Unlocking The Constraints: An In-Depth Study Of Limitation In Insolvency Litigation
The Insolvency and Bankruptcy Code (IBC), promulgated in 2016, has
significantly changed the Indian bankruptcy landscape. The limitation period is
the maximum amount of time that a creditor or debtor has to bring a claim or
file an insolvency petition and is therefore, a vital component of insolvency
proceedings in India.
The court has made clear on numerous occasions that the primary goal of the Code
is not to grant time-barred debts a new lease on life. With no express provision
in the code specifying the limitation applicable in an insolvency petition, one
has to refer to other statutes, readily and expressly clarifying the stand on
the instant subject.
The need to have an express provision of limitation in insolvency proceedings in
place arose because it notified the creditors and debtors of the timelines
within which they must file or defend insolvency conduct. The need additionally
guaranteed that the insolvency procedure runs efficiently and promptly.In the
case of Speculum Plast Pvt. Ltd., the NCLAT ruled that the Insolvency and
Bankruptcy Code (Code) was a self-contained law and the Limitation Act could not
be applied unless expressly included.
However, the Insolvency Law Committee recommended amending the Code to make the
Limitation Act applicable. Section 238A was added in August 2018, and its
retrospective application was upheld by the Supreme Court in B.K. Educational
Service Pvt. Ltd. v. Parag Gupta, stating that the Code's nature as a
complete code does not restrict the application of limitation.
Intersection Of The Statutory Provisions
There exist pertinent provisions in certain legislations that may affect
insolvency procedures in India, alongside the limitation period regulations in
the IBC. Section 238A of the IBC expressly lays down that 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.
In conjunction with this, Section 433 states that provisions of the Limitation
Act, 1963 shall, as far as may be, apply to proceedings or appeals before the
Tribunal or the Appellate Tribunal, as the case may be.
Sections 18 and 137 of the Limitation Act of 1963 alongside, apply to insolvency
procedures. Section 18 lets in an extension of the limitation period in specific
events, such as where the creditor has been prohibited from establishing the
claim within the stipulated limitation period owing to a reasonable cause.
Section 137, on the other hand, explains how the limitation period is determined
when the legislation allows for the exclusion of certain periods.
Sections 18 and 137, which offer for leeway in the computation and extension of
the limitation period, may additionally be vital in insolvency proceedings. For
example, if a creditor can show adequate cause for failing to submit an
insolvency petition within the specified limitation period, they may be eligible
to seek a limitation period extension under Section 18.
Similarly, if the limitation period is excluded by the legislation at any point
during the insolvency procedure, Section 137 can be used to compute the new
limitation period. Overall, the impact of Section 238A of the IBC, 2016 and
Sections 18 and 137 of the Limitation Act, 1963 to insolvency proceedings
underlines the vitality of comprehending the manner in which various legal
provisions in the insolvency framework interact with one another.
CIRP And Limitation
The Insolvency and Bankruptcy Code states that Article 137 of the Limitation Act
governs the statute of limitations for a request to begin the Corporate
Insolvency Resolution Process (CIRP) under Section 7 of the Code.The Corporate
Insolvency Resolution Process ('CIRP') is a recovery mechanism for the creditors
of a corporate debtor.
The Limitation Act's provisions must be followed in any proceedings or appeals
before the Adjudicating Authority, the National Company Law Appellate Tribunal,
the Debt Recovery Tribunal, or the Debt Recovery Appellate Tribunal, according
to Section 238A of the IBC Code. The Limitation Act, however, cannot be used to
a corporate debtor's claim for insolvency under Section 10 of the Code.The CIRP
must be finished within 330 days, taking into account any extensions and extra
time, or within 180 days, plus the additional 90 days.
In order to include Section 238A and make the Limitation Act applicable to
insolvency procedures, the law was changed in August 2018. However, the
Limitation Act cannot bring back claims that have already passed their deadline,
so stale claims should not be considered.
