Extension of Limitation Period Under IBC: A Creditor’s Dilemma

[By Prashansa M. Agrawal]

The author is an Advocate practicing in the High Court of Bombay.

Recently, in the judgment dated 14th August 2020 in Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries Pvt. Ltd. & Anr., the Supreme Court decided that the application filed by the financial creditor therein was not barred by limitation. While pronouncing the decision, the Supreme Court reasserted the settled aspects of limitation under the Insolvency and Bankruptcy Code, 2016 (“the Code”) in reference to its earlier landmark judgments. At the same time, the Supreme Court touched upon a slightly different and disputed position with respect to the applicability of Section 18 of the Limitation Act to the Code― which has come up before the Supreme Court for the first in the instant case.

In this article, the author analyses the landmark judgments on the limitation period under the Code along with a few disputed judgments on Section 18, in order to assess the stand of the Supreme Court in the instant case.

Background

The legislature sought to answer the ever-looming question of ‘limitation’ under the Insolvency and Bankruptcy Code, 2016 (“the Code”) by incorporating Section 238A in the Code by way of the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 which applies provisions of the Limitation Act (“the Act”) to the proceedings before National Company Law Tribunal (“NCLT”) and National Company Law Appellate Tribunal (“NCLAT”)

Consequently, the question of retrospective application of Section 238A arose before the Supreme Court in B.K. Educational Services Private Limited v.Parag Gupta and Associates. The Apex Court held that limitation provisions were applicable to the Code from its very inception. Therefore, it was construed that Section 238A only clarifies the said position and is applicable retrospectively.

Thus, as per the judgment in B.K. Education(supra), the right to sue accrues when the default occurs, which lasts for three years to be computed from the date of default. After the said period, an application under the Code would be barred under Article 137 of the Act except when the delay is explained and condoned as per Article 5.

However, there arose ambiguities with regard to other ways of extending the prescribed limitation period of three years. One such ambiguity relates to the applicability of Section 18 of the Act to the Code which came for consideration before the Apex Court in the case of Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries Pvt. Ltd. & Anr. As per Section 18, when a party against whom a property or right is being claimed acknowledges the liability during the subsistence of the limitation period prescribed for a suit or application in respect of such property or right i.e. 3 years under the Code, a fresh period of limitation shall be computed from the date of such acknowledgment.

The contention, ‘Whether or not Section 18 pushes the date of default under the Code’ has been addressed in a few judgments over the years as provided below-

Prior to the Instant Case

In Fernas Construction India Pvt. Ltd. v. RVR Projects Pvt. Ltd., the National Company Law Appellate Tribunal (“NCLAT”) held that Section 18 in Part I of the Act would not apply to an application under the Code as such an application is neither a suit nor can be regarded as a recovery proceeding.

Thereafter in Jignesh Shah & Anr. v. Union of India & Anr., the question before the Supreme Court was whether a prior suit for recovery extends the limitation period for filing a subsequent winding-up petition. The Supreme Court answered the aforementioned in negative and remarked that the limitation period can only be extended by the provisions under the Limitation Act such as by way of Section 18 of the Act.

Relying on the aforementioned judgment of the Supreme Court, the NCLAT in Sh G. Eswara Rao v.. Stressed Assets Stabilisation Fund and Others held that the period of limitation under the Code commences from the date of default and this date of default can be forwarded to a future date only under Section 18 of the Act.

In light of the judgments in Jignesh Shah (supra) and Sh. G Eswara Rao (supra), the financial creditor in the instant case argued the applicability of Section 18 which was not accepted by the Supreme Court as explained below.

Obiter Dictum of the Instant Case

The Supreme Court clarified that the illustrative reference to Section 18 in Jignesh Shah(supra) was only with respect to suits or other proceedings, wherever it could apply. It further emphasized that the said observations in Jignesh Shah (supra) do not alter the settled position in B.K. Education(supra) i.e. an application under Section 7 (i.e. by a financial creditor) under the Code is time-barred after 3 years from the date of default except when the delay is condoned under Article 5.

The Supreme Court further observed that even while assuming that Section 18 is, in fact, applicable for extension of the limitation period for an application under the Code, the same would not come to the rescue of the applicant creditor in the instant case as no suggestion of any acknowledgment as required under Section 18 has been made. It was thus observed that limitation is a mixed question of fact and law which requires the pleader to produce the necessary facts and evidence in order to argue that a particular provision is applicable to extend the prescribed limitation period.

In light of the above observations, the Supreme Court decided that the application filed by the financial creditor was barred by limitation.

Conclusion and Analysis

The instant case certainly creates a doubtful situation around the applicability of Section 18 to the Code, causing dilemma to a number of creditors.

In order to understand the position of Section 18 vis-a-vis an application under the Code, it is imperative to note that the phrase ‘suits or applications’ appears under Section 18, as opposed to Article 62 of the Act relating to mortgages which only contains the word ‘suits’ and is therefore not applicable under the Code as per the judgment of the Supreme Court in Gaurav Hargovindbhai Dave v. Asset Reconstruction Company (India)Ltd.& Anr.

Further, since the limitation act is penal in nature, it shall be interpreted strictly. When such strict interpretation is attributed to Section 18, it becomes clear that Section 18 applies to both suits as well as applications including the applications under the Code. Similarly, it was observed by R.F. Nariman, J. in Gaurav Hargovindbhai (supra)“it is not for us to interpret, commercially or otherwise, articles of the Limitation Act when it is clear that a particular article gets attracted.Therefore, Section 18 is clearly applicable to applications under the Code and a different interpretation would not stand within the bounds of the limitation act.

Interestingly, the purpose of prescribing a limitation period for filing a suit/application is― on one hand, to protect the rights of those who have enjoyed them undisturbed for the prescribed limitation period and on the other, to extinguish the unexercised rights of those who slumber upon them throughout the said period. But when a person acknowledges his/her liability in the prescribed manner, the status quo gets disturbed. The date of acknowledgment becomes the renewed date of default such that the limitation period restarts from that date. This underlying principle under Section 18 advances the cause of justice, and should ideally be applied while computing the limitation period under the Code.

Thus, the instant case may have rendered the application of Section 18 questionable leaving creditors under the Code in dilemma. But one needs to understand that the right under Section 18 is available to applicant creditors and can only be taken away by a clear mandate denying the right and not otherwise. The instant case does not provide for any such mandate, hence does not prohibit the application of Section 18 to the Code.

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