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B.K.Educational Services Pvt Ltd v/s Parag Gupta And Associate: Needs Reconsideration

With the enactment of the Insolvency and Bankruptcy Code, one of the questions that often arose before the National Company Law Tribunal, which is vested with Jurisdiction to adjudicate upon and supervise insolvency resolution and liquidation of Corporate debtors, was whether the Limitation Act applied to applications made by Creditors under the IB Code. In order to set this controversy at rest, the legislature, by an amendment act, enacted section 238A which expressly made the provisions of the limitation Act,1963 applicable to proceedings under the IB Code before the NCLT.

The introduction of section 238A gave rise to the questions whether the amendment was clarificatory in nature and whether the provisions of the Limitation Act applied to Insolvency applications from the inception. These questions were determined by the Supreme Court in B. K. Educational Services Pvt. Ltd. Vs. Parag Gupta and Associates (2018 SCC Online 1921)

The Supreme Court held that 1) the provisions of the IB Code were not meant to resurrect time barred claims 2) the expression 'debt due' as defined in the IB Code referred only to debts that were not time barred on the date the creditor filed the application under the IB Code, 3) the provisions of section 238A were clarificatory and 4) provisions relating to limitation were procedural and for these reasons they would apply retrospectively. The Supreme Court relying on section 433 of the Companies Act, 2013 (which makes the provisions of the Limitation Act applicable to proceedings before the NCLT) also held that the NCLT would have to decide applications made to it under the IB Code in the same manner as it exercises jurisdiction under the Companies Act.

After having held that the provisions of the Limitation Act applied from the inception, the Supreme Court proceeded to hold that Article 137 of the Schedule to the Limitation Act applied to Insolvency Applications and in suitable cases delay could be condoned in exercise of powers under section 5 of the Limitation Act. This was an incidental question which did not directly arise for consideration, but was nonetheless decided by the Supreme Court.

The law laid down by the Supreme Court relating to the applicability of Article 137 to Insolvency applications is, with respect, erroneous for more than one reason. The first is that the "Adjudicating Authority" under the IBC is not a "court" and it is settled law that Article 137 of the Limitation Act applies only to applications filed before a court. In The Kerala State Electricity Board v. T. P. Kunhaliumma [(1976) 4 SCC 634], the Supreme Court held "The conclusion we reach is that Article 137 of the 1963 Limitation Act will apply to any petition to application filed under any act to a civil court." This statement of the law continues to hold the field.

Besides, even the language of section 238A of the IBC reveals the intention of the Legislature not to apply all the provisions of the Limitation Act to Insolvency applications under the IBC.

Section 238A of the IBC read as follows:
238A. 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.

The expression "as far as may be" which the Supreme Court has interpreted to mean ' to the extent possible' in Bengal Chemist and Druggists v Kalyan Chowdhury [(2018) 3 SCC 41] would have been unnecessary if the legislature intended all provisions of the Limitation Act to apply to Insolvency applications under the IBC. To the contrary, the use of the expression "as far as may be" clearly reveals the intention of the legislature that a provision such as Article 137 which applies only to applications before courts is not to apply to applications before the "Adjudicating Authority" under the IBC.

The finding that Article 137 applies to insolvency applications is also in direct conflict with the finding that the IBC is not meant to resurrect time barred debts and that the expression "debt due" refers only to debts that are not barred by limitation. For if Article 137 applies, section 5 of the Limitation Act also applies and the Tribunal would have the power to condone delay. And in the event delay is condoned, it would tantamount to affording a remedy for a debt which was otherwise barred by limitation i.e. the same claim laid in a suit for recovery would be dismissed as being time barred. The two findings of the Supreme Court are therefore irreconcilable.

Prior to enactment of the IBC and the Companies Act, 2013, section 433(e) of the Companies Act, 1956 provided for the winding up of a company if it was unable to pay its debts. Creditors routinely filed Petitions for winding up on the ground that a company was unable to pay its debts after complying with the provisions of section 434. Jurisdiction to entertain and decide winding up petitions vested in the High Courts. One of the issues which the High Courts determined whilst adjudicating such Winding up Petitions, was whether the claim of the Petitioning creditor, if made in a suit, would have been barred by limitation on the date of filing of the Petition. Determination of this issue necessarily involved an inquiry into the facts in order to decide which article of the schedule to the Limitation Act applied.

