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Application Of Limitation Act To Resolution Process Under Insolvency & Bankruptcy Code

Application Of Limitation Act To Resolution Process Under Insolvency & Bankruptcy Code
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The liquidity in the Indian banking sector has seen a drastic plunge due to the threat of increasing non-performing assets ('NPAs'). The enactment of the Insolvency and Bankruptcy Code, 2016 ('IBC'/ 'Code') put a fresh lease of life for resolution of stressed assets. However, there has been some conflicting views in the manner in which the Limitation Act, 1963 ('LA') could be...

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The liquidity in the Indian banking sector has seen a drastic plunge due to the threat of increasing non-performing assets ('NPAs'). The enactment of the Insolvency and Bankruptcy Code, 2016 ('IBC'/ 'Code') put a fresh lease of life for resolution of stressed assets. However, there has been some conflicting views in the manner in which the Limitation Act, 1963 ('LA') could be invoked vis-à-vis the IBC.

When IBC came into force in 2016, there were no provisions of the LA for filing applications for Corporate Insolvency Resolution Process under Sections 7, 9 and 10 of the Code. Neither was the LA made applicable to IBC. However, in 2017, the National Company Law Tribunal ('NCLT'), Delhi bench had held that the provisions of LA shall be applicable to the proceedings under it.[1] The National Company Appellate Law Tribunal ('NCLAT'), in an appeal on the same question of law reversed this stand and held that if there was a debt and there was default of debt having a continuous course of action, the claim would not be barred by limitation[2] and IBC being a complete Code had purposely ignored the applicability of the LA[3]. This decision of NCLAT resulted in a rise of several debt applications which were otherwise time barred.

APPLICABILITY OF THE LA:

The conflict regarding the applicability of the LA came up for consideration before the Hon'ble Supreme Court ('SC') and it extensively dealt with this issue in 2 landmark judgments - B.K. Educational Services v. Parag Gupta & Associates[4] and Babulal Vardharji Gurjar v.Veer Gurjar Aluminium Industries Pvt. Ltd. & Anr[5]. In these cases, the SC primarily brought forth the nuances for the applicability of the LA.

Simultaneously, the Insolvency Law Committee in its Report[6] of March 2018 recommended an amendment to the IBC. Section 238A was inserted[7] in IBC which envisaged that the LA is applicable to the proceedings/ appeals before the NCLT/ Adjudicating Authority / NCLAT/ Debt Recovery Tribunal ('DRT')/ Debt Recovery Appellate Tribunal.

In B.K. Educational Services (Supra) the SC dealt with 2 main issues - first, whether the LA applied to the proceedings under Section 7/ 9 since the commencement of the Code? And second, whether the LA gets triggered on the commencement of the IBC or on the date of default?

Addressing the first issue, the SC held that LA would be applicable to Tribunals while deciding the proceedings under Section 7/ 9 of the IBC as it also applies to proceedings before NCLT/ NCLAT under Section 433 of the Companies Act, 2013 ('CA'). It clarified that Section 238A of the IBC was retrospective in nature and the intention of the Code was not to give a new lease of life to debts which were time-barred. If a default had occurred over three years prior to the date of filing of the application, the application would be barred under Article 137 of the LA, save and except in those cases where, on the facts of the case, Section 5 of the LA may be applied for condonation of delay.

On the second issue, the SC analyzed the terms 'debt due', 'default', 'due and payable' and held that the LA gets triggered from the date of default and the date of enforcement of IBC is wholly irrelevant for triggering the limitation period. It reasoned that the Code could not be triggered in the year 2017 for a debt which was time barred much earlier and the expression 'debt due' defined in the Code referred to debts that were 'due and payable' in law i.e. debts that were not time barred. The 'right to sue', therefore, accrued when a default occurred.

SCOPE AND EXTENT OF APPLICABILITY OF SECTION 18 OF LA ('SEC. 18') ON IBC PROCEEDINGS:

The SC in Babulal Vardharji Gurjar (Supra) held that considering the facts of the case, Sec. 18 did not apply to an application under Section 7 of the IBC.

The crux of Sec. 18 is that an acknowledgement of liability has the effect of commencing a fresh period of limitation from the date on which the acknowledgement was so signed. This acknowledgment, if any, has to be prior to the expiry of the prescribed period for filing the suit. In other words, if the limitation has already expired, it would not revive under this section.

It is pertinent to note that there is nothing in the newly inserted Sec. 238A of the IBC which suggests that Sec. 18 is excluded.

IS A BALANCE SHEET OF A COMPANY DEEMED TO BE A VALID ACKNOWLEDGMENT UNDER SEC. 18?

It is settled law, as has been consistently held by the SC and various High Courts that entries made in the balance sheet of the company are to be treated as an acknowledgement of debt for the purpose of Sec. 18. The balance sheet is a material document attached with sanctity that is submitted to the Registrar of Companies ('RoC') and is used for obtaining loans/ investments.

Further the newly inserted provisions of the CA, also provide that a company cannot reopen its books of account/ financial statements without the order made by a court of competent jurisdiction/ Tribunal. Documents filed with the RoC are admissible in any proceedings without proof or production of the original. The acknowledgement of liability contained in the balance-sheet of a company furnishes a fresh starting point of limitation. The SC in n Mahabir Cold Storage v. CIT[8] that registers of a company are prima facie evidence.

