Limits of the Limitation Law and IBC

-Megha Mittal

(resolution@vinodkothari.com)

The law of limitation revolves around the basic concept of fixing or prescribing the time period for barring legal actions beyond that period. A concept widely acknowledged, in India, the law of limitation is governed by the Limitation Act, 1963[1]. As stated in its preamble, the Limitation Act, 1963 (“Act”) is an act to consolidate the laws for the limitation of suits and other proceedings and for purposes connected therewith.

As observed in the 89th Report of the Law Commission of India[2], the laws of limitation are ultimately based on justice and convenience. An individual should not live under the threat of possible action for an indefinite period, and at the same time, should be saved from the task of defending a stale cause of action, as it would be unjust. The Report states, “all that has been said on the subject can be summarised by stating that the laws of limitation rest upon three main foundations – justice, convenience and the need to encourage diligence.” 

The very crux of having a limitation law in force is that a person cannot sleep over his rights[3] for an indefinite period and seek such remedy at a later stage. That being the tenet on which the law is based, there are several basic principles which the law states. These principles substantively affect the rights of parties. Recently, there has been a lot of commotion around the manner and the circumstances, in which the limitation law can be invoked in the context of the Insolvency and Bankruptcy Code, 2016 (‘Code’), though it is established now that the limitation law is applicable to the proceedings under the Code by virtue of section 238A.

In this article, we have made a humble attempt to analyse the various principles of the Limitation Act and its impact on the Code.

Basic Principles of Limitation

Before seeing how the limitation law affects rights of parties under the Code, it might be important to take note of certain basic principles of limitation law, as provided in the Limitation Act and/or has been well-established by years of judicial analysis and interpretation.

(i) Period of stay is excluded

Section 15 of the Act provides that “in computing the period of limitation of any suit or application for the execution of a decree, the institution or execution of which has been stayed by injunction or order, the time of the continuance of the injunction or order, the day on which it was issued or made, and the day on which it was withdrawn, shall be excluded.”

(ii) Limitation period to begin afresh from the time when acknowledgement was made

“Acknowledgment” generally refers to acceptance or admission of something that exists. Section 18 (1) of the Act states that

“Where, before the expiration of the prescribed period for a suit or application in respect of any property or right, an acknowledgment of liability in respect of such property or right has been made in writing signed by the party against whom such property or right is claimed, or by any person through whom he derives his title or liability, a fresh period of limitation shall be computed from the time when the acknowledgment was so signed.”

Hence, it can be said that the Act uses the term “acknowledgement” to mean an admission of an existing liability in lieu of which the period of limitation is extended. The question that now arises is what shall be constituted as acknowledgement under section 18 of the Act.

Considering that the Act requires such acknowledgement to be in writing, in general parlance, the following may be considered as valid acknowledgement-

(a) Balance sheets are deemed to be the most substantive admission of indebtedness and sufficient acknowledgment under the Indian Limitation Act (held by the Hon’ble Calcutta High Court in Bengal Silk Mills Co. vs Ismail Golam Hossain Arif AIR 1962 Cal 115, 65 CWN 856)[4]. However, care must be taken that such balance sheet must be a duly signed one, failing which it shall not be considered as an authenticated document, and as such shall not stand as a valid acknowledgment under section 18 of the Act (Babulal Rukmanand vs. Official Liquidator, Bharatpur Oil Mills Pvt. Ltd. AIR 1968 Raj 214)[5].

(b) E-mails acknowledging the debt constitute a valid and legal acknowledgement of debt, despite the fact that it is not a strictly “signed” document for the purpose of section 18 of the Act (Sudarshan Cargo Pvt. Ltd vs. M/S Techvac Engineering Pvt Ltd. [C.O.P. No.11/2013][6]). Considering that “e-mails” are legally recognized forms of communication under the Information Technology Act, e-mails are valid acknowledgment under the Act.

(c) Cheque given by a debtor to pay his dues is an acknowledgement, even though the Cheque is dishonoured. (Hindusthan Apparel Industries vs. Fair Deal Corporation AIR 2000 Guj 261 (FB))[7]. It was held that even though the cheque so given was later dishonoured, the very fact that the debtor gave a cheque to the creditor is indicative of acknowledgement of debt by the debtor.

(d) Acknowledgment has to be prior to the expiration of limitation period-

The Hon’ble Supreme Court in “Sampuran Singh and Ors. v. Niranjan Kaur and Ors.─ (1999) 2 SCC 679[8], observed that the acknowledgment, if any, has to be prior to the expiration of the prescribed period for filing the suit, failing which it shall not lead to a fresh trigger of limitation period.

