Supreme Court clarifies the applicability of the Limitation Act to applications under Sections 7 and 9 of the Insolvency and Bankruptcy Code: B.K. Educational Services Private Limited vs. Parag Gupta and Associates (2018) INSC 908 (11 October 2018)

Date of the Judgment: 11 October 2018
Citation: (2018) INSC 908
Judges: R.F. Nariman, J. and Navin Sinha, J.

Can a creditor initiate insolvency proceedings for a debt that is time-barred under the Limitation Act? The Supreme Court of India addressed this critical question, clarifying the applicability of the Limitation Act, 1963 to applications filed under Sections 7 and 9 of the Insolvency and Bankruptcy Code, 2016 (IBC). This judgment settles the debate on whether the law of limitation applies to insolvency proceedings and provides much-needed clarity for creditors and corporate debtors alike.

The Supreme Court bench, comprising Justices R.F. Nariman and Navin Sinha, delivered the judgment. Justice R.F. Nariman authored the opinion.

Case Background

The appeals before the Supreme Court arose from a dispute regarding the applicability of the Limitation Act, 1963 to applications filed under Sections 7 and 9 of the Insolvency and Bankruptcy Code, 2016. The core issue was whether the Limitation Act applied to applications made under the IBC from its commencement on December 1, 2016, until June 6, 2018, when Section 238A of the IBC was introduced.

The appellants argued that the Limitation Act should apply retrospectively to such applications, while the respondents contended that the IBC is a complete code and the Limitation Act should not apply. The National Company Law Appellate Tribunal (NCLAT) had previously held that the Limitation Act did not apply to the initiation of Corporate Insolvency Resolution Process (CIRP) but introduced a concept of delay and laches, which the appellants challenged.

The appellants, B.K. Educational Services Private Limited and others, were corporate debtors against whom insolvency proceedings were initiated. The respondents, Parag Gupta and Associates and others, were creditors who had initiated these proceedings. The appellants sought a declaration that the Limitation Act applied to the IBC from its inception and that their applications were time-barred.

Timeline

Course of Proceedings

The National Company Law Appellate Tribunal (NCLAT) had held that the Limitation Act, 1963, did not apply to the initiation of the Corporate Insolvency Resolution Process (CIRP) under Sections 7 and 9 of the IBC. However, the NCLAT introduced the doctrine of laches, stating that applications for CIRP could be rejected if there was a long delay without a valid explanation. The NCLAT also stated that if there was a delay of more than three years from the date of the cause of action, the applicant could explain the delay.

The NCLAT remanded the matter back to the Adjudicating Authority (NCLT) for a hearing on all points other than the point of limitation. The appellants then appealed to the Supreme Court, challenging the NCLAT’s decision and arguing that the Limitation Act should apply retrospectively.

Legal Framework

The Supreme Court examined several key provisions of the Insolvency and Bankruptcy Code, 2016, and the Companies Act, 2013. The relevant sections are:

• Section 238A of the Insolvency and Bankruptcy Code, 2016: This section, inserted by the Amendment Act of 2018, explicitly states that the provisions of the Limitation Act, 1963, shall apply to proceedings or appeals before the Adjudicating Authority, the National Company Law Appellate Tribunal, the Debt Recovery Tribunal, or the Debt Recovery Appellate Tribunal. The section states:

  “238A. Limitation .—The provisions of the Limitation Act, 1963 (36 of 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.”

• Section 3(6) of the Insolvency and Bankruptcy Code, 2016: Defines “claim” as a right to payment or a right to remedy for breach of contract.

  “(6) “claim” means —
  (a) a right to payment, whether or not such
  right is reduced to judgment, fixed,
  disputed, undisputed, legal, equitable,
  secured or unsecured;
  (b) right to remedy for breach of contract
  under any law for the time being in force, if
  such breach gives rise to a right to
  payment, whether or not such right is
  reduced to judgment, fixed, matured,
  unmatured, disputed, undisputed, secured
  or unsecured;”

• Section 3(11) of the Insolvency and Bankruptcy Code, 2016: Defines “debt” as a liability or obligation in respect of a claim which is due.

  “(11) “debt” means a liability or obligation in respect
  of a claim which is due from any person and
  includes a financial debt and operational debt;”

• Section 3(12) of the Insolvency and Bankruptcy Code, 2016: Defines “default” as non-payment of debt when it has become due and payable.

