The Supreme Court in BK Educational Services Private Limited v. Parag Gupta and Associates (BK Educational), while interpreting Section 238A of the Insolvency and Bankruptcy Code, 2016 (the Code), held that provisions of the Limitation Act, 1963 are applicable to applications filed by financial and operational creditors under Sections 7 and 9 of the Code from the “inception of the Code”.
While the author does not dispute the fact that the Limitation Act would now apply to the Code, the author respectfully disagrees with the ultimate conclusion of the Court, namely
(1) “The right to sue” under Section 7 and 9 of the Code accrues when a default occurs;
(2) Save and except those cases where Section 5 of the Limitation Act is applicable, “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…”
The Issue before the Supreme Court
The Supreme Court was dealing with Section 238A, which was inserted into the Code by an amendment which states that the Limitation Act “shall, as far as may be,” apply to the proceedings before the National Company Law Tribunal (NCLT). The issue that arose before the Supreme Court was whether the Limitation Act is applicable to applications that are made under Section 7 and/or Section 9 of the Code from its commencement on December 1, 2016 till June 6, 2018 i.e. the date on which the Amendment Act came into force.
Finding of the Supreme Court
The Court came to the conclusion that the Limitation Act would apply to NCLT proceedings. As for Section 238A, the Court said that it should be applied retrospectively, “otherwise, applications seeking to resurrect time-barred claims would have to be allowed, not being governed by the law of limitation.”
The Court further stated,
“The Code cannot be triggered in the year 2017 for a debt which was time-barred, say, in 1990, as that would lead to the absurd and extreme consequence of the Code being triggered by a stale or dead claim….”
It was held that “since the Limitation Act is applicable to applications filed under Sections 7 and 9 of the Code from the inception of the Code, Article 137 of the Limitation Act gets attracted.” In effect, the Court held that Section 238A of the Act would apply to applications filed under Section 7 and/or Section 9 of the Code from its commencement on December 1, 2016. Up to this point, there is no difficulty with the verdict.
However, the Court further states, “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.
Right to Sue
The use of the expression “the right to sue” is at odds with Article 137 of the Limitation Act, because this expression is nowhere mentioned in the Article. The expression used in Article 137 is “the right to apply”. The expression “the right to sue” finds place in Article 113 of the Limitation Act. Both are residuary articles, providing for a limitation period of three years.
However, Article 113 applies only to “Suits” and not to any other legal proceeding. The “right to sue” arises when the “cause of action” arises i.e. “the right to prosecute to obtain relief by legal means.” Article 137, on the other hand, is a residuary article for applications or petitions which can be filed within three years “when the right to apply accrues.”
Article 137 applies to any petition or application filed under CPC as well as Special Laws. Article 137 applies only to “applications” and not “suits”. The time to make an application under Article 137 begins to run from the moment the applicant first had the right to make the said application. It is “this right under to make an application” under Article 137 that has been interpreted by two recent judgments of the NCLAT.
In Shankar Vardharajan v. Dewachand Ramsaran Corporation Pvt. Ltd. and others, the appellant, while relying on the judgment of the Supreme Court in BK Educational, contended that the claim of the respondent was time-barred as it arose in the year 2014. The NCLAT, while referring to BK Educational, held that the right to apply under Section 9 accrued to the eespondent “since December 1, 2016 when the I&B Code came into force.”
Therefore, in the NCLAT’s opinion, the Section 9 application was filed on time. It is pertinent to note that though in the facts of the case, the NCLAT found that there was a continuous cause of action, in the NCLAT’s view, the right to apply under Section 9 accrued from the date on which the Code came into force i.e. from December 1, 2016.
It is submitted that this view of the NCLAT is directly contrary to the law laid down in BK Educational, which states that the “right to sue” accrues when a default occurs and if the default occurred over three years prior to the date of filing of the application, the application would be barred by Article 137. The same view was also taken in another judgment delivered by the NCLAT in Pushpa Shah and Ors. v. IL & FS Financial Services Limited and Ors.
In the author’s opinion, the view of the NCLAT appears to be correct for the following reasons:
Concluding Comments and Suggestions
It appears that the intention behind the Amendment Act was to prevent “delayed” and “dead” claims from being agitated under the Code. However, in light of the recent decisions of the NCLAT mentioned above, it would be advisable for the Legislature to amend the Limitation Act in the following manner:
In the author’s view, the above-mentioned suggestions would obviate any ambiguity while filing Corporate Insolvency Resolution Proceedings and would ensure that stale, time-barred, or dead claims cannot be revived or re-agitated.
The author is an independent practitioner in the Bombay High Court. He can be contacted at firstname.lastname@example.org