Therefore, a fresh acknowledgement shall imply a fresh start of limitation period, wherein as per section 12 (1) of the Act, the date on which the acknowledgment is given shall not be included.

(iii) Any payment/ interest payment made towards a legacy, fresh limitation period starts

Section 19 of the Act provides that where payment on account of a debt or of interest on a legacy is made before the expiration of the prescribed period of the debt or legacy, a fresh period of limitation shall be computed from the time when payment was made, as every payment made towards such legacy shall be treated as a fresh/ renewed acknowledgement, as discussed above.

(iv) Continuing breach- every moment till continued breach

The provisions of the Act state that in case of a continuing breach of contract, or a case of continuing tort, fresh limitation period begins every moment of such continued breach.[9]

 The said principle was also appreciated by the Hon’ble Allahabad High Court in the matter of Pashupati Pratap Singh vs Chairman, District Board, Gonda[10], wherein it was held that:

“A third kind might be where there is a total deprivation of a set of rights so that the wrongful act is complete but the effect thereof continues. In such a case, the cause of action is one which came into existence in the beginning but the effect of the wrong is continuous. For example where a man has been dispossessed from his property. Here the limitation begins to run from the date of the dispossession even though the person dispossessed is deprived of his rights during the whole period of his dispossession:

(v) The limitation Act does not extinguish a right but it only bars the remedy.

In a case of Bombay Dyeing & Mfg. Co. Ltd. v. State of Bombay, AIR 1958 SC 328[11], the Hon’ble Supreme Court held that,

“21. ….It has been already mentioned that when a debt becomes time-barred, it does not become extinguished but only unenforceable in a court of law. Indeed, it is on that footing that there can be a statutory transfer of the debts due to the employees, and that is how the Board gets title to them. If then a debt subsists even after it is barred by limitation, the employer does not get, in law, a discharge there from. The modes in which an obligation under a contract becomes discharged are well-defined, and the bar of limitation is not one of them.

(Emphasis supplied)

 (vi) Trigger of limitation period in case of payment in instalments-

 Where any party is under the obligation to make payment in form of instalments, or for a continued period, every instance of payment made shall imply a fresh limitation period. For instance, “A” agrees to extend to “B” a sum of Rs. 5,00,000/- on the basis of an agreement that “A” shall repay the sum in 20 instalments. In this case, the limitation period shall trigger from the date of entering into loan agreement, rather it shall commence from the date when “A” makes the first default in payment of instalment.

The above principle has also been appreciated by the Hon’ble Delhi High Court in Kotak Mahindra Bank Ltd. vs Anuj Kumar Tyagi[12], wherein it was observed that:

“…The period of limitation would, though, commence from the date of the last defaulted EMI, which is made the subject matter of the notice and not from the date of the notice itself….”

        (Emphasis supplied) 

Insolvency & Bankruptcy Code, 2016 in light of the Limitation Law

Applicability of Limitation Law

The basic principle of the Code requires that for an application to be filed under the Code, there must exists (a) a debt; and (b) default in payment of such debt. However, a question here is how old can the event of default be? Did the Code give a window of redemption to such creditors who had been sleeping over their rights all along?

At the outset, it may be noted that the law of limitation would apply equally to an applicant’s claim as well as claims of other creditor who submit proof of claim before the RP/liquidator.

As per the Act, being a general law, the right to sue accrues when the default has occurred and the default should have occurred not beyond 3 years from filing of the application. However, when introduced, the Code did not explicitly provide for applicability of limitation law for matters under the Code- hence the anomaly.

The question first came up in the matter of Neelkanth Township and Construction Pvt. Ltd. v. Urban Infrastructure Trustees Ltd (Company Appeal (AT) (Insolvency) No. 44 of 2017)[13], wherein the Hon’ble NCLAT, vide its order dated 11.08. 2017 observed that since the Code is not for recovery of claims, so long as the debt is due, application under the Code can be filed regardless of limitation, and as such held that the Limitation Act shall not be applicable for matters under the Code. The above view was again affirmed by the Hon’ble Appellate Tribunal in Black Pearls Hotel Pvt. Ltd. v Planet M Retail Ltd (Company Appeal (AT) (Insolvency) No. 91 of 2017)[14]

However, the above view of the Hon’ble NCLAT was a departure from the traditional view that “a time barred debt is not a debt at all”. Having said that must also note that the Hon’ble Supreme Court in its landmark judgment in the matter of “Innoventive Industries Ltd. vs. ICICI Bank Limited (2018) 1 SCC 407[15]held that “a debt may not be due if it is not payable in law or in fact”, from which, one can imply indication towards applicability of limitation law for ascertaining the validity of an application filed under the Code.