  “(12) “default” means non-payment of debt when
  whole or any part or installment of the amount of
  debt has become due and payable and is not paid
  by the debtor or the corporate debtor, as the case
  may be;”

• Section 5(6) of the Insolvency and Bankruptcy Code, 2016: Defines “dispute” as including a suit or arbitration proceedings relating to the existence of the amount of debt, the quality of goods or service, or the breach of a representation or warranty.

  “(6) “dispute” includes a suit or arbitration
  proceedings relating to —
  (a) the existence of the amount of debt;
  (b) the quality of goods or service; or
  (c) the breach of a representation or warranty;”

• Section 5(1) of the Insolvency and Bankruptcy Code, 2016: Defines “Adjudicating Authority” as the National Company Law Tribunal constituted under Section 408 of the Companies Act, 2013.

  “(1) “Adjudicating Authority”, for the purposes of this
  Part, means National Company Law Tribunal
  constituted under section 408 of the Companies Act,
  2013 (18 of 2013);”

• Section 408 of the Companies Act, 2013: Provides for the constitution of the National Company Law Tribunal.

  “408. Constitution of National Company Law
  Tribunal.—The Central Government shall, by
  notification, constitute, with effect from such date as
  may be specified therein, a Tribunal to be known as
  the National Company Law Tribunal consisting of a
  President and such number of Judicial and
  Technical members, as the Central Government
  may deem necessary, to be appointed by it by
  notification, to exercise and discharge such powers
  and functions as are, or may be, conferred on it by
  or under this Act or any other law for the time being
  in force.”

• Section 433 of the Companies Act, 2013: States that the provisions of the Limitation Act, 1963, shall apply to proceedings or appeals before the Tribunal or the Appellate Tribunal.

  “433. Limitation .—The provisions of the Limitation
  Act, 1963 (36 of 1963) shall, as far as may be, apply
  to proceedings or appeals before the Tribunal or the
  Appellate Tribunal, as the case may be.”

• Section 424(2) of the Companies Act, 2013: Defines the powers of the Tribunal and Appellate Tribunal while discharging their functions under the Companies Act or the IBC.

  “424. Procedure before Tribunal and Appellate
  Tribunal.—
  xxx xxx xxx
  (2) The Tribunal and the Appellate Tribunal shall
  have, for the purposes of discharging their functions
  under this Act or under the Insolvency and
  Bankruptcy Code, 2016, the same powers as are
  vested in a civil court under the Code of Civil
  Procedure, 1908 (5 of 1908) while trying a suit in
  respect of the following matters, namely:-
  (a) summoning and enforcing the attendance
  of any person and examining him on oath;
  (b) requiring the discovery and production of
  documents;
  (c) receiving evidence on affidavits;
  (d) subject to the provisions of sections 123
  and 124 of the Indian Evidence Act, 1872 (1 of
  1872), requisitioning any public record or
  document or a copy of such record or
  document from any office;
  (e) issuing commissions for the examination of
  witnesses or documents;
  (f) dismissing a representation for default or
  deciding it ex parte;
  (g) setting aside any order of dismissal of any
  representation for default or any order passed
  by it ex parte; and
  (h) any other matter which may be prescribed.”

Arguments

Appellants’ Arguments:

• The appellants argued that Section 238A of the IBC was intended to clarify the law and should be applied retrospectively. They contended that the law of limitation, being procedural, should always apply retrospectively.
• They referred to the Insolvency Law Committee Report of March 2018 to support their argument that the intention of the legislature was never to give a new lease of life to time-barred debts.
• The appellants argued that the definitions of “debt” and “default” in the IBC require that a debt be “due,” and a time-barred debt cannot be considered “due.”
• They contended that allowing applications for time-barred debts would lead to absurd consequences, as it could revive stale claims, resulting in the drastic measure of taking over the management of the corporate debtor.
• The appellants argued that Section 433 of the Companies Act, 2013, read with Section 5(1) of the IBC, makes the Limitation Act applicable to proceedings before the NCLT from the very inception of the IBC.
• They also argued that even if the Limitation Act does not apply, the doctrine of laches, as per the principle in State of Madhya Pradesh and Anr. v. Bhailal Bhai and Ors. [(1964) 6 SCR 261], should apply, using the period prescribed by the Limitation Act as a guide.

