Limitation Act applies to IBC proceedings

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The Supreme Court, while hearing an appeal against an order of National Company Law Appellate Tribunal (NCLAT), held that Limitation Act, 1963, is applicable to applications filed under the Insolvency and Bankruptcy Code, 2016 (IBC). The judgment arose from a batch of cases in which NCLAT held that Limitation Act does not apply to applications made under section 7 and section 9 of IBC from the date of commencement of IBC (i.e. 1 December 2016) until the date on which the IBC was amended to incorporate section 238A of IBC (i.e. 6 June 2018).

In BK Educational Services Private Limited v Parag Gupta and Associates, a dispute regarding liability arose between Parag Gupta & Associates, chartered accountants (the financial creditors) and BK Educational Services Private Limited (the corporate debtor). The corporate debtor, while denying the financial liability, contended that all but one financial claim were false and that the records were tampered and manipulated by the relatives of the financial creditors. Further, the amounts claimed were time-barred and there was nothing on record that would extend the limitation to recover the amount since the period was between 2012 and 2013.

NCLAT held that documents submitted were not justifiable for the purpose of extending the limitation and therefore the claim amounts were not legally recoverable except one from 2015.

The order was challenged before NCLAT by the financial creditors and NCLAT held that the Limitation Act provisions were not applicable for the commencement of the corporate insolvency resolution process under the IBC and further passed the order to accept the application for initiation.

On appeal, while setting aside the NCLAT order, the Supreme Court held 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. The expression “debt due” in the definition sections of IBC mean debts that are “due and payable” in law, i.e., the debts that are not time-barred. Since the Limitation Act is applicable to applications filed under sections 7 and 9 of the IBC from inception, article 137 of the Limitation Act is evoked, which provides 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.

“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, on the facts of the case, section 5 of the Limitation Act may be applied to condone the delay in filing such applications.

The dispute digest is compiled by Bhasin & Co, Advocates, a corporate law firm based in New Delhi. The authors can be contacted at lbhasin@bhasinco.in or lbhasin@gmail.com. Readers should not act on the basis of this information without seeking professional legal advice.