Meanwhile, in spirit of the principles of purport of the law of limitation and in light of the confusion of an explicit provision, a counterpart to section 433 of the Companies Act, 2013 was introduced in the Code by way of section 238A w.e.f. 06.06.2018, which stated that:

“238A. Limitation:

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 aw Appellate Tribunal, the Debt Recovery Appellate Tribunal, as the case may be.”

Hence, it was substantiated in clear words that the Limitation Act, 1963 is applicable to the Insolvency and Bankruptcy Code, 2016.

The question of retrospective application

While it was made clear that the Limitation Act is infact applicable in matters under the Code, another budding issue was the date from which such limitation period was to be determined. In a batch of matters, the Hon’ble NCLAT held that the Act does not apply to applications made under the Code from the date of commencement (i.e. 01.12.2016) till the date on which section 238A was inserted (i.e. 06.06.2018).

This gave rise to the landmark judgment of the Hon’ble Supreme Court in the matter of B.K. Educational Services Private Limited vs. Parag Gupta & Associates (Civil Appeal No.23988 of 2017)[16], wherein the Apex Court held that the Limitation Act will apply to the Code on and from its very commencement i.e. 01.12.2016.

In the said matter, the Hon’ble SC appreciated that the very insertion of section 238A would be rendered fruitless unless it was construed as being retrospective. It further referred to the Insolvency Committee Report of March, 2018, and stated that

“21. ….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 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, leading to the drastic consequence of 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 obviously only refer to debts that are “due and payable” in law, i.e., the debts that are not time-barred. That this is the case has already been held by us in the Innoventive Industries Ltd……”

 (emphasis supplied)

 Recent Judicial Developments

(i) Determination of limitation period in case of security-

A question that arises is what shall be the modus-operandi of determining limitation period in cases where a security against the loan has been given by way of a mortgage deed. In light of similar facts, the Hon’ble NCLAT in the matter of Mr. Bisab Biraja Paul & ors v. Edelweiss Asset Reconstruction Company Limited & anr (Company Appeal (AT) (Ins) No.772 of 2019)[17] held that where a valid mortgage has been entered into, the period of limitation shall be determined in light of Article 62 of Part V of the Act, which provides that an application for enforcing payment of money secured by a mortgage or otherwise charge upon immovable property, shall be subject to a limitation period of 12 years.

Hence, it can be drawn that in cases where a sum payable is secured by an instrument, the period of limitation shall be equivalent to the period prescribed for such instrument.

(ii) Status of application filed under IBC, in view of a pending application before other Court-

Considering that the Code came into effect only in 2016, and that the problem of defaulted payments has been an indispensable characteristic of the economy, it is only sensible to presume that recovery suits must have been filed before Court. Thus on commencement of IBC, there were many instances wherein cases pending before the Courts were filed afresh before the Adjudicating Authority, for cases which but obviously were older than 3 years.

Hence, while adjudging the question of limitation in such cases, the Hon’ble NCLAT in Sanghvi Movers Limited v. M/s Tech Sharp Engineers Pvt. Ltd. held that where a winding up petition (due to non-payment of dues) is pending finality before a court and meanwhile an application under the Code is filed, it is implied that there is continuous cause of action the hence, the claim is within the period of limitation.

(iii) Exclusion of period for which a corporate debtor was classified as sick unit under the Sick Industrial Companies (Special Provisions) Act, 1985

As discussed above, section 15 of the Act provides that the period during which a stay/ interim order passed by any authority is operative, shall not be included for the purpose of determination of limitation period.

Relying on the same principle, if it so happens that pursuant to an order of BIFR under SICA, a creditor was unable to take any action against its debtor until introduction of the Code, the period during which such creditor was barred by the order of BIFR shall be excluded for the purpose of determining limitation. The same has also been appreciated by the Hon’ble NCLAT in the matter of Mr. Gouri Prasad Goenka v. Punjab National Bank & ors. (Company Appeal (AT) (Insolvency) No. 28 of 2019)[18] wherein the Hon’ble Appellate Authority held that-

“9. Admittedly, in the instant case the Corporate Debtor was declared as a Sick Industrial Unit by BIFR vide order dated 16th July, 2009 which passed direction under Section 22(1) of SICA to Secured Creditors not to take any coercive action against it without prior permission of BIFR. While SICA came to be repealed, Section 7 of I&B Code was enforced w.e.f. 1st December, 2016. It is therefore crystal clear that on account of statutory bar the period commencing from 16th July, 2009 to 1st December, 2016 stood excluded under the aforesaid provisions rendering the Financial Creditor ineligible to file for recovery of outstanding debt through the ordinary mode i.e. by way of filing of suit etc. Even Corporate Insolvency Resolution Process could not be triggered before 1st December, 2016. Therefore, for purposes of limitation such period has to be excluded.”

