Exception to Limitation Act in an IBC process
A
division bench of the NCLT Mumbai in its recent judgement in the case of
TJSB Sahakari Bank Ltd. Vs. M/s. Unimetal Castings Ltd.[1] has held that, a debt that is barred by limitation can be proceeded
against under provisions of the Insolvency and Bankruptcy Code (IBC), 2016 if
it is evident that the debt is continued in the balance sheet of the corporate
debtor.
Background of the case
- The TJSB Sahakari Bank Ltd. (“Financial Creditor/Petitioner”) sought CIRP of M/s. Unimetal
Castings Ltd. (“Corporate Debtor”) u/s 7 of
Insolvency and Bankruptcy Code(IBC), 2016 on the ground that the Corporate
Debtor committed default in repayment of loan facilities granted to the
Corporate Debtor.
- The Corporate Debtor raised objections
to the petition on ground of being an MSME as well as on the ground that
petition is barred by limitation.
- The NCLT rejected the contentions of
the Corporate Debtor in view of Section 7 of the IBC, the ratio decidendi of
the case being “the moment the adjudicating authority is satisfied that a
default has occurred, the application must be admitted”.
Issue Involved
Whether the period of limitation would run
from the date of default i.e from June, 2015 or a fresh limitation would be considered
from the date when there is an acknowledgement of liability on part of the
Corporate Debtor.
Contentions of the
Parties
The
Financial Creditor contended that the Corporate Debtor committed default in repayment
of loan facilities granted to the Corporate Debtor and sought Insolvency u/s 7 read
with rule 4 of the IBC, 2016.
Contrarily,
the Corporate Debtor raised several objections to the petition. It was
contended that Corporate Debtor is a medium enterprise as defined under the
Micro, Small and Medium Enterprises Development Act, 2006 (‘MSMED Act’). The declaration
of the account of the Corporate Debtor as Non-Performing Asset (‘NPA’) w.e.f.
30.06.2015 is illegal, void and non-est. There is no due payable by the
Corporate Debtor.
The
Corporate Debtor further contended that, the petition is barred under Article
137 of the Limitation Act, 1963 as the date of default was on 30.06.2015
whereas the insolvency petition was filed on 23.08.2018 i.e. 3 years after the
debt converted into a due. To support this contention, Corporate Debtor relied
on the decision of Hon’ble Supreme Court in the “B.K. Educational Services Pvt.
Ltd. vs. Parag Gupta & Associates”[2].
The
Petitioner submitted that the loan was evinced in the balance sheet of the
Corporate Debtor which is an acknowledgment of liability and hence the debt is
not barred by limitation. When the liability is evinced in the balance sheet
that is a clear acknowledgement of debt by the Corporate Debtor.
It was therefore argued that the period of limitation would continue in view of
such admission of debt.
Judgment
Exception
to applicability of The Limitation Act, 1963
Distinguishing the
present case from the Supreme Court decision in B.K. Educational Services Private Limited v Parag Gupta And
Associates,Hon’ble Bench observed that the acknowledgment
of liability was shown in the balance sheet of the Corporate Debtor which is an
acknowledgment of liability and hence the debt is not barred by limitation.
However, Corporate Debtor has not disputed the fact that the loan was shown as
a liability in its balanace sheet.
When
the liability is shown in the balance sheet that is a clear acknowledgment of
debt by the Corporate Debtor. Hon’ble Bench relied on several citations wherein
the debt shown in the balance sheet is an acknowledgment of liability. In view
of this, the contention of the Corporate Debtor that the debt is barred by
limitation will not hold water. Thus the adjudication authority having
satisfied with the fact that the Corporate Debtor defaulted in making payment
towards the liability to the Petitioner, the petition deserves to be admitted.
Analysis
In a remarkable judgment namely B.K. Educational
Services Private Limited v Parag Gupta And Associates, Hon’ble Supreme
Court has held that the Limitation Act is applicable to insolvency petitions
filed under Section 7 and 9 of the IBC from the commencement of IBC on
01.12.2016. The Supreme Court had elucidated that insolvency proceedings
cannot be initiated based on time barred claims. Observing that an application
filed after the IBC came into force in 2016 cannot revive a debt which is no
longer due as it is time- barred.[3]
The amendment of Section 238A would not serve its object unless it is construed
as being retrospective. Otherwise, applications seeking to invigorate
time-barred claims would have to be allowed, not being governed by the law of
limitation.[4] It
is clear from a reference to the Insolvency Law Committee Report of March, 2018[5],
that the legislature did not contemplate enabling a creditor who has allowed
the period of limitation to set in to allow such delayed claims through the
mechanism of IBC.
The expression “debt due” in the definition
sections of IBC has already been interpreted by the Hon’ble Supreme Court to
mean debts that are “due and payable” in law, i.e., the debts that
are not time-barred.[6]In this regard, the Hon’ble Supreme Court has referred to its judgment
in Innoventive Industries Ltd. v. ICICI Bank & Anr., wherein it
had held that “a debt may not be due if it is not payable in law or in
fact” Since the Limitation Act is applicable to petitions for insolvency
filed under Sections 7 and 9 of IBC from the inception of IBC, Article 137 of the
Limitation Act gets evoked.
Article 137 of the Limitation Act
renders the period of limitation in case of “any other application
for which no period of limitation is provided elsewhere” as three
years from the time when the right to apply accrues.[7]
“The right to sue”, therefore, emanates when a default occurs. If
the default had occurred for more than three years prior to the date of filing
of application under IBC, the application would get barred under Article 137 of
the Limitation Act, 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.
In the present case, the Hon’ble Bench carved out the
exception to the applicability of the limitation period while holding that the
limitation period shall stand extended in cases where creditor produces an
evidence of continuing cause of action against the debtor.The debt remains due
and payable in case where period of limitation stands extended on the account
of acknowledgment or continuing cause of action.
Thus the Supreme Court judgment elaborated above does not
hold good in situations wherein the period of limitation may be extended by
proving acknowledgment on part of the corporate debtor.
Conclusion
This is certainly a prudent judgment for the operational and financial creditors to initiate insolvency process against defaulters. This judgment ensures that the corporate debtors cannot escape from their liability merely by incorporating Article 137 of The Limitation Act, 1963 thereby protecting the interests of the petitioners mending resolution to their affliction.
Contributed by – Avani Sinha, Associate
[1] CP (IB)-3622/I&BP/MB/2108
dated 25-01-2019.
[2] B.K.
Educational Services Pvt. Ltd. vs. Parag Gupta & Associates 2018 SCC Online
SC 1921
[3] Para 12 of Judgment
[4] Para 15 of Judgment
[5] http://www.mca.gov.in/Ministry/pdf/ILRReport2603_03042018.pdf
[6] Para
28 of the judgment of the Hon’ble Supreme Court in Innoventive
Industries Ltd. v. ICICI Bank & Anr., (2018) 1 SCC 407
[7] The relevant provision of the Limitation Act is Article 137 of The Schedule to the Limitation Act which provides limitation in case of any application for which no period of limitation is provided elsewhere as three years from the date on which right to apply accrue
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