CORPORATE LAW

Limitation in Insolvency & Bankruptcy Proceeding: Period & Defence

In case of Neelkanth Township and Construction Pvt. Ltd. Vs Urban Infrastructure Trustees Ltd. (44/2017) dated 11th August, 2017, the National Company Law Appellate Tribunal (NCLAT) held following:

  1. The next ground taken on behalf of the appellant is that the claim of respondent is barred by limitation, as the Debentures were matured between the year 2011-2013 is not based on Law. There is nothing on the record that Limitation Act, 1963 is applicable to I and B Code. Learned Counsel for the appellants also failed to lay hand on any of the provision of I and B Code to suggest that the Law of Limitation Act, 1963 is applicable. The I and B Code, 2016 is not an act for recovery of money claim, it relates to initiation of Corporate Insolvency Resolution Process. If there is any debt which includes interest and there is default of debts and having continuous course of action, the argument that the claim of money by Respondent is barred by Limitation cannot be accepted.

Earlier the National Company Law Tribunal (NCLT), Mumbai branch in instant case of Urban Infrastructure Trustees Ltd. Vs Neelkanth Township and Construction Pvt. Ltd. (69/I&BP/NCLT/MAH/2017) dated 21st April, 2017 held following:

         Point No. 3: Whether the debt is time barred or not

  1. The corporate debtor counsel argued because this three debenture certificates were due for redemption as far as 2011, 2012 and 2013, since this application is filed in the year 2017, this claim is ex-facie time barred, hence this Tribunal ought not entertain or proceed with or decide the same. He further submits that the purported acknowledgement by the corporate debtor in the Annual Returns is subject to the qualification contained in the Directors report, which clarified to the Notes on Account contained in the auditor’s report. Since the said acknowledgement being qualified by the Director’s report, it can’t be treated as an admission for extension of limitation basing on section 18 of the Limitation act.
  2. Looking at the argument of the corporate debtor counsel, it is clear that it is not the case that the debentures certificates have not been issued. It is also not the case that admission of default is not present in the financial statements. The only twist that is given to that admission is that it is in dispute. As to this point it need not be newly propound to say that the admission appearing gin the financial statement of the company is an acknowledgement covered by section 18 of the limitation act, an acknowledgement need not be given to the financial creditor stating that debt is owed to them………………………..

The NCLT has overruled the objection of limitation by corporate debtor on the ground of acknowledgement within the spirit and meaning of section 18 of the Limitation Act, 1963. However, per contra the NCLAT has ruled out the play of the Limitation Act, 1963 in  the Insolvency and Bankruptcy Code, 2016 per se. The section 60(6) and 179 (3) of the Insolvency and Bankruptcy Code, 2016 lays down following :

60……..

(6) Notwithstanding anything contained in the Limitation Act, 1963 or in any other law for the time being in force, in computing the period of limitation specified for any suit or application by or against a corporate debtor for which an order of moratorium has been made under this Part, the period during which such moratorium is in place shall be excluded.

179……

 (3) Notwithstanding anything contained in the Limitation Act, 1963 or in any other law for the time being in force, in computing the period of limitation specified for any suit or application in the name and on behalf of a debtor for which an order of moratorium has been made under this Part, the period during which such moratorium is in place shall be excluded.

The Section 60(6) and 179 (3) of the Insolvency and Bankruptcy Code, 2016 with regard to exclusion of moratorium period from period of limitation have identical provision for subject matter covered their in. Thus, there cannot be any dispute regarding play of “period of limitation” under the Insolvency and Bankruptcy Code, 2016. There are provisions in the Insolvency and Bankruptcy Code, 2016, which prescribes for “period of limitation” for the prescribed procedure as this code itself is based on principle of “TIME IS ESSENCE” .However, The Insolvency and Bankruptcy Code, 2016 neither restricts the play of the Limitation Act, 1963 nor prohibits it.

The objective of the Limitation Act, 1963 is stated in following words:

An Act to consolidate and amend the law for the limitation of suits and other proceedings and for purposes connected therewith.

The Limitation Act, 1963 is not only applicable to suit but to other proceedings also. The Part II of Schedule to the Limitation Act, 1963 states following:

“     

PART II—OTHER APPLICATION 

Description of suit Period of limitation Time from which                  period begins to run 
137. Any other application for which no period of limitation is provided elsewhere in this Division Three years                      When the right to apply accrues

The the Insolvency and Bankruptcy Code, 2016, do not provide for “period of limitation” as stated above, hence the provision of the Limitation Act, 1963 automatic comes into play read with Part II of the Schedule to this act even if it’s not covered under Part I to the Schedule covering various type of suit including various type of suit for recovery of money (Sr. No. 19-26).

In case of Black Pearl Hotels Pvt. Ltd. Vs. Planet M Retail Ltd, (91 of 2017), the NCLAT , while accepting the play of the Limitation Act, 1963, specially article 137 has held following:

“12. Insolvency and Bankruptcy Code, 2016 has come into force with effect from 1st December, 2016. Therefore, the right to apply under I&B Code accrues only on or after 1st December, 2016 and not before the said date (1st December, 2016). As the right to apply under section 9 of I&B Code accrued to appellant since 1st December, 2016, the application filed much prior to three years, the said application cannot be held to be barred by limitation.”