Respondents’ Arguments:

• The respondents argued that the IBC is a complete code dealing with insolvency and not debt recovery, and therefore, the Limitation Act should not apply. They cited Innoventive Industries Ltd. v. ICICI Bank & Anr. [(2018) 1 SCC 407] to support this argument.
• They contended that the NCLT is a tribunal and not a court, and therefore, the Limitation Act does not apply.
• The respondents argued that the terms “due and payable” as used in Section 3(12) of the IBC are different from “due and recoverable,” and a time-barred debt is still “due.”
• They relied on Sections 25(3), 60, and 61 of the Indian Contract Act, 1872, to support the argument that a time-barred debt is still a valid debt.
• They argued that Section 238A of the IBC could not be retrospective as it would take away the vested right of the application filed under Section 7 or Section 9 to be decided without applying the Limitation Act before 06.06.2018.
• They also argued that if the doctrine of laches were to be applied, it would have to be applied along with other doctrines such as acquiescence and estoppel on the facts of each case.

Issues Framed by the Supreme Court

The Supreme Court framed the central issue as:

1. Whether the Limitation Act, 1963, applies to applications made under Sections 7 and 9 of the Insolvency and Bankruptcy Code, 2016, from its commencement on December 1, 2016, until June 6, 2018.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

How each authority was viewed by the Court?

• The Court followed National Sewing Thread Co. Ltd. v. James Chadwick and Bros. Ltd. [1953 SCR 1028]* to state that the procedure that would apply to the NCLT would be the procedure contained inter alia in the Limitation Act.
• The Court referred to State of Madhya Pradesh and Anr. v. Bhailal Bhai and Ors. [(1964) 6 SCR 261]* for the doctrine of laches, but did not apply it as the Limitation Act was held to be applicable.
• The Court cited M.P. Steel Corporation v. CCE [(2015) 7 SCC 58]* to state that periods of limitation are procedural and applied retrospectively, but a new law of limitation cannot revive a dead remedy.
• The Court cited State of Kerala v. V.R. Kalliyanikutty [(1999) 3 SCC 657]* to state that the meaning of “due” depends on the context, and a time-barred debt is not “due” in the context of recovery proceedings.
• The Court cited Union of India v. Uttam Steels Ltd. [(2015) 13 SCC 209]* to state that limitation, being procedural law, is ordinarily retrospective, but a claim should not be dead before the amending act.
• The Court cited Allied Motors (P) Ltd. v. CIT [(1997) 3 SCC 472]* to state that a curative amendment is generally intended to be retrospective.
• The Court cited SBI v. V. Ramakrishnan [(2018) SCC Online SC 963]* to state that a clarificatory amendment is retrospective.
• The Court cited State of Jharkhand v. Shivam Coke Industries [(2011) 8 SCC 656]* to state that the Limitation Act does not apply to quasi-judicial bodies, but such bodies must exercise power within a reasonable time.
• The Court cited Bombay Dyeing & Mfg. Co. Ltd. v. State of Bombay [1958 SCR 1122]* to reiterate the distinction between loss of a right and loss of a remedy; limitation bars the remedy but not the right.
• The Court cited Punjab National Bank v. S. Sinha [1993 Supp (1) SCC 499]* to reiterate the difference between the right to recover a debt and the remedy to do so.
• The Court cited Bhimsen Gupta v. Bishwanath Prasad Gupta [(2004) 4 SCC 95]* to differentiate between “due and payable” and “due and recoverable,” but held it to be not applicable to the present case.
• The Court cited In re Sir Harilal Nemchand Gosalia [AIR 1950 Bom 74]* to differentiate between “payable” and “recoverable,” but held it to be not applicable to the present case.
• The Court cited Andhra Pradesh Power Coordination Committee and Ors. v. Lanco Kondapalli Power Ltd. and Ors. [(2016) 3 SCC 468]* to state that a statutory body cannot entertain claims that are barred by limitation.
• The Court cited Innoventive Industries Ltd. v. ICICI Bank & Anr. [(2018) 1 SCC 407]* to state that a debt may not be due if it is not payable in law or in fact.
• The Court distinguished France B. Martins v. Mafalda Maria Teresa Rodrigues [(1999) 6 SCC 627]* on the ground that the Consumer Protection Act is a beneficial social legislation.
• The Court cited Bhogilal Chunilal Pandya v. State of Bombay [1959 Supp. (1) SCR 310]* to state that when the same word occurs in a similar context, the draftsman intends that the word bears the same meaning throughout the statute.
• The Court cited Lachmeshwar Prasad Shukul and Ors. v. Keshwar Lal Chaudhuri and Ors. [AIR 1941 FC 5]* to state that an appeal is a continuation of the application filed before the original authority.

