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Limitation Act in connection with IBC Laws

AUTHOR- Sakshi Kashyap, Faculty of Law, Delhi University.

Ø INTRODUCTION

On recommendation of Insolvency Laws Committee’s Report published in March, 2018, Section 238A was inserted by the Insolvency and Bankruptcy Code (Second Amendment) Act. Prior to the section 238A, the issue of applicability of the Limitation Act to proceedings under the IBC were initially dealt by NCLAT.

The judgment arose from a batch of cases in which NCLAT held that Limitation Act does not apply to applications made under section 7 and section 9 of IBC from the date of commencement of IBC.

Ø OBJECTIVE

To help bonafide claimants to be prompt in claiming the relief and to prevent fraud being practiced by people upon innocent persons by an action being kept hanging upon them for a long time.

Ø CASE STUDY

In BK Educational Services Private Limited v Parag Gupta and Associates, a dispute regarding liability arose between Parag Gupta & Associates, chartered accountants (creditors) and BK Educational Services Private Limited (debtor). Debtor, while denying the financial liability, contended that all but one financial claim was false and that the records were tampered and manipulated by the relatives of the financial creditors. Further, the amounts claimed were time-barred and there was nothing on record that would extend the limitation to recover the amount since the period was between 2012 and 2013.[1]

Hon’ble Supreme Court in the above case clarified that the Limitation Act is applicable to applications filed under Sections 7 and Section 9 of the Insolvency & Bankruptcy Code.

NCLAT held that documents submitted were not justifiable for the purpose of extending the limitation and therefore the claim amounts were not legally recoverable.

The order was challenged before NCLAT by the financial creditors and NCLAT held that the Limitation Act provisions were not applicable for the commencement of the corporate insolvency resolution process under the IBC and further passed the order to accept the application for initiation.

“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.[2]

Section 18 of the Limitation Act 1963, which deals with the effect of acknowledgement in writing is reproduced here:

“applications” are petitions which are filed under the Code, it is Article 137 of the Limitation Act which will apply to such applications. Accordingly, we set aside the judgment under appeal and direct that the matter be determined afresh. It will be open for both sides to argue the case on facts on the footing that Article 137 of the Limitation Act alone will apply.

Section 18. Effect of acknowledgment in writing.

(1) Where, before the expiration of the prescribed period for a suit or application in respect of any property or right, an acknowledgment of liability in respect of such property or right has been made in writing signed by the party against whom such property or right is claimed, or by any person through whom he derives his title or liability, a fresh period of limitation shall be computed from the time when the acknowledgment was so signed.

(2) Where the writing containing the acknowledgment is undated, oral evidence may be given of the time when it was signed; but subject to the provisions of the Indian Evidence Act, 1872 (1 of 1872), oral evidence of its contents shall not be received.

Explanation: For the purpose, of this section, —

(a) an acknowledgment may be sufficient though it omits to specify the exact nature of the property or right, or avers that the time for payment, delivery, performance or enjoyment has not yet come or is accompanied by a refusal to pay, deliver, perform or permit to enjoy, or is coupled with a claim to set-off, or is addressed to a person other than a person entitled to the property or right;

(b) the word “signed” means signed either personally or by an agent duly authorised in this behalf; and

(c) an application for the execution of a decree or order shall not be deemed to be an application in respect of any property or right.”

Whereas, Hon’ble Supreme Court in case of C. Budhraja v. Chairman, Orissa Mining Corpn. Ltd., has held that:

“Section 18 of the Limitation Act, 1963 deals with effect of acknowledgment in writing. Sub-section (1) thereof provides that where, before the expiration of the prescribed period for a suit or application in respect of any right, an acknowledgment of liability in respect of such right has been made in writing signed by the party against whom such right is claimed, a fresh period of limitation shall be computed from the time when the acknowledgment was so signed. The explanation to the section provides that an acknowledgment may be sufficient though it omits to specify the exact nature of the right or avers that the time for payment has not yet come or is accompanied by a refusal to pay, or is coupled with a claim to set off, or is addressed to a person other than a person entitled to the right. Interpreting Section 19 of the Limitation Act, 1908 corresponding to Section 18 of the Limitation Act, 1963.[3]

The Apex court also made a reference to Sections 60 and 61 of the Indian Contract Act, which led to the conclusion that limitation merely bars the remedy and not the right. It is noteworthy that Section 60 uses the phrase

"whether its recovery is or is not barred by the limitation law. It is pertinent to note that the word "actually" makes it clear that in fact a debt must be due and payable notwithstanding the law of limitation. Thus, it is impossible to conclude from the same that in the context of Contract Act, the expression "due and payable" by itself would connote an amount that may be due even though it is time barred, for otherwise, it would be unnecessary for Section 60 to contain the word "actually" together with the words "whether its recovery is or is not barred by the law for the time being as to the limitation of suits".[4]

Ø CONCLUSION

Provisions of the Limitation Act will be applicable to IBC, including the applications filed under Section 7 and 9.

Wherein, the default had occurred three years prior to the date of filing, the said application would attract the provisions of Article 137 of the Limitation Act.

Exception: Section 5 of the Limitation Act

Ø REFERENCE

[1] https://www.vantageasia.com/limitation-act-applies-ibc-proceedings/

[2] https://www.vantageasia.com/limitation-act-applies-ibc-proceedings/

[3] https://ibclaw.in/analysis-of-the-provisions-of-limitation-act-1963-with-respect-to-insolvency-and-bankruptcy-code-2016/

[4]https://www.mondaq.com/advicecentre/content/3858/IBC-Barred-By-Limitation-Or-Not




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