(iv) Status of an application under IBC filed beyond limitation, on grounds of a pending money suit

One of the cardinal principles of insolvency is that “corporate insolvency resolution process is not a recovery proceeding”. Hence. The a recovery/ money suit filed before a court is essentially different from an application filed for winding up (prior to the Code) and an application filed under the Code.

The Hon’ble Supreme Court in Jignesh Shah vs Union of India[19] held that the purpose of which a winding up petition vis-à-vis a money suit is filed significantly differ. Hence, the mere continuance of the money suit does not imply revival/ extension of the limitation period.

Hence, when the application under the Code is filed beyond limitation, the mere existence of a pending money suit shall not be an excuse for extension of limitation whatsoever, and the application so filed shall be liable to be dismissed.

(v) Determination of period of limitation in case of guarantee contracts

Guarantee contracts have been an indispensable element in the journey of the Code so far, and in light of its deep-rooted presence in everyday commercial arrangements, it becomes important to understand the impact of limitation law w.r.t. guarantee contracts.

As per section 128 of Indian Contract Act, 1872, the liability of a surety is co-extensive to that the principal debtor. However, it is not clear when does the limitation period trigger in case of guarantee contracts. It shall be most prudential to assume that limitation period in case of guarantee contracts must be triggered only when the guarantee contract is invoked. Having said the liability of the surety is co-extensive, it is important that the guarantee contract is invoked at the first place.

A general practice observed in case of guarantee contracts is the provision of a window to the guarantor between invocation of guarantee and its payment, generally 15- 30 days. The question that now arises is whether limitation is triggered on the date of invocation or on expiration this window. In this light, the Hon’ble Supreme Court in the case of Deepak Bhandari versus Himachal Pradesh State Industrial Development Corporation Limited [Civil appeal no.1019/2014 in Supreme Court][20] held that the right to sue under a contract of indemnity or guarantee would principally arise when the indemnifier or the guarantor fails to pay the money claimed from it and not from the time when the ‘Recall Notice’ is served.

Further, in Syndicate Bank vs Channaveerappa Beleri & Ors (Appeal (civil) 6894 of 1997[21], the Hon’ble Supreme Court held that where the guarantee deeds specifically state that the guarantors agree to pay and satisfy the bank on demand and interest will be payable by the guarantors only from the date of demand in a case where the guarantee is payable on demand, the limitation begins to run when the demand is made and the guarantor commits breach by not complying with the demand.

The case above gives rise to possible deviation in application in case of continuous guarantees. Amongst several ruling in this regard, one of the leading cases is that of Margaret Lalita Samuel Vs. Indo Commercial Bank Ltd. (AIR 1979 SC 102)[22], wherein the Hon’ble Supreme Court held that-

“The guarantee is seen to be a continuing guarantee and the undertaking by the defendant is to pay any amount that may be due by the company at the foot of the general balance of its account or any other account whatever. In the case of such a continuing guarantee, so long as the account is a live account in the sense that it is not settled and there is no refusal on the part of the guarantor to carry out the obligation, we do not see how the period of limitation could be said to have commenced running. Limitation would only run from the date of breach under Art. 115 of the schedule to the Limitation Act, 1908.”

(vi) Action by the creditor vs. inaction of the debtor

It must be noted that the objective of the Code is to ensure vigilance and that people (here, creditors) do not sleep over the rights. However, the ambit of the expression “creditors must take action within prescribed time” is ambiguous in the sense that does it include any valid action taken by the creditor, or only includes a legal recourse before the court of law. For instance, where a creditor continues to send correspondences to the debtor w.r.t. his dues, but the debtor remains unresponsive for as long as period of limitation, does it tantamount to expiration of limitation period despite all the efforts and steps taken by the creditor? While it shall only be prudential that the burden of inaction of the debtor must not be borne by the creditor, let us understand the stance of law in such cases.

On similar facts, the Hon’ble NCLT, Mumbai Bench in Daimler Financial Services India Private Limited v. Natconn Engineering Private Limited (C.P. (IB) No. 1802/ MB/ 2017)[23] admitted an application against the corporate debtor on the following grounds-

“6.4. It is further noticed that despite number of notices and reminders the Debtor has failed to make the payment. It is also noticed that the Financial Creditor has made due efforts to serve the Petition / Application to the Debtor but the Debtor has left its registered office. The RoC extract does not show any change in Registered Address of the Debtor Company.