What weighed in the mind of the Court?

The Supreme Court wasprimarily influenced by the following factors:

• Statutory Interpretation: The Court emphasized that the definition of “debt” in the IBC requires it to be “due,” and a time-barred debt cannot be considered “due” in the context of insolvency proceedings. The Court interpreted the term “due” to mean legally recoverable and not merely payable.
• Retrospective Application: The Court held that Section 238A of the IBC is clarificatory and procedural, and therefore, it applies retrospectively. This retrospective application was crucial in preventing the revival of time-barred debts, which would have been contrary to the purpose of the Limitation Act.
• Harmonious Construction: The Court sought to harmonize the provisions of the IBC with the Limitation Act, ensuring that the IBC is not used to circumvent the law of limitation. It emphasized that the intention of the legislature was not to give a new lease of life to stale claims.
• Procedural Fairness: The Court recognized that the law of limitation is a procedural law that aims to ensure that claims are brought within a reasonable time. It stated that allowing time-barred debts would lead to absurd consequences and would be unfair to corporate debtors.
• Applicability of Companies Act: The Court held that Section 433 of the Companies Act, 2013, applies to the NCLT, making the Limitation Act applicable to proceedings before it, including those under the IBC.
• Legislative Intent: The Court considered the legislative intent behind the IBC, which was to provide a framework for insolvency resolution and not a debt recovery mechanism. Allowing time-barred debts would have been contrary to this intent.

Ratio Decidendi

The ratio decidendi of the judgment is that the Limitation Act, 1963, applies to applications made under Sections 7 and 9 of the Insolvency and Bankruptcy Code, 2016, from its commencement on December 1, 2016. This is because:

• a. Section 433 of the Companies Act, 2013, applies to the NCLT, making the Limitation Act applicable to proceedings before it.
• b. Section 238A of the IBC is clarificatory and applies retrospectively.
• c. The intention of the IBC was not to revive time-barred debts.
• d. The expression “due” in the IBC refers to debts that are not time-barred.

Obiter Dicta

The court made the following obiter dicta:

• The court observed that the doctrine of laches, as argued by the appellants, could be applied in cases where the Limitation Act does not apply, but it did not decide on the application of the doctrine in the present case as the Limitation Act was held to be applicable.
• The court clarified that the IBC is not a debt recovery mechanism but a framework for insolvency resolution. This observation was made to distinguish the IBC from other debt recovery laws and to highlight the importance of adhering to the law of limitation.

Impact of the Judgment

The judgment has had a significant impact on insolvency law in India, particularly in the following ways:

• Clarity on Limitation: It has provided much-needed clarity on the applicability of the Limitation Act to IBC proceedings. This has removed the uncertainty that existed before the judgment, ensuring that creditors cannot initiate insolvency proceedings for time-barred debts.
• Protection of Corporate Debtors: The judgment has protected corporate debtors from the revival of stale claims. By ensuring that only legally recoverable debts can be the basis for insolvency proceedings, the judgment has prevented the misuse of the IBC as a debt recovery mechanism.
• Consistency with Legislative Intent: The judgment has aligned the interpretation of the IBC with the legislative intent, ensuring that the law of limitation is not circumvented. This has strengthened the integrity of the insolvency framework.
• Impact on Creditors: The judgment has emphasized the importance of creditors being diligent in pursuing their claims within the prescribed limitation period. This has made it imperative for creditors to take timely action to recover their debts.
• Procedural Certainty: The judgment has promoted procedural certainty in insolvency proceedings by clarifying the applicability of limitation periods. This has ensured that all parties involved in insolvency proceedings are aware of the legal framework and their rights and obligations.

Flowchart

Ratio Table