Applicability of Section 18 Limitation Act to proceedings under Insolvency & Bankruptcy Code: The saga ends

Much has been written and discussed on the topic of applicability of Section 18 of the Limitation Act, 1963 to proceedings under the Insolvency & Bankruptcy Code, 2016 , especially after the Supreme Court's recent decision in Babulal Vardharji Gurjar (BVG).

However, many conflicting views have been expressed in relation to the present provision. In the authors' view, the decision of BVG, rather than setting the issue straight, has made the issue even more complicated.

By way of this article, the authors have tried to break down the issue in view of the recent order of the Supreme Court in MM Ramchandran, wherein the order of the National Company Law Appellate Tribunal (NCLAT) has been approved by the Supreme Court. In essence, the view of BVG has been clarified, and in the authors' view, the controversy in relation to Section 18 of the Limitation Act has been settled.

The Controversy

Though the issue of applicability of the Limitation Act on proceedings under the Code has been fairly well settled by the plethora of judgments of the Supreme Court, the issue of application of Section 18 of the Limitation Act has always remained a contentious issue before the courts. This, especially since this issue is usually dependant on the facts of a particular case and less on the issue of law.

The latest case was the decision of BVG, wherein though the argument of applicability of Section 18 was taken by the respondent, the Supreme Court chose to not to deal with the issue by stating that it did not arise in the peculiar facts and circumstances of that case. This view was taken not before certain observations were made in this regard.

For a little more context, the respondents in the aforestated case of BVG extensively argued the ground of application of Section 18 on the basis of the decision of Jignesh Shah passed by the Supreme Court.

However, one of the arguments taken by the respondents in this case was that the period of limitation for recovery of the mortgaged property is twelve years and therefore the proceedings under Code could have been initiated within the period of this twelve years as the debt was still alive. The Supreme Court in the case of BVG brushed off this argument on two counts.

Firstly, that the issue is no longer res integra as Jignesh Shah does not change the law laid down by BK Educational Trust and other judgments in relation to the applicability of Article 137 of the Limitation Act as applicable to Section 7 of the Code, and therefore the limitation is not of twelve years but three years and the same can only be extendable under Section 5 of the Limitation Act where the case for condonation of delay is made out and not otherwise.

The second count was simply that the Court found that the said section is not applicable in the facts and peculiar circumstances of that case as the respondent never made any pleadings related to acknowledgement of debt before the NCLT nor made a foundation that the same was extended beyond the year 2011. Therefore, the Supreme Court did not make any departure from any of the earlier judgments in this regard.

However, the judgment in the case of BVG as written down, sparked a controversy that Section 18 of the Limitation Act does not apply to the proceedings under the Code. It is pertinent to mention here that even in the case of Jignesh Shah, the issue before the Court was not of the applicability of Section 18 of the Limitation Act. Certainly the Court did not decide said case based on the interpretation and applicability of Section 18 of the Limitation Act.

The route to possible salvation – the recent decision of MM Ramchandran

In the said case, the account of the corporate debtor was marked as a non-performing Asset (NPA) on December 31, 2015 and the bank filed an application under Section 7 of the Code on April 10, 2019. The National Company Law Tribunal (NCLT) admitted the application, passed an order of moratorium, and appointed an Insolvency Resolution Professional (IRP).

The promoter of the Group, MM Ramachandran, then preferred an appeal against the order of the NCLT, by way of which he had challenged the initiation of the Corporate Insolvency Resolution Process (CIRP) and contested that the same was barred under law as the limitation period of the default was beyond the period of limitation of three years.

The question that arose before the NCLAT was whether the said application under Section 7 was barred by limitation. It was argued by the Bank that besides other acknowledgements, the corporate debtor through its promoter and director had also issued an email dated May 2, 2016 and a letter dated May 30, 2016 within the limitation period of the subsisting three years and that the same clearly acknowledged the debt due to the bank.

The bank, basis the aforestated email and letter, sought the benefit of Section 18 of the Limitation Act and claimed that the said application under Section 7 is within the limitation of three-year duration. The NCLAT, basis the email and the letter, accepted the argument of application of Section 18 of Limitation Act to the facts and circumstances of the case and dismissed the appeal of the corporate debtor.

The said order was challenged by MM Ramachandran before the Supreme Court as well, wherein during the course of arguments, counsel for the appellant heavily relied on the judgment of BVG. It was vehemently argued that the first observations made in BVG squarely apply in the present case and that the argument of application of Section 18 as explained above seals the issue. Thus, it was argued that Section 18 of the Limitation Act does not apply to proceedings under the Code at all.

The Full Bench of the Supreme Court observed that the issue of application of Section 18 of the Limitation Act has been not dealt by the Court in BVG at all, and did not find merit in this argument. The Full Bench also remarked that the argument was considered by the Division Bench and accordingly dismissed the said appeal.

The importance of this decision is more so as the Full Bench of the Supreme Court was dealing with its appellate jurisdiction under Section 62 of the Code and not under Article 136 of the Constitution of India. Thus, the doctrine of merger will apply to make the order of NCLAT absolute on the said issue of Section 18.

Conclusion

From the above analysis of law and in our humble opinion, both the judgments of the Supreme Court in Jignesh Shah and BVG are not the relevant authorities on the application of Section 18 of the Limitation Act as the said issue never arose for consideration before the Supreme Court. The said cases were certainly not decided on the said basis by the Supreme Court as the doctrine of precedents makes it clear that a judgment is a precedent only on the issue which it decides and nothing more beyond it.

On the other hand, the judgment in MM Ramchandran, having been affirmed by the Supreme Court, is an authority on the application of Section 18 of the Limitation Act on proceedings under the Code and would help in countering the argument that Section 18 doesn’t apply to the Code.

Parag Maini is a Partner, Abhimanyu Chopra is a Counsel, and Amit Shrivastava is a Senior Associate at AZB & Partners. The views of the authors are personal.

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of Bar & Bench.