Applicability of Limitation to insolvency applications: NCLT Mumbai carves out exception
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Applicability of Limitation to insolvency applications: NCLT Mumbai carves out exception

Varun Marwah

The Mumbai Bench of NCLT has held that, a debt that is barred by limitation can be proceeded against under provisions of the Insolvency and Bankruptcy Code (IBC), if the debt continued to be recorded in the books of the corporate debtor.

The Supreme Court in in the case of B.K. Educational Services Private Limited Vs. Parag Gupta & Associates held that Limitation Act, 1963 will apply to proceedings under the IBC. The judgment found that “the right to sue”, accrues when a default occurs. It further held that 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.

Following this judgment by the Supreme Court, several debtors filed applications before the NCLTs on the ground that the Insolvency Applications have been filed beyond the prescribed period of limitation, and thereby cannot be proceeded further in view of the Supreme Court decision.

A Section 7 application was filed by TJSB Sahakari Bank Ltd. (Applicant Bank) against Unimetal Castings Ltd (Corporate Debtor). The Corporate Debtor raised several objections to the application. It, inter alia, contended that since it is an MSME, it is extremely important for the national economy and that, declaration of its account as an NPA is illegal, void and non-est. The NCLT rejected all these contentions in view of Section 7 of the IBC, which requires (for it to be only to be satisfied) that a default has occurred.

The Corporate Debtor also raised an objection that, the Insolvency Application filed against it is barred under Article 137 of the Limitation Act as the date of default was June 30, 2015 whereas the Insolvency Application was filed in August, 2018 i.e. 3 years after the debt becoming due. In this respect the Corporate Debtor relied on the Supreme Court’s decision in the B.K. Educational Services case.

However, in response to this objection on limitation, the Applicant Bank relied upon an entry in the Corporate Debtor’s balance sheet for the Financial Year ending 2017. In this balance sheet, the Applicant Bank’s name and outstanding were both disclosed under ‘Long Term Borrowings’. It was hence argued that the period of limitation would stand extended in view of such admission of debt. The Applicant Bank, therefore, argued that, despite the fact that the Insolvency Application is being filed 3 years after the date of default as disclosed in the Insolvency Application, the admission of liability in the Corporate Debtor’s balance sheet would extend the period of limitation.

Distinguishing the present case from the Supreme Court decision, the NCLT  rejected the objection raised by the Corporate Debtor in view of the admission in its balance sheet. The Bench, while agreeing with the Applicant Bank and relying upon various decisions, held that the objection raised by the Corporate Debtor that the debt is barred by limitation will not hold water in view of the admission of liability in its balance sheet.

The Applicant Bank was represented by Nausher Kohli instructed by DSK Legal and the Corporate Debtor by Aditya Pimple instructed by MAG Legal.

(Read the order)

TJSB-SAHAKARI-BANK-LTD.-CP-3622-2018-NCLT-ON-25.01.2019-INTERIM.pdf
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