Limitation Law Under Insolvency and Bankruptcy Code, 2016: SC Finally Bells the Cat

LIMITATION LAW UNDER INSOLVENCY AND BANKRUPTCY CODE, 2016: SC FINALLY BELLS THE CAT

SC held that an offer of one-time settlement of a live claim, made within the period of limitation, can also be construed as an acknowledgment of debt and same will attract Section 18 of the Limitation Act

Since the inception of the Insolvency and Bankruptcy Code, 2016 ("IBC"/ "Code"), the legislature, regulator as well as the courts have successfully settled the dust around the disputed issues with lightening speed. However, the issue of limitation under the Code has been in the discussion since the inception of the IBC due to the evolving yet contrasting decisions by the courts. When Code was first enforced, there were several related concerns such as (i) whether the Limitation Act, 1963 ("Limitation Act") will be applicable to the proceedings initiated under the Code?; (ii) in case of default, whether there will be a continuous cause of action available with the creditor?; (iii) whether entries in the Balance Sheet amounted to acknowledgment of debt to extend limitation period under Section 18 of the Limitation Act?

In response to the above raised concerns, the legislature vide amendment introduced Section 238A¹ under the Code which states that "The provisions of the Limitation Act, 1963 shall, as far as may be, apply to the proceedings or appeals before the Adjudicating Authority, the National Company Law Appellate Tribunal, the Debt Recovery Tribunal or the Debt Recovery Appellate Tribunal, as the case may be.".

The Hon'ble Supreme Court ("SC") in BK Educational Services Private Limited v. Parag Gupta Associates,² and Vashdeo R. Bhojwani v. Abhyudaya Cooperative Bank Ltd.,³ clarified in a nutshell that the law of limitation is applicable to the applications filed under Sections 7 and 9 of the Code from inception of the Code. If the application has been filed after 3 years from the date of default, the would be barred under Article 137 of the Limitation Act, save and except were Section 5 of the Limitation Act is applied to condone the delay.

Further, SC in Laxmi Pat Surana vs Union Bank of India & Anr.,⁴ settled the issue of applicability of Section 18 of the Limitation Act to the applications filed for the initiation of corporate insolvency resolution process under the Code. While deciding the case, SC reaffirmed that the aim of the IBC was not to reopen or resurrect time-barred debts and accrual of a fresh period of limitation under Section 18 will not give a new life to the time-barred debts. Therefore, SC held that there is no reason to exclude Section 18 to the proceedings initiated under the Code. SC further held that when the principal borrower or the corporate guarantor admits or acknowledges the liability, there is a need to compute a fresh period of limitation from the time the acknowledgment was signed by the principal borrower or corporate guarantor, provided that the acknowledgment must be signed before the expiration of limitation period.

The SC also emphasized on the fact that since in lieu of Section 128 of Contract Act, 1872, a guarantor's liability is coextensive with the principal borrower, so when the principal borrower commits a default of the acknowledged debt, it triggers the liability of the guarantor, which would flow from the guarantee deed and memorandum of mortgage, unless the contrary is expressly provided.

Thereafter, recently SC in Asset Reconstruction Company Limited v. Bishal Jaiswal,⁵ ("ARCIL Case") decided that the acknowledgement of debt in the books of the Corporate Debtor ("CD") will be treated as a fresh cause of action as per the provisions of the Limitation Act. In this case, SC categorically observed that as long as the requirements under Section 18 of the Limitation Act were met, and subsequently a jural relationship was proved between the creditor and CD, the entries in the balance sheet of the CD would be taken as valid evidence for a default under the Code.

SC has further clarified that the intent of IBC was not to revive the time-barred claims and grant an action to the creditor which it didn't have under the Limitation Act. The purpose of Limitation is to bar the remedy but not the right. SC elaborated that limitation, being procedural in nature, would ordinarily be applied retrospectively, however, it cannot revive a dead remedy meaning that an application that is filed after the Code came into force, cannot revive a debt which is time-barred and is no longer due.

Again, in the Dena Bank (Now Bank of Baroda) vs C. Shivakumar Reddy,⁶ ("Dena Bank Case"), which is decided most recently on August, 2021, SC resolved questions as to what all can and cannot be accepted as a CD's acknowledgment of debt and whether belated filing of additional documents is permitted under the Code.

SC while placing reliance on ARCIL Case, ruled that an acknowledgment of liability that is made in a balance sheet can amount to an acknowledgment of debt. Thus, entries in books of accounts and/or balance sheets of a CD would amount to an acknowledgment under Section 18 of the Limitation Act and such acknowledgment need not be accompanied by a promise to pay expressly or even by implication as long as the acknowledgment is made within the period of limitation. SC further held that an offer of one-time settlement of a live claim, made within the period of limitation, can also be construed as an acknowledgment of debt and same will attract Section 18 of the Limitation Act. Lastly, it is clarified there is no bar in law to amendment the pleadings filed under Section 7 of the Code, or to the filing of additional documents, apart from those initially filed along with the application under Section 7 of the IBC in Form-1.

These recent judgments have set a tone and clarified the position on several aspects of the limitation issue which were looming since inception or came to light during the use of IBC by various creditors and causing flux amongst various stakeholders. We are hopeful that these judicial pronouncements must be celebrated by the market forces as one more positive step in the right direction.

Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.