The Calcutta High Court in Bengal Silk Mills Co.[9] and the Delhi High Court in South Asia Industries Pvt. Ltd[10] have also held that merely on the ground that the balance sheet of a company is prepared under the compulsion of law or in discharge of statutory duty, it cannot be held that it does not amount to an acknowledgement of liability.

BABULAL VARDHARJI GURJAR (SUPRA) JUDGMENT:

The main issue in this case was that balance sheet of a company was not a valid acknowledgment of debt for the benefit under Sec. 18. The SC held that when a party seeks application of any particular provision for extension or enlargement of the period of limitation, the relevant facts are required to be pleaded and evidence is required to be adduced. In this case, though the financial creditors had mentioned the date of default no pleadings about acknowledgement of debt in balance sheets had been made.

The SC declined the benefit of Sec. 18 and held that no case for extension of period of limitation was available to be examined and even if Sec. 18 was applicable, the same could not come in operation in the present case for want of pleading by the financial creditors to that effect.

YOGESHKUMAR JASHWANTLAL THAKKAR v. INDIAN OVERSEAS BANK & ANR[11]:

In this case, the NCLAT reconfirmed the applicability of Sec. 18 and held that a fresh limitation period arose as the CD had acknowledged the debt by issuing revival/ debt confirmation letters before the expiry of the limitation period.

The NCLAT, while distinguishing Babulal Vardharji Gurjar (Supra) as inapplicable, reasoned that the instant case was supported with relevant materials and acknowledgements were duly signed/ stamped by the directors of the CD.

BISHAL JAISWAL v. ASSET RECONSTRUCTION COMPANY (INDIA) LTD. AND OTHERS[12]:

Bishal Jaiswal ('Supra') is a recent case in which the NCLAT questioned the decision in [13]V. Padmakumarv. Stressed Assets Stabilizations Fundcase on the point of validity of non-acceptance of balance sheet as a valid proof of debt.

In V. Padmakumar (Supra), a 5 member bench of NCLAT had held that since the filing of balance sheet every year was mandatory under the CA, it cannot be treated as an acknowledgement as it would tantamount to no limitation being applicable and no reasons had been assigned for disagreement with this view.

⮚ Expressing doubt on the correctness of this decision, a 3 judge bench of NCLAT in Bishal Jaiswal (Supra) stated that there is a consistent view of the SC and several High Courts that the entries in the balance sheet of a company are to be treated as an acknowledgement of debt for the purpose of Sec.18. The bench has referred the decision for reconsideration for constituting an appropriate bench Acting Chairperson.

OUR VIEWS:

Pleading Issues: In our view, the verdict of the SC in Babulal Vardharji Gurjar (Supra) facilitated a positive reinforcement of jurisprudence on the issue of limitation. The SC rightly held that if any party relies on the applicability of Sec. 18, the same should be pleaded at the filing stage and adduced with proper evidence.

Accounting Jurisprudence: An analysis of Bishwal Jaiswal ('Supra') reflects NCLAT's view that "the balance sheet entries are not a valid acknowledgment of debt", is not only against the settled legal position but also contrary to the jurisprudence/ principles of accounting and company law as applicable in India. The balance sheet is a document, duly signed by an authorized person to acknowledge the debt of the company (as liability) on a yearly basis and filed/published on or before a particular date for various statutory compliances.

Reconsideration: The proactive judicial wisdom of NCLAT in Bishwal Jaiswal ('Supra') on the issue is significant wherein the bench has referred V. Padmakumar (Supra) for reconsideration. This referral is a positive step and could pave a way for lenders to restructure debt without any fear of their debt becoming time barred for recovery through the courts of law.

(Vinita Hombalkar, Partner and Shruti S Sareen, Associate Partner, Orbit Law Services)



[1] M/s Deem Roll Tech Limited v. R.L. Steel & Energy Ltd., Company Application No. (I.B.)24/PB/2017.

[2] Neelkanth Township and Construction Pvt. Ltd. v. Urban Infrastructure Trustees Limited [2017] 143 SCL 538.

[3] Speculum Plast Pvt. Ltd. and Ors v. PTC Techno Pvt. Ltd. and Ors. [2018] 142 CLA 165.

[4] B.K. Educational Services v. Parag Gupta & Associates, AIR 2018 SC 5601.

[5] Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries Pvt. Ltd., [2020] 222 Comp Cas 115 (SC).

[6] Ministry of Corporate Affairs, Report of the Insolvency Law Committee, Available at http://www.mca.gov.in/Ministry/pdf/ReportInsolvencyLawCommittee_12042019.pdf.

[7] With effect from 06.06.2018, The Insolvency and Bankruptcy (Second Amendment) Act, 2018.

[8] Mahabir Cold Storage v. CIT, 1991 Supp (1) SCC 402.

[9] Bengal Silk Mills Co. v. Ismail Golam Hossain Ariff, AIR 1962 Cal 115.

[10] South Asia Industries (P) Ltd. v. Krishna Shamsher Jung Bahadur Rana and Ors. MANU/DE/0372/1972 (Delhi).

[11] Yogeshkumar Jashwantlal Thakkar v. Indian Overseas Bank, MANU/NL/0341/2020.

[12] Bishal Jaiswal v. Asset Reconstruction Company (India) Ltd., [2020] 222 Comp Cas 508.

[13] V. Padmakumar v. Stressed Assets Stabilizations Fund, Company Appeal (AT) (Ins) No. 57 of 2020


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