It is apparent that such a conclusion of NCLAT is not just and proper as it will lead to revival of all time barred case leading to clogging of justice system in I & B Code, 2016. The “right to apply accrues” when the difference arises or differences arise, as the case may be between the parties subject to section 18 of the Limitation Act, 1963. The words ‘when the right to sue accrues’ have been construed to mean when the cause of action arises. It is common law that such “right to apply” cannot be construed to be the date of enactment of new law. The existing cause of action cannot be revived by the enactment of new law like the I & B Code, 2016. In such a scenario the Limitation Act, 1963 will be rendered otiose.

The act like the Customs Act, 1962 and the Central Excise Act, 1944 provides for “period of limitation” under its various provision for recovery by government or refund to the assesse. Even in such self-contained law regarding “period of Limitation” the provision of the Limitation Act, 1963 was applied in case of abortive period at tribunal level. In case of M.P. Steel Corporation vs Commissioner of Central Excise (CIVIL APPEAL NO.4367 OF 2004), Supreme court has held following:

  1. The present case stands on a slightly different footing. The abortive appeal had been filed against orders passed in March- April, 1992. The present appeal was filed under Section 128, which Section continues on the statute book till date. Before its amendment in 2001, it provided a maximum period of 180 days within which an appeal could be filed……………………..On the principles contained in Section 14 of the Limitation Act the time taken in prosecuting an abortive proceeding would have to be excluded as the appellant was prosecuting bona fide with due diligence the appeal before CEGAT which was allowed in its favour by CEGAT on 23.6.1998. ……….

 

Thus, the doctrine that the Limitation Act, 1963 only applies to court cases and not to tribunal cases has been decided in contradiction of this doctrine on sound footing and considering various provision of the Limitation Act, 1963 including section 14 of this act.

M/s Neelkanth Township and construction Pvt. Ltd. had approached the Supreme Court  against the order of the NCLAT in  Neelkanth Township and Construction Pvt. Ltd. Vs Urban Infrastructure Trustees Ltd. (44/2017) dated 11th August, 2017 , the Supreme Court vide order dated 23rd August, 2017 has upheld the order of the NCLAT.  However, it still appears that the NCLAT decision regarding non-applicability of the Limitation Act, 1963 to the Insolvency and Bankruptcy Code, 2016, will not hold water in long run. The apex court will revisit this non applicability the Limitation Act, 1963 to the Insolvency and Bankruptcy Code, 2016 if faced with this specific issue.

The NCLT and NCLAT is creature of CHAPTER XXVII of the Companies Act, 2013. The section 433 of the Companies Act, 2013 provides for following:

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

The Limitation Act, 1963 as law exist today shall be applicable to  the Insolvency and Bankruptcy Code, 2016  by virtue of NCLT and NCLAT being creature of the Companies Act, 2013 due to irrevocable fact that  the NCLAT and NCLT cannot violate section 433 of the the Companies Act, 2013. A similar opinion was held by NCLT, Principal Bench, New Delhi incase of M/s Deem Roll-Tech Limited Vs. M/s R. L. Steel & Energy Ltd. 

In case of Union Of India And Anr vs Kirloskar Pneumatic  Company Limited (1996 SCC (4) 453), the Supreme Court held following:

“……………………In particular, the Customs authorities who are the creatures of the Customs Act, cannot be directed to ignore or act contrary to Section 27, whether before or after amendment. May be the High Court or a Civil Court is not bound by the said provisions but the authorities under the Act are. Nor can there be any question of the High Court clothing the authorities with its power under Article 226 or the power of a civil court. ………………….”

EXISTENCE OF DISPUTE:

The Supreme Court in case of Mobilox Innovations Private Limited vs Kirusa Software Private Limited (CIVIL APPEAL NO. 9405 OF 2017) has held following:

45. Going by the aforesaid test of “existence of a dispute”, it is clear that without going into the merits of the dispute, the appellant has raised a plausible contention requiring further investigation which is not a patently feeble legal argument or an assertion of facts unsupported by evidence. The defense is not spurious, mere bluster, plainly frivolous or vexatious. A dispute does truly exist in fact between the parties, which may or may not ultimately succeed, and the Appellate Tribunal was wholly incorrect in characterizing the defense as vague, got-up and motivated to evade liability.

The section 5 (6) of the Insolvency and Bankruptcy Code, 2016 is set in as follows:

“5. Definitions. In this Part unless the context otherwise requires,-

(6) “dispute” includes a suit or arbitration proceedings relating to—

(a) the existence or the amount of debt;

(b) the quality of goods or service; or

(c) the breach of a representation or warranty;”

The definition of “Dispute”  under the Code is inclusive definition and covers all “Existing Dispute” between “Operational Creditor” and “Corporate Debtor” hence all sort of existing and plausible contentions and not spurious, frivolous or vexatious dispute shall be covered by this definition.

Rajni Sinha
Advocate High Court,
Mobile No. 7738080174.

 

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