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Question of law:

Can proceedings be initiated under IBC with regard to a debt, the recovery of which has become time-barred?

Existing provisions under IBC 2016:

It appears that this question remains unresolved despite an amendment made to IBC by way of introduction of Section 238A which specifically provides that Limitation Act will be applicable to proceedings initiated under the Code.

Section 238A states as follows: 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.

The Report of ILC (“Insolvency Law Committee”) dated March 2018 notes that the intent of Code was not to give a new lease of life to debts which are time-barred. It was in this light that Section 238A was incorporated in the Code to ensure that the Code does not become a fresh opportunity for creditors and claimants who did not exercise their remedy under existing laws/provisions within the prescribed limitation period.

Pursuant to the provision of section 3 of the Limitation Act 1963 a recovery suit for claim of money and/or application against any other person for his/her claim of money has to be filed within the period of limitation prescribed under the aforesaid act. According to entry no. 19 of the schedule provided under the aforesaid act the period of limitation prescribed for the money payable for money let is 3 years from the date when loan is made.

NCLAT Judgments:

However, despite the inclusion of the aforesaid provision in the Code, in two recent judgments passed by NCLAT on 05.07.2018 and 09.07.2018 respectively, in the case of M/s. Kunj Forgings (P) Ltd. and in the case of M/s Jord Engineers India Ltd. Wherein it had held that even if Limitation Act is applicable; under Article 137, Part II of Limitation Act, limitation commences on the date when the right to apply accrued. NCLAT reasoned that because the right to apply under the Code could only have accrued after the Code came into effect, therefore, the limitation for initiating proceedings under the Code would commence only on 01.12.2016, i.e., the date when the Code came into effect.

Key take away:

  • Going by the said reasoning, even if recovery of the financial debt/ operational debt is otherwise time-barred, an application under Section 7 or Section 9 would still be maintainable.
  • Please note that the aforesaid appeals pertain to judgments passed prior to the inclusion of Section 238A in the Code.
  • Nonetheless, the reasoning given by the Appellate Tribunal is contrary to and defeats the very purpose of the inclusion of Section 238A in the Code and we will have to await the pronouncement of law by Hon’ble Supreme Court in the pending appeals involving such question of law.
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