On arriving at a finding that a suit for recovery of the debt which was the subject of the winding up petition, was barred by limitation on the date of the petition, the winding up petition had necessarily to be dismissed. The question of condoning delay did not arise as section 5 of the Limitation Act does not apply to suits. In Modern Decor Painting Contracts v Jenson And Nicholson India ltd., [1985] 58 Comp Case 255] a division bench of the Bombay High Court in determining whether at the time of hearing the Winding up petition the recovery of the debt should not be time barred observed:
 It is not disputed that to maintain a petition for winding up on the ground of inability to pay the debt, the debt must be recoverable, i.e., due and payable and not barred by limitation at the date of the petition. This was so because under section 439, quoted above, one of the persons, inter alia, entitled to file a petition for winding up was a creditor and in order that a person could qualify himself to be a creditor, he must be able, to satisfy the court that at the date of the petition, there was a debt ascertainable or due and payable to which he could claim

In B. K Educational Services Pvt. Ltd., the Supreme Court has arrived at the same conclusion in determining the applicability of the Limitation Act to Insolvency applications under the IBC. In para 21 of the Judgement the Supreme Court has held:
"As in the present case, and as is reflected in the Insolvency Law Committee Report of March,2018, the legislature did not contemplate enabling a creditor who has allowed the period of limitation to set in to allow such delayed claims through the mechanism of the code. The Code cannot be triggered in 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 and dead claim, leading to the drastic consequence of the Code instant removal of the present Board of Directors of the corporate debtor permanently, and which may ultimately lead to liquidation and, therefore, corporate death. This being the case, the expression "debt due" in the definition sections of the Code would only refer to debts that are "due and payable" in law, i.e. the debts that are not time barred…"

The conclusion reached by the Supreme Court that the expression 'debt due' refers only to debts that are not barred by time i.e. debts that are legally recoverable, would consequentially require a creditor who has filed an Insolvency Application to show that a suit to recover the debt was not time barred on the date of filing the insolvency application under the IB Code. This legal position obtained even when winding up of companies due to inability to pay debts was governed by the provisions of the Companies Act, 1956.

Thus, in an insolvency application filed by a creditor under the IB Code, the NCLT will have to first determine whether the claim of the creditor was not time barred on the date the application was filed. In determining this issue, the NCLT would have to consider the nature of the claim and other related facts to first decide which article of the schedule to the Limitation Act applies.

On such a decision being reached, the NCLT would have to ascertain the starting point of limitation i.e. the date on which the right to recover came into existence and the period prescribed by the relevant article for bringing an action to recover. In the event of the NCLT arriving at the conclusion that on the date of filing the application, a suit to recover the debt was time barred, it would have no choice but to dismiss the application. To illustrate, if a claim in an insolvency application relates to a bill of exchange or promissory note payable at a fixed time after date, it is article 31 that would apply.

This article prescribes a limitation period of three years and provides that time begins to run when the bill or note falls due. In such a case, on the NCLT arriving at the conclusion that a suit on a bill to which article 31 applies, would be barred on the date of the Insolvency application, dismissal of the application would follow.

Even the law committee which recommended the enactment of section 238A contemplated that the nature of the claim in the insolvency application would determine the article of the schedule to the Limitation Act that would apply. This is evident from Para 28.3 of its report which has been reproduced in B. K Educational Services and reads:
Given that the intent was not to package the Code as a fresh opportunity for creditors and claimants who did not exercise their remedy under existing laws within the prescribed limitation period, the Committee thought it fit to insert a specific section applying the Limitation Act to the Code. The relevant entry under the Limitation Act may be on a case to case basis….
This passage of the Insolvency Law Committee Report shows that the Committee did not envisage that Article 137 would apply to Insolvency applications.

The enunciation of the Supreme Court that Article 137 of the Limitation Act applies to insolvency applications under the IB Code and delay can be condoned in exercise of powers under section 5 of the Limitation Act has created a conundrum for the NCLT. Does it apply the law laid down by the Supreme Court that the debt must not be a time barred debt on the date of filing the insolvency application (a finding that a suit to recover the debt was time barred on the date of filing the insolvency application would necessarily entail the dismissal of the insolvency application) or does it entertain applications to condone delay in filing the insolvency application on the basis that Article 137 of the Limitation Act is applicable.

If it entertains such applications to condone delay and in some cases condones delay in filing the insolvency application, it would in effect be resurrecting a time barred claim which the Supreme Court in the same judgment rules cannot be done. At the same time, it cannot refuse to entertain an application for condoning delay as the Supreme Court has held that Article 137 of the Limitation Act applies and therefore delay in some cases can be condoned in exercise of powers under section 5 of the Limitation Act. Entertaining insolvency applications after condoning delay would be providing a remedy for a time barred debt. The contradiction in the findings of the Supreme Court is obvious.

The decision of the Supreme Court in B.K Educational Services Pvt. Ltd. therefore needs urgent reconsideration to prevent the NCLT from being inundated with Insolvency applications based on time barred claims and applications to condone delay. The finding of the Supreme Court regarding the applicability of Article 137 of the Limitation Act and consequently of section 5 of the Limitation Act to creditors insolvency applications is, with respect, erroneous. It not only overlooks that Article 137 applies only to applications before a court, which the adjudicating authority is not, but is in direct conflict with its conclusion that the provisions of the IB Code are not intended to resurrect time barred claims.

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