Unwinding Limitation Conundrum Under IBC- By Advocate Sanjiv M Shah

Shri Sanjiv M Shah, B.COM, CA, CS, ICWA, LLB-Advocate, the Author can be reached at sanjivshah3@gmail.com

Unwinding Limitation Conundrum Under IBC


  • Section 238-A introduced in Insolvency and Bankruptcy Code, 2016 [Code] by amendment Act of 2018 with retrospective effect from 06.06.2018 is applicable inter alia to all proceedings before Adjudicating Authority [AA] and National Company Law Appellate Tribunal [NCLAT].
  • In B. K. EDUCATIONAL SERVICES PRIVATE LIMITED v. PARAG GUPTA AND ASSOCIATES [MANU/SC/1160/2018] aforesaid amendment was held to be clarificatory in nature because Limitation Act, 1963 [LA] being procedural in nature applied to Code since its inception [PARAGRAPHS 15, 27, 28]. Moreover, another object and purpose of initiating the amending legislation was to remove the confusion that aforesaid limitation statute cannot be invoked by express or necessary exclusion since Code was a self-contained law coupled with intention behind enactment of Code was not to impart a fresh lease of life to or give fresh opportunity to revive stale and dead claims barred by limitation [B. K. EDUCATIONAL SERVICES PRIVATE LIMITED v. PARAG GUPTA AND ASSOCIATES (MANU/SC/1160/2018), PARAGRAPH 6, 26].
  • In this connection, it is noteworthy that Supreme Court rejected particular arguments advanced by Counsel that LA does not come into play for proceedings under Code by dint of latter being an independent law as also on account of Section 238 of Code conferring overriding effect to Code over other enactments by holding that if such was a position then there was no need to incorporate Section 60(6) in Code positing by way of a non-obstante clause that while computing limitation period under LA time absorbed in moratorium under Section 14 of Code shall not reckoned with [B. K. EDUCATIONAL SERVICES PRIVATE LIMITED v. PARAG GUPTA AND ASSOCIATES (MANU/SC/1160/2018), PARAGRAPH 26]. Moreover, Sections 433 and 238-A lay down that provisions of LA shall apply “as far as may be” and therefore, where shorter time frame is interdicted by Code then those special yardsticks shall be adhered to [B. K. EDUCATIONAL SERVICES PRIVATE LIMITED v. PARAG GUPTA AND ASSOCIATES (MANU/SC/1160/2018), PARAGRAPH 26].        
  • In the premises, subject to Section 5 of LA for condoning delay where-ever applicable, residuary Article 137 of LA is to be brought into play in respect of applications under Sections 7, 8, and 10 of Code which postulates that period of limitation to lodge application runs from the date when “right to sue” accrues on occurrence of a “default” contemplated in aforementioned sections of Code.  Section 1(12) of Code  defines “default” as “non-payment of debt when whole or any part or instalment 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”. In turn, “debt” is expounded in Section 1(11) meaning “a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt”. In substance and effect, therefore, to trigger “default” liability or obligation must be “due and payable” connoting a debt which is not time barred in law and  not paid by corporate debtor [B. K. EDUCATIONAL SERVICES PRIVATE LIMITED v. PARAG GUPTA AND ASSOCIATES (MANU/SC/1160/2018), PARAGRAPHS 21, 22, 23, 27, 28 relying on INNOVENTIVE INDUSTRIES LTD v. ICICI BANK (MANU/SC/1063/2017)].  
