"Controversies are restricted to a fixed period of time, lest they should be immortal, when men are mortal"
John Voet

Introduction

The law of limitation forms an indispensable part of public policy aiming to suppress all acts of the past, which are redundant and stale in the eyes of law. Such laws impose a bar upon the exercise of civil remedies after a certain period of time in order to ensure that spurious litigant are precluded from using delaying mechanism. The Limitation Act of 1963 ("Limitation Act") is a statute of repose providing for a strict time period within which legal rights are required to be exercised, subject to specified exceptions. The Supreme Court of India ("Supreme Court"), has also held that the rules of limitation have been enacted to ensure that a person exercises its right of remedy as soon as possible and does not resort to dilatory tactics1. The Supreme Court, at various instances, have clarified the interplay between the Limitation Act and other statutes, for the purpose of ascertaining the time-limits of exercising legal remedies provided under different statutes. One of such statutes is The Insolvency and Bankruptcy Code 2016 ("IBC") wherein, Section 238A was inserted by way of an amendment making the Limitation Act applicable to the provisions of IBC2.

Even though there have been series of cases that have been decided on the aspect of limitation, the Supreme Court, has once again, clarified the applicability of the Limitation Act to the provisions of IBC in the matter of Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries Pvt. Ltd. ("Judgement")3. The Judgment was rendered while deciding a situation which involves acknowledgement of a debt liability with such debt being secured by way of a mortgage. This article aims to discuss the aspect of limitation applicable on proceedings under the IBC, as laid down in the Judgement.

Facts of the Case

The Corporation Bank, along with Bank of India and Indian Overseas Bank, had disbursed certain loans to the Respondent No. 1 on 22.12.2007, and Respondent No. 1 had executed certain securities against such loan facilities. Thereafter, the Corporation Bank, from time to time, extended/modified the loan facilities for Respondent No.1. The Corporation Bank had also executed a deed for transfer of all its rights against Respondent No. 1, in favour of Respondent No. 2, by way of an Assignment Agreement dated 30.03.2013. On account of defaults on the part of the Respondent No. 1 in paying loan amounts, the loan accounts of Respondent No. 1 held with the Corporation Bank was classified as a Non-Performing Asset ("NPA") on 08.07.2011, and those held with the Indian Overseas Bank was classified as NPA on 05.08.2011. Consequently, the Indian Overseas Bank issued a notice under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interests Act 2002, which was followed by recovery proceedings initiated by the consortium of banks, including the Respondent No. 2, against Respondent No. 1 before the Debt Recovery Tribunal, Aurangabad ("DRT").

During the pendency of the proceedings before the DRT, the Respondent No. 2, on or around 21.03.2018, filed an Application under Section 7 of IBC before the National Company Law Tribunal, Mumbai ("NCLT") for initiating Corporate Insolvency Resolution Process ("CIRP") against Respondent No. 1. Consequently, NCLT allowed the Application and CIRP was initiated against the Respondent No. 1 vide Order dated 09.08.2018. Thereafter, the Appellant i.e., the ex-director of Respondent No. 1, filed an appeal before the National Company Law Appellate Tribunal ("NCLAT") challenging the Order dated 09.08.2018, which was subsequently dismissed by NCLAT vide its Order dated 17.09.2018. The Appellant preferred an appeal against the Order dated 17.09.2018 before the Supreme Court, wherein the Supreme Court, vide its judgement dated 26.02.2019, remanded the matter to NCLAT after observing that the issue of limitation was not decided even though the same was raised before NCLAT.

Consequently, the NCLAT decided on the issue of limitation and held vide its Order dated 14.05.2019 ("Impugned Order"), that the Application filed by the Financial Creditor was well within the limitation for the reason that the right to file an application only accrued when IBC came into existence i.e. 01.12.2016 and the Application was filed in 2018. The NCLAT also reasoned that because Corporate Debtor had provided mortgage security, the limitation period would be 12 years as per Article 62(b) of the Limitation Act.

Issue Determined by the Supreme Court

While appreciating the facts of the case, the Supreme Court framed the following issue for determination:

  1. Whether the Application filed by Respondent No. 2 under Section 7 of IBC is barred by limitation or not?

Summary of Findings

The Supreme Court initiated its analysis by discussing the intent and objectives of IBC and further referred to the findings in the Innoventive Industries Case4 and the Swiss Ribbons Case5. While discussing the aforesaid judgements, it was observed by the Supreme Court that IBC was formulated with an objective to unify the legislation for insolvency proceedings in the country and the focus of this legislation is to ensure the revival and continuation of a company as a going concern, thus, making IBC a beneficial legislation which is not mere legislation for recovery.

It was further observed by the Supreme Court that even though the Innoventive Industries Case has given a fair outlook of the objectives and schemes of IBC, the question of the applicability of the Limitation Act on the provisions of IBC was still a matter of debate. This led to the amendment of IBC on the recommendation of the Insolvency Reforms Committee's Report, inserting a new Section 238A which made the Limitation Act applicable to the proceedings under IBC. However, Section 238A of IBC was also put to challenge before the Supreme Court and, in the B.K. Educational Services Case6, wherein the Supreme Court held that if an Application under IBC has been filed for a default that is more than three years old, then such an Application would be barred by limitation by virtue of the application of Article 137 of the Limitation Act. It was further observed that for condoning the period of delay, Section 5 of the Limitation Act is applicable depending upon the facts and circumstances of the case.