In Chand Prakash Mehra versus Praveen Bansal Interim Resolution
Professional of Silverton Spinners Limited, State Bank of India, the National
Company Law Appellate Tribunal held that if a debt occurred more than three
years prior to the date of filing of an application for initiation of
insolvency, it would be barred under Article 137 of the Limitation Act, 1963.
This case established a three-year limitation period for initiating Corporate
Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code.
However, this limitation period would not be applicable to cases where Section 5
of the Limitation Act would be applicable leading to condonation of delay.
In Gaurav Hargovindbhai Dave v. Asset Reconstruction Company (India) Ltd. and
Others, The Supreme Court ruled that applications filed under Section 7 of
the Insolvency and Bankruptcy Code (IBC) must be regulated by Article 137 of the
Limitation Act in order to determine the limitation period.
Furthermore, in B.K. Educational Services Private Limited v Parag Gupta and
Associates, the Court stated that if the default occurred more than three
years prior to the date of filing of the application under IBC, the application
would be barred under Article 137 of the Limitation Act, unless, in the facts of
the case, Section 5 of the Limitation Act may be applied to excuse the delay in
filing such application.
In Laxmi Pat Surana v. Union of India & Anr, the Supreme Court expressed
its opinion that Section 18 of the Limitation Act shall apply to the Code. The
Apex Court continued by explaining how, for the purposes of section 18 of the
Limitation Act, entries in a balance sheet may constitute an acceptance of debt.
The Supreme Court mandated that a new petition of limitations be established
beginning on the date when the principal borrower and/or the corporate guarantor
acknowledge a debt. As a result, by giving the advantage of time exclusion under
section 18 of the IBC, the FC's application under section 7 of the IBC was
determined to be within the restriction.
In Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries Pvt. Ltd. &
Anr, the Hon'ble Supreme Court held that the right to apply under the IBC
accrues on the date the default occurs, despite the fact that the date the IBC
Code entered into force, i.e., on 01.12.2016, is irrelevant to the triggering of
any limitation period for the purposes of the Code. Except in circumstances
where the filing delay may actually be excused, the application would be
time-barred if the default happened more than three years prior to the date of
The case also mentioned the extent to which Limitation Act, 1963 would apply to
the IBC wherein it held that an application under section 7 of the IBC is not
for enforcing mortgage liability and therefore Article 62 of the Limitation Act
would not apply to this application.
In Sanghvi v. Tech Sharp Engineers (P) Ltd. The Court ruled that there is
no set formula for accepting or rejecting the appellant's or applicant's
explanation for the delay in taking steps, and that whether the explanation
provided for the delay might be considered "sufficient cause" or not would
depend on the facts of each case.
It was decided in State Bank of India vs. Krishidhan Seeds Pvt. Ltd. that
proceedings under the IBC are subject to the limitations set forth in Section 18
of the Limitation Act. Furthermore, it was decided that as long as an
acknowledgement is made within three years of the original event, it can serve
as a valid foundation for evaluating whether the statute of limitations would be
To conclude, the limitation period is an indispensable component of insolvency
proceedings in India. The Insolvency and Bankruptcy Code, 2016, sets a
straightforward and unambiguous structure governing the limitation period, with
a three-year time limit for filing insolvency petitions. The limitations period
established by the IBC makes sure that the insolvency procedure is efficient and
on time, while simultaneously protecting creditors' and debtors' interests.
Section 238A of the IBC and Sections 18 and 137 of the Limitation Act, 1963 are
an additional two key provisions in the law that may affect insolvency
procedures in India. In a few instances, these regulations provide for the
suspension of the limitation period, the extension of the limitation period, and
the computation of the limitation period.
Added to that, Section 433 of the Companies Act, 2013, plays a pivotal part in
the Indian insolvency landscape, notably with regard to winding-up petitions.
Given the Apex Court's stated position in the case of Swiss Ribbons (P) Ltd. Vs
Union of India, that the Code is a beneficial legislation intended to put the
corporate debtor back on its feet and is not merely a money recovery legislation
, it is important to gain a clear understanding of the interplay between various
legal provisions and frameworks in India's insolvency landscape.
Law Article in India
You May Like
Legal Question & Answers