcy Code (Second Amendment) Act, 2018. 

 

Takeaway:

1.     The Limitation Act, 1963 is applicable to applications filed under Sections 7 and 9 of the IBC from the inception of the IBC; Article 137 of the Limitation Act, 1963 gets attracted to applications filed under Sections 7 and 9 of the IBC, therefore, ‘the right to sue’ 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, 1963, save and except in those cases where, in the facts of the case, Section 5 of the Limitation Act, 1963 may be applied to condone the delay in filing such application.

2.     The Limitation Act, 1963 applies from the inception of the IBC.     


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