India’s bankruptcy law: Lenders, take note! This act helps only vigilant creditors, not sleeping ones

Published: November 13, 2018 4:19:55 PM

The conundrum of whether the Limitation Act, 1963 (Act) applies to the proceedings initiated under the Insolvency and Bankruptcy Code, 2016 (Code) has confused the stakeholders since the inception of the latter. Here's what it really means under IBC regime.

a creditor that has slept over its rights and has allowed the limitation period to set in, it cannot rely upon the Code to recover its time barred, dead and stale debts.A creditor that has slept over its rights and has allowed the limitation period to set in, it cannot rely upon the Code to recover its time-barred, dead and stale debts.

By Vikas Kumar & Surbhi Jaju

The conundrum of whether the Limitation Act, 1963 (Act) applies to the proceedings initiated under the Insolvency and Bankruptcy Code, 2016 (Code) has confused the stakeholders since the inception of the Code.

The Code was formulated primarily to provide a mechanism to creditors who have been unable to recover their debts and to resolve the procedural and systematic inefficiencies pertaining to the insolvency process in India.

The insolvency resolution in the pre-Code era dealt with challenges of delay, inadequacy and ineffectiveness. The objective laid down in the preamble of the Code primarily indicated towards settling these concerns and constituting a robust mechanism for recovery of debts and balancing the interests of all stakeholders.

However, the issue with respect to the applicability of the Act on Code has been well debated and has now been settled by the Apex Court through its judgment in BK Educational Services Private Limited v. Parag Gupta and Associates (‘BK Educational’).

The confusion on the issue has been caused due to various conflicting decisions of NCLT and NCLAT that have led to contrasting views. To elucidate and ascertain the role of the Act in matters of Code and to clear the prevailing confusion, the 2018 Amendment expressly made the Act applicable to the proceedings or appeals before the NCLT, NCLAT, DRT and the DRAT by introducing Section 238A.

This stance has now been further reaffirmed by the Supreme Court in BK Educational where while deliberating on this issue, the Apex Court affirmed the application of the Act along with providing it retrospective application.

The Supreme Court observed, that from the commencement of Code, the legislature intended to apply limitation period on applications instituted under Section 7 and Section 9 of the Code. It interpreted clarificatory intention from the 2018 Amendment that expressly made the Act applicable to the Code, which meant that debts which have become time-barred cannot be claimed afresh via the insolvency route.

The Apex Court passed this ruling while relying upon and discussing the provisions of the Companies Act 2013 (‘2013 Act’) and the Insolvency Law Committee’s Report (‘Report’) aside of Section 238A of the 2018 Amendment constituting the basis of its finding.

The Companies Act, 2013

In the judgment penned down by R.F. Nariman J, Hon’ble Apex Court pointed out that the 2013 Act makes the Act applicable to the NCLT and NCLAT under Section 433. The adjudicating authority i.e. the NCLT and NCLAT are set up to discharge such powers and functions that are conferred on it not merely under the 2013 Act but also under any other law for the time being in force.

Additionally, Section 434(1)(c) of the 2013 Act provided that all the proceedings pending under the Act before various High Courts and District Courts including winding up proceedings pending immediately before such date shall be transferred to the NCLT.

Hence, Section 433 read together with Section 434 implied that the Limitation Act is applicable to all winding up cases which moved from various High Courts to NCLTs after the Code came into force. It also connoted that the Act shall be applicable to all the cases instituted under the Code as the forum for adjudication under the Code is NCLT.

Insolvency Law Committee’s Report

Relying on the Insolvency Law Committees Report, Hon’ble Justice observed that the intent behind formulating Code was not to provide new lease to time barred debts, but instead to provide mechanisms to recover and settle the debts that have become ‘due and payable’.

The Report discusses at length the nature of debts and reiterates the point that when a debt is barred by time, the right to remedy is also time barred. The Report also laid down the issues that non-application of the Act creates and observed the following problems that arise – (i) reopens the right of creditors holding time barred debts and lies in adversity to general law on debt recovery; (ii) it allows time barred debts as a part of resolution plan and restructuring time barred debt is against the essence of the Code.

Retrospective Application of Section 238A

In BK Educational, the Apex Court when confronted with the question of whether Section 238A pertaining to limitation introduced in the 2018 Amendment has retrospective applicability, deliberated extensively on the views adopted by NCLT and NCLAT along with the arguments put forth by the Counsels for the parties.

It was held that limitation law being procedural in nature should be applied retrospectively except where law of limitation revives a dead remedy. The context of the exception being that the new law of limitation should not provide for a longer period of limitation than what was provided earlier before amendment. Hon’ble Justice Nariman observed that if the retrospective applicability of the Act is not applied, a creditor can trigger the Code for a debt that is time barred which cannot be the intention of the legislature.

Conclusion

The Apex Court through its discussions arrived at the conclusion that the Act is applicable to applications that are filed under Sections 7 and 9 of the Code from the inception of the Code i.e. from 2016.

In our opinion, the Supreme Court in BK Educational has further pronounced the already laid down common law maxim “Vigilantibus Et Non Dormientibus Jura Subveniunt” which means the law helps those who are vigilant and not those who sleep over their rights.

Through the judgment, it is clearly laid down that a creditor that has slept over its rights and has allowed the limitation period to set in, it cannot rely upon the Code to recover its time barred, dead and stale debts.

This judgment and reasoning by the Apex Court are important as it clears the prevailing confusion regarding applicability of Act and authoritatively lays a precedent that is binding on the NCLT and NCLAT.

(Vikas Kumar is a Partner and  Surbhi Jaju is an Associate at law firm Lakshmikumaran & Sridharan. The views are the authors’ own)

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