  • In BABULAL VARDHARJI GURJAR v. VEER GURJAR ALUMINIUM INDUSTRIES PVT LTD [MANU/SC/0589/2020], NCLAT allowed CIRP application filed in 2018 vis-a-vis default date of 08.07.2011 under Section 7 of Code notwithstanding it was otherwise barred by limitation under LA on foundation that limitation period starts from 01.12.2016, date of enforcement of Code and Top Court reversed foregoing conclusion advocating that:-
  1. there is nothing even remotely either in Code or LA to support view that limitation is to be counted from enactment of Code [01.12.2016] and such a stand cannot be sustained in the wake of its ruling in B. K. EDUCATIONAL SERVICES PRIVATE LIMITED v. PARAG GUPTA AND ASSOCIATES (MANU/SC/1160/2018, PARAGRAPH 21) [PARAGRAPH 36 OF MANU/SC/0589/2020] relying on INNOVENTIVE INDUSTRIES LTD v. ICICI BANK [MANU/SC/1063/2017] and such an approach of NCLAT was pin-pointedly negatived in SAGAR SHARMA v. PHOENIX ARC PVT LTD [MANU/SC/1357/2019] [PARAGRAPH 36.1 of MANU/SC/0589/2020] reminding that its judgments are binding on all courts under Article 141 of Constitution of India [PARAGRAPH 36.1];
  2. Article 62 of LA dealing with recovery of possession of mortgaged property prescribing 12 years as outer threshold to file suits cannot be called in aid because it applies to “suits” and not “applications” in conformity with pronouncements of Top Court in GAURAV HARGOVINDBHAI DAVE v. ASSET RECONSTRUCTION COMPANY (INDIA) LTD [MANU/SC/1301/2019] and SAGAR SHARMA v. PHOENIX ARC PVT LTD [MANU/SC/1357/2019] and in the premises, it is inexplicable as to how NCLAT can apply any other article more so when it is well settled law that only Article 137 can be invoked [PARAGRAPH 37];
  3. plea of Counsel super-structured on observations in PARAGRAPH 21 [(2019) 10 SCC 750, 770] of JIGNESH SHAH v. UNION OF INDIA [MANU/SC/1319/2019, [PARAGRAPH 19] that period of limitation stands extended by virtue of Section 18 of LA inasmuch as much as corporate debtor acknowledged debt through balance sheets and annual reports is untenable since B. K. EDUCATIONAL SERVICES PRIVATE LIMITED v. PARAG GUPTA AND ASSOCIATES [MANU/SC/1160/2018] ruled that application under Section 7 of Code are dictated by Article 137 of LA enshrining limitation period of 3 years from date of default subject to prolongation engrafted in Section 5 of LA and hence there is no dilution of ratio of B. K. EDUCATIONAL SERVICES PRIVATE LIMITED v. PARAG GUPTA AND ASSOCIATES [MANU/SC/1160/2018] which is reaffirmed in subsequent pronouncements in VASHDEO R. BHOJWANI v. ABHYUDAYA CO-OPERATIVE BANK LTD [MANU/SC/1213/2019] and GAURAV HARGOVINDBHAI DAVE v. ASSET RECONSTRUCTION COMPANY (INDIA) LTD [MANU/SC/1301/2019] {PARAGRAPH 32 OF MANU/SC/0589/2020};
  4. even assuming while denying that applicant can fall back upon Section 18 of LA, in the instant case, impugned application unequivocally mentions 08.02.2011 as the only date of default on which account turned into an non-performing asset [NPA] without even adverting to any other default date or stating fact of acknowledgement much less any such statement in part V of application wherein applicant could have given variety of descriptions along with particulars of financial debt together with documents and evidence nor such information was embedded in residuary point 8 of part V and consequently, no pedestal for making such a claim founded on Section 18 was ever laid inasmuch as question of limitation is mixed of law and fact warranting pleading and leading of requisite evidence by party so claiming thereby declining to entertain submissions in that behalf developed at later stage [PARAGRAPH 33].