The Court further referred to the findings as given in K. Shashidhar Case7 wherein it was held that Section 238A of IBC, being clarificatory and procedural in nature, must be given a retrospective effect. The Court further stated that in the Vashdeo R. Bhojwani Case8, the Court had rejected the applicability of Section 23 of The Limitation Act 1908 in the proceedings initiated under IBC, as was done by NCLAT while arriving at a conclusion that no period of limitation would be attracted in the case where the default was continuous in nature.

The Court further stated that it had also rejected NCLAT's findings in the Gaurav Hargovindbhai Dave Case9 wherein NCLAT had observed that the time of limitation would start from the date when IBC came into force i.e. 01.12.2016. In such a case, the Court had observed that the limitation period will start from the date when the loan account of the corporate debtor was declared as NPA. In the said matter, the Supreme Court further held that Article 62 of the Limitation Act which provides a limitation period of 12 years, would not be applicable to the provisions of IBC as such a provision is only applicable to enforcement of mortgage liability. A similar judgement that was passed in the Sagar Sharma Case10 was also discussed by the Supreme Court wherein it was held that the period of limitation for the enforcement of a mortgage deed will not be applicable to Applications filed under the provisions of IBC thus, making Article 62 of the Limitation Act inapplicable to cases filed under IBC.

While relying on the principles laid down in the aforesaid cases, the Supreme Court deciphered that there are only two aspects that are needed to be dealt with. First, is the applicability of Section 18 of the Limitation Act on the proceedings under IBC and second, is the effect of the observations made by the Court in the Jignesh Shah Case11. While observing that the contending parties on both sides have relied upon the law declared in the Jignesh Shah Case, the Court discussed the facts of the case involved in the said matter and went ahead to state that in the Jignesh Shah Case, the reference to Section 18 of the Limitation Act has only been done by the Court in relation to suit or other proceedings, wherein the limitation period can be extended by way of acknowledgement of liability.

The Supreme Court held that the principles that have been applied in the Jignesh Shah Case with respect of winding proceedings will be applicable to the insolvency proceedings under IBC as well. While comparing the nature of winding up proceedings with the insolvency proceedings under IBC, the Court stated that the Jignesh Shah Case clarifies that Section 18 of the Limitation Act, being applicable only to suit proceedings, does not affect the limitation period for initiating distinct proceeding of winding up of a company. While holding the same, the Court rejected Respondent No. 2's contentions that Respondent No. 1 has acknowledged the debt at various occasions by way of balance sheets that were prepared over the years by Respondent No. 1. The Court further held that the observations made in the Jignesh Shah Case, in no manner, has altered the principles of limitation given by the Court in the B.K. Educational Services Case, which clearly states that the limitation period for filing an Application under Section 7 of IBC is three years as provided under Article 137 of the Limitation Act.

The Court even stated that if one is to assume that Section 18 of the Limitation Act is applicable to the present case, still such a provision cannot be interpreted in the favour of Respondent No. 2. The Court reasoned that the date of default, as mentioned by Respondent No. 2 in its Section 7 Application, was '08.07.2011' i.e. the date when the loan accounts of Respondent No. 1 were declared as NPA. The Court further stated that even Section 18 of Limitation Act is not applicable in the facts of the case because the Respondent No. 2 never raised a contention in regard to any other date of default by way of acknowledgement of liability.

The Court has also raised concerns over the conduct of NCLAT for considering the date of the enactment of IBC as the starting point of limitation, despite such a proposition being already decided to be absurd, as stated in the Sagar Sharma Case12. The Court also stated that it has remained unexplained as to how NCLAT and the lower tribunals have been applying the provisions of limitation that are related to enforcement of a mortgage deed, in cases where Application has been filed under Section 7 of IBC. The Court explained that in the B.K. Educational Services Case, it has been clearly held that no provision other than Article 137 of the Limitation Act will be applicable on an Application filed under Section 7 of IBC.

Decision

The Supreme Court allowed the appeal and set aside the Impugned Order. All the proceedings that had been undertaken in the said Application filed under Section 7 of IBC, which includes the operation of moratorium and appointment of Interim Resolution Professional, has been nullified by the Supreme Court.

Conclusion

The Supreme Court's discussion on the judicial precedents encapsulated all the fundamental principles of limitation that are applicable to the provisions of IBC. By way of the present Judgement, the Supreme Court has also clarified that Article 18 of the Limitation Act is only applicable to suit proceedings, making its applicability out of the purview of insolvency proceedings conducted under the IBC. Moreover, the Judgement has also provided a definite principle on the application of limitation which will prevent the litigators to misuse the provisions of IBC as a mere recovery legislation.

Footnotes

1. N. Balakrishnan v. M. Krishnamurthy (1998) 7 SCC 123

2. Section 34 of The Insolvency and Bankruptcy Code (Second Amendment) Act, 2018

3. Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries Pvt. Ltd. 2020 SCC OnLine SC 647.

4. Innoventive Industries Ltd. v. ICICI Bank (2018) 1 SCC 407

5. Swiss Ribbons Private Limited and Anr. v. Union of India and Ors. (2019) 4 SCC 17

6. B.K. Educational Services Pvt. Ltd. v. Paras Gupta & Associates AIR 2018 SC 5601

7. K. Sashidhar v. Indian Overseas Bank (2019) 12 SCC 150

8. Vashdeo R. Bhojwani v. Abhyudaya Co-operative Bank Ltd. & Anr. (2019) 9 SCC 158

9. Gaurav Hargovindbhai Dave v. Asset Reconstruction Company (India) Ltd. & Anr. (2019) 10 SCC 572.

[10] Sagar Sharma & Anr. v. Phoenix Arc. Pvt. Ltd. & Anr. (2019) 10 SCC 353

11. Jignesh Shah and Anr. v. Union of India and Anr. (2019) 10 SCC 750

12. Supra Note 10

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.