Time-barred debts and the insolvency code

By Karthik Somasundram and Shreya Gupta, Bharucha & Partners
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The Insolvency and Bankruptcy Code, 2016, has been construed as a complete code. Based on that construction and noting that the code contained no provision expressly making the Limitation Act applicable, and as the act could not be considered as applicable by necessary implication, time-barred debts were allowed to trigger insolvency proceedings. To remedy this, section 238A was introduced on the recommendations of the Insolvency Law Committee, making the act applicable to proceedings under the code with effect from 6 June 2018.

Karthik-Somasundram-Bharucha-&-Partners
Karthik Somasundram
Bharucha & Partners

However, the question remained whether the amendment had retrospective effect. This was resolved by the Supreme Court in BK Educational Services Private Limited v Parag Gupta and Associates (2018).

According to the appellant, the amendment was clarificatory and had retrospective effect. Further, limitation was a matter of procedural law and therefore the amendment must operate retrospectively. Referring to definitions of “debt” and “default” under the code, the appellants argued that only claims for debts that were not barred by limitation were covered, as time-barred debts could not be considered “due”. The appellant also argued that the Limitation Act applied to proceedings before the National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) under the Companies Act, and it would be unreasonable to hold that it did not apply to proceedings under the code.

The respondent refuted these arguments contending that since it was a complete code, the Limitation Act would not apply for any period prior to the amendment being effective. Moreover, the NCLT is a tribunal to which the Limitation Act could not apply as that act was only applicable to proceedings before courts. Proceedings under the code were not for “recovery” and therefore even a time-barred debt was subsumed within the words “due” and “due and payable”, in the definitions of “debt” and “default”, respectively.

Shreya Gupta   Bharucha & Partners
Shreya Gupta
Bharucha & Partners

Respondent argued that if section 238A of the code was construed to have retrospective effect, vested rights that had accrued to operational and financial creditors would be extinguished and such an effect was impermissible. Additionally, NCLAT exercised jurisdiction under the Competition Act, 2002, as well as under the code. It would be anomalous, if limitation did not apply to proceedings under the Competition Act before NCLAT but applied to proceedings under the code before NCLAT.

When recommending the amendment, the Insolvency Law Committee did not intend to provide a fresh opportunity to creditors whose claims were barred by limitation. The committee had concluded that it was counter-intuitive to exclude the law of limitation when the trigger for initiating proceedings under the code was “default in payment of debt”.

Therefore, the construction suggested by the respondent was contrary to the legislative intent. The court also ruled that the words “due and payable” used in the definition of “default” in the code, was in the context of non-payment by the corporate debtor. Since a time-barred debt could not be recovered, there could be no failure on the part of the corporate debtor to pay such debt.

The appellant’s argument that Limitation Act was applicable to proceedings before the NCLT by virtue of section 433 of the Companies Act found favour with the court. NCLT was set up to exercise jurisdiction and discharge powers and functions not only under the Companies Act but also under other statutes. The section 433 made the act applicable to all proceedings before the NCLT and NCLAT.

Moreover, proceedings under the Companies Act pending before high courts, which were subject to the Limitation Act, were also transferred to NCLT. It would result in absurdity, if limitation applied to proceedings under the Companies Act transferred to NCLT but not to fresh proceedings instituted before it. Therefore, the court held that the Limitation Act was applicable, by virtue of section 433 of the Companies Act, to proceedings under the code from inception. It was for this reason also that section 433 of the Companies Act was not expressly made applicable when the code, under the Eleventh Schedule, amended various statutes.

The court further held that as limitation was procedural law, section 238A of the code must be construed to have had effect from the time the code was enacted. Taking note of its earlier ruling in Innoventive Industries Limited v ICICI Bank (2018), the court held that it was erroneous to contend that the code somehow revived a dead remedy by enabling a creditor to claim a time-barred debt.

Karthik Somasundram is a partner and Shreya Gupta is a senior associate at Bharucha & Partners.

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