  • In VASHDEO R. BHOJWANI v. ABHYUDAYA CO-OPERATIVE BANK LTD [MANU/SC/1213/2019] to wriggle aforementioned statement of law explicated in B. K. EDUCATIONAL SERVICES PRIVATE LIMITED v. PARAG GUPTA AND ASSOCIATES [MANU/SC/1160/2018], it was urged that once a default was a continuing one ken of Article 23 of LA was attracted and thus cause of action would not suffer from infirmity of limitation, but Apex court placing reliance on its own  precedent in BALKRISHNA SAVALRAM PUJARI v. SHREE DNYANESHWAR MAHARAJ SANSTHAN [MANU/SC/0174/1959] drew distinction between an act that is continuing source of injury by virtue of which doer is liable and responsible for the act in a subsisting way and one which has exhausted, completed and ceased at once to be an injury in itself whose consequence and effect may result in a recurring damage not tantamount to injury per se; former falls within ambit and purview of Article 23 and not latter and in addition, Article 23 is concerned with “continued wrong” and not “continued right”. In the result, issue of recovery certificate on 24.12.2001 effectively and completely emptied the bucket of injury resulting there from on that very date and hence time for instituting application started ticking on 24.12.2001 rendering application time barred [PARAGRAPH 4].
  • In JIGNESH SHAH v. UNION OF INDIA [MANU/SC/1319/2019], Highest Court of land mutatis mutandis analogically invoked time limit of 3 years under Article 137 apropos application under Section 7 of Code as expounded in B. K. EDUCATIONAL SERVICES PRIVATE LIMITED v. PARAG GUPTA AND ASSOCIATES [MANU/SC/1160/2018] to a winding up petition filed in this case to hold that aforesaid petition being filed on 21.10.2016 was beyond 3 years from admitted date of default in repayment, namely, 19th August 2012 and consequently, barred by limitation inasmuch as existence and institution of a suit for specific performance of a letter of undertaking on 19.06.2013 with reasonable diligence by instant Appellant within the statutory time frame does not save, revive or extend period of limitation for subsequent action of lodging winding up petition drawing support from a catena of authorities cited in paragraphs 11 to 18 of decision since winding up proceedings are separate, distinct and independent proceedings [PARAGRAPH 19 AND 21]. Alternative submission advanced by counsel of instant Appellant relying on several precedents noted in paragraphs 23 to 27 of ruling was that cut-off date for lodging winding up petition would be the date when company lost its substratum or become commercially insolvent namely, when assets worth Rs.1000 crores in 2013 were eroded to a value of 200 crores in 2016 i.e. year of actual date of filing winding up petition [21.10.2016] and when so viewed, it is unequivocal that Appellant could not have instituted such a petition in 2013 in or around time suit for specific performance was filed [19.06.2013] and thus aforestated petition lodged in 2016 [21.10.2016] was within contours of limitation period. Supreme Court did not entertain abovementioned plea because present Appellant’s petition was under Section 433(e) and not under 434(1)(c) of Companies Act, 1956; former is activated when company is unable to pay its debts by dint of default in not discharging liability or obligation which thereafter remains outstanding and unpaid, whereas latter is invoked in a situation where substratum of company is lost or it becomes commercially insolvent [PARAGRAPHS 24 AND 25] and Apex Court also remarked that factual pleadings neither in winding petition or statutory notice reinforce above said legal arguments, in that, averments therein did not contain any allegations that company had lost its substratum in the sense that there is no reasonable possibility of company making a profit in future or it had relinquished its business and hence it was unable to meet dues owed by it [PARAGRAPHS 25 AND 30] and it also conspicuously noted at paragraph 30 that date adopted for fall in value assets was October 2016, on other hand, date of statutory notice is 03.11.2015, a factual mismatch indicating no co-relation. Supreme Court, on facts, further observed that very latest date that can be taken recognized for accrual of cause of action for filing petition winding petition under Section 433(e) is 07.01.2013 deadline by which Respondent Company was legally obliged to purchase requisite shares in conformity with letter of undertaking [PARAGRAPH 29] and left it at that inasmuch as even so, three years ended in January 2016, whereas Petition was filed on 21.10.2016 rendering it clearly time barred.              

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