The Insolvency and Bankruptcy Code, 2016 has taken a paradigm shift in recent years. An insolvency application under the code can be filed before the National Company Law Tribunal (NCLT) if the debt becomes accrued and eventually the corporate debtor becomes liable to make the payment or if default arises and the corporate debtor fails to clear the dues payable to the creditor. However, there has been a lot of controversy regarding the time-barred limitation for the application of proceedings.
Before going further into the subject, first, understand what limitation is. Under section 2 (j) of the Limitation act 1963, ''period of limitation'' means the limitation period prescribed for any suit, appeal, or application by the Schedule, and 'prescribed period' means the period of limitation computed under the provisions of this Act. The law of limitation revolves around the basic concept of fixing or prescribing the time for barring legal actions beyond that period. Limitation Act, 1963 applies to the proceedings under the Insolvency and Bankruptcy Code, 2016 in the matters relating to the initiation of the corporate insolvency resolution process(CIRP) based on time-barred debt.
Insolvency and Bankruptcy Code, 2016 was initially silent on the application of the Limitation Act in matters pertaining to IBC. However, Supreme Court cleared the air, in the case of M P Steel Corporation v. Commissioner of Central Excise( 2015 VI AD (S.C.) 501), and noted that the Limitation Act applies only to courts and not to quasi-judicial tribunals. Section 7 and Section 9 of the Code allow financial and operational creditors, respectively of a defaulting company to apply for the initiation of CIRP before the NCLT. The threshold for triggering CIRP under the Act was a minimum default of INR 1 lakh. However, the Central Government through a gazette notification has specified INR I crore as the minimum amount of default for initiation of proceedings under the Code. This increase in the threshold comes in the wake of the COVID-19 crisis which has affected MSMEs severely.
In the judgment given in M/s. Prowess International Private Limited v. Action Ispat and Power Private Limited. (C.A. No. (I.B.) 18(PB)/2017), Principal Bench held that the provisions of the Limitation Act would apply to proceedings under the Code, and a time-barred claim, being unenforceable, could not be considered by the NCLT and further held that:
“To ascertain as to whether there is a default in making payment of the operational debt, the tribunal is required to examine that the claim made before it is within time. In the case of revenue recovery, the limitation period is three years from which the debt has fallen due or the claim has arisen. The Law of limitation has to be applied with all its rigor and the tribunal has no power to extend the period of limitation. A live claim after the lapse of limitation period becomes a stale claim unenforceable in law. Accordingly, it is to be seen whether the tribunal has been moved within the maximum period of three years prescribed under the Indian Limitation Act, 1963 from the date on which the debt has fallen due or the claim has arisen.” (emphasis supplied)
Whilst the Supreme Court did not interfere with the decision of the NCLAT in the past few years, regarding the question of law viz. 'Whether the Limitation Act would apply to CIRP proceeding'.However, the Supreme Court cleared the fuss about the applicability in the case of Babulal Vardharji Gurjar vs.Veer Gurjar Aluminium Industries Pvt. Ltd. &Anr. (Civil Appeal No. 6347 of 2019). In this case, Babulal Vardharji Gurjar(creditor) filed a case before the NCLT, to initiate CIRP proceedings, under section 7 of the IBC against Veer Gurjar Aluminium Industries Pvt. Ltd. NCLT in its judgment admitted the Corporate Insolvency Resolution Process (CIRP) application & appointed an interim resolution professional to represent the respondent debtor company. Being aggrieved with the court's order, the appellant filed an appeal before NCLATchallenging the admissibility of the CIRP application. However, the Appellate Tribunal dismissed the appeal.
The appellant finally approached the Supreme Court(SC), but the SC did not approve of the decision of the Appellate Tribunal, remanded the matter back to the NCLAT. The NCLAT, after considering the issue related to the limitation period, held that, ''neither the application made by nor the claim of the Respondent is barred by limitation''. Finally, the appellant preferred an instant appeal under Section 62 of the Insolvency and Bankruptcy Code, before the Supreme Court, after being aggrieved by the decision of the Appellate Tribunal.
The main issue before the Supreme Court was, ''Whether the application made by the financial creditor under section 7 of IBC, 2016 is within the period of limitation?''. Supreme Court after hearing both sides of the arguments observed that, National Company Law Tribunal (NCLT) cannot admit applications for corporate insolvency resolution process (CIRP) initiations where more than three years (as prescribed by the Limitation Act) have passed since the date of debt default. The court observed that there is nothing in the Code to even remotely indicate if the period of limitation for an application under Section 7 is to commence from the date of commencement of the Code itself. To substantiate the same, the court relied upon the case of B.K. Educational Services Pvt. Ltd. v. Paras Gupta & Associates(AIR 2018 SC 56 01), wherein it was held that the date of the Code’s coming into force on 01.12.2016 was wholly irrelevant to the triggering of any limitation period for the Code, this Court said:
Article 141 of the Constitution of India mandates that our judgments are followed in letter and spirit. The date of coming into force of the IB Code does not and cannot form a trigger point of limitation for applications filed under the Code. Equally, since “applications” are petitions which are filed under the Code, it is Article 137 of the Limitation Act which will apply to such applications.” (emphasis supplied).
Finally, Supreme Court in the present case of Babulal Vardharji Gurjar vs.Veer Gurjar Aluminium Industries Pvt. Ltd. &Anr. observed that, ''the respondent-creditor never came out with any pleading other than stating the date of default as ‘08.07.2011’ in the application. That being the position, no case for the extension of the period of limitation is available to be examined. Finally, the court remarked that, the application made by the respondent-creditor under Section 7 of the Code, seeking initiation of CIRP in respect of the corporate debtor with the specific assertion of the date of default as 08.07.2011, is barred by limitation for having been filed much later than the period of three years from the date of default as stated in the application'' (emphasis supplied).
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