Limitation and IBC

APPLICATION OF LIMITATION ACT TO A S.9 APPLICATION UNDER IBC, 2016 AND HOW TO DETERMINE IF APPLICATION IS WITHIN LIMITATION

• The limitation law concerns the primary concept of ascribing a fixed time frame within which all legal contentions are required to be raised by parties; the law in this regard is governed primarily by The Limitation Act.
• S. 238A of IBC, 2016 provides:-

“238A. 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.”

• So, an application under IBC against a corporate debtor must be brought within period of limitation.

• Principles for extension of period of Limitation:-

• In terms of s.18, if the debtor acknowledges the liability in writing before the expiration of the prescribed period for suit or application in respect of property or right, a fresh period of limitation shall be computed from the time when the acknowledgement was made.
• In terms of s.19 of the Limitation Act, 1963, where payment on account of a debt  or of interest on a legacy is made before expiration of the prescribed period by the person liable to pay, a fresh period of limitation shall be computed from the time when the payment was made.
• The limitation period when payments are made in instalments: In the event that there is an obligation to pay in the form of instalments or in any continuous period, it is construed that there shall be a fresh limitation period at every instance of payment. This has been expressly observed in the case of Kotak Mahindra Bank v. Anuj Kumar Tyagi.

• Principle Pertaining to Condonation of Delay

• S.5 of the Limitation Act, 1963 provides that any appeal or any application, may be admitted after the prescribed period, if the appellant or the applicant satisfies the court that he had sufficient cause for not preferring the appeal or making the application within such period.

• Limitation Law in The Context of Insolvency and Bankruptcy Code, 2016

• Typically, for an application to be filed under the code there must exist a debt in question and a subsequent default in the payment of such debt.
• The question that arises is how old the default on a debt can be for a case to be valid ?

• In the case of B.K. Educational Services Private Limited vs. Parag Gupta & Associates (Civil Appeal No. 23988 of 2017), the Supreme Court held:-

• “27. It is thus clear that since the Limitation Act is applicable to applications filed under Sections 7 and 9 of the Code from the inception of the Code, Article 137 of the Limitation Act gets attracted. “The right to sue”, therefore, accrues when a default occurs. If the default has occurred over three years prior to the date of filing of the application, the application would be barred under Article 137 of the Limitation Act, save and except in those cases where, in the facts of the case, Section 5 of the Limitation Act may be applied to condone the delay in filing such application.”
• Thus, in terms of this judgment right to file an application accrues on occurrence of date of default which is not necessarily the date of supply of goods or services and delay in preferring an application under IBC could be condoned as well.

• How to determine the date of occurrence of default

• The term ‘default’ is defined under section 3(12) of IBC, 2016 as non-payment of debt by the corporate debtor when it has become due.
• When the payment is not made and when the debt becomes due is, in our opinion, required to be determined looking at the nature of transaction, whether the contract is simplicity for supply of goods or services or a composite contract for commissioning of a project, whether the accounts between the parties are for one off transaction or it’s a running mutual or a running non-mutual account, whether the parties remain in discussions in connection with payment of  a debt subject to resolution of any outstanding issues and/ or reconciliation of accounts etc.

Our Views

• While there are many arguments in different forums in light of B.K. Educational Services Pvt. Ltd. judgment that an application of operational creditor may not be maintainable in light of goods having been supplied or services having been rendered before a period of 3 years and no payment having been made in last three years, we believe that correct position of law is:-
  1. Creditor is not without remedy to file an application under IBC, 2016 merely on account of having supplied goods or rendered services before more than three years.
  2. Date of rendering services or date of supplying goods is not necessarily the date of occurrence of default.
  3. Date of occurrence of default is to be determined considering facts of each case.
  4. Even if the default occurred prior to three years, as an application u/s.9 is not a suit, the NCLT would have powers to condone the delay in light of principles contained u/s.5 of the Limitation Act, 1963 i.e. if the applicant satisfies that he had sufficient cause for not preferring the application.
  5. The period of limitation could be extended in case of satisfaction of conditions stipulated in s.18 and s.19 of Limitation Act, 1963.

You can contact us at:-

R&D Law Chambers

Email:- info@rdlawchambers.com

604, Entice, Nr. Jayantilal Park Bus Stand,
Iskon-Ambli Road, Ahmedabad-380058

*Above information is neither intended to be nor should it be taken as any professional advice.  Please contact a legal practitioner for any specific query.