 6.5. Hence, keeping the facts and submissions in mind this Bench has come to conclusion that, the nature of Debt is a “Financial Debt” as defined under section 5(8) of the Code. Further, admittedly there is a “Default” as defined under section 3(12) of the Code on the part of the Corporate Debtor.

 6.6 On the basis of the evidences on record and statement of account the Financial Creditor has established that the loan was sanctioned and duly disbursed to the Corporate Debtor but there is non-payment of the Balance Debt on the part of the Corporate Debtor.”

        (emphasis supplied)

The order of the Hon’ble Bench was further upheld by the Hon’ble Appellate Tribunal in Vivek Jha v. Dailmer Financial Services India Private Limited & Anr (Company Appeal (AT) Insolvency No. 756 of 2018)[24].

Another line of thought here is what would be the outcome where the creditor chose not to take recourse by way of out of court settlement- will it be considered as a valid attempt to seeks his rights? The Indian legal system has always promoted out of court settlement and as such it is assumed that in cases where the creditor has been actively taking steps to recover his dues, however the debtor remains unresponsive, the burden of limitation should not be imposed on the creditor.

(vii) Applicability of limitation in case of debt ascertained by way of arbitral award

Since arbitral awards are deemed as decrees for the purposes of enforcement (as observed by the Hon’ble Supreme Court in M/s Umesh Goel v. Himachal Pradesh Cooperative Group Housing Society (2016) 11 SCC 313)[25], the Limitation Act applies to arbitrations. The limitation period for enforcement of such an award is twelve years.

Hence, it can be drawn that where a disputed sum is settled by way of an award, or where a person owes any sum to another pursuant to an arbitration award, the creditor has the right to claim the same within 12 years of such award.


Readers may also refer:


[1] Text: https://indiacode.nic.in/bitstream/123456789/1565/1/196336.pdf

[2] http://lawcommissionofindia.nic.in/51-100/Report89.pdf

[3] In the matter of B.B. & D. Mfg. Co. v. ESI Corporation, AIR 1972 SC 1935 , it was observed by the Hon’ble Supreme Court, “The necessity for enacting periods of limitation is to ensure that actions are commenced within a particular period …… to give effect to the principle that law does not assist a person who is inactive and sleeps over his rights by allowing them when challenged or disputed to remain dormant without asserting then in a Court of law. The principle which forms the basis of this rule is expressed in the maximum vigilantibus, non dermientibus, jura sub-veniunt (the laws give help to those who are watchful and not to those who sleep). Therefore, the object of the statutes of limitations is to compel a person to exercise his right of action within a reasonable time as also to discourage and suppress stale, fake or fraudulent claims.” (Emphasis supplied)

[4] https://indiankanoon.org/doc/572449/

[5] https://indiankanoon.org/doc/345183/

[6] https://indiankanoon.org/doc/190932835/

[7] https://indiankanoon.org/doc/410694/

[8] https://indiankanoon.org/doc/880718/

[9] See: Section 22 of the Act-

“in the case of a continuing breach of contract or in the case of a continuing tort, a fresh period of limitation begins to run at every moment of the time during which the breach or the tort, as the case may be, continues”

[10] https://indiankanoon.org/doc/1991389/

[11] https://indiankanoon.org/doc/871138/

[12] https://indiankanoon.org/doc/197507698/

[13] https://www.casemine.com/judgement/in/5af193269eff43223484599a

[14] https://nclat.nic.in/Useradmin/upload/13163976265b711e6c4d8b8.pdf

[15] https://indiankanoon.org/doc/181931435/

[16]https://www.ibbi.gov.in/webadmin/pdf/whatsnew/2018/Oct/In%20the%20matter%20of%20B.K.%20Educational%20Services%20Private%20Limited%20Civil%20Appeal%20No.439,436,3137,4979,5819,7286%20-2018_2018-10-11%2020:47:58.pdf

With Civil Appeal Nos. 439 of 2018; 436 of 2018; 3137 of 2018; 4979 of 2018; 5819 of 2018; 7286 of2018

[17] https://nclat.nic.in/Useradmin/upload/19614659175d722a9c54384.pdf

[18] https://nclat.nic.in/Useradmin/upload/17736810815dc55b2919227.pdf

[19] https://indiankanoon.org/doc/136710490/

[20] https://indiankanoon.org/doc/120004531/

[21] https://www.legalauthority.in/judgement/syndicate-bank-vs-channaveerappa-beleri-17382

[22] https://indiankanoon.org/doc/1367514/

[23] https://nclt.gov.in/sites/default/files/Interim-order-pdf/Daimler%20Financial%20Services%20India%20Private%20Limited%20CP%201802-2017%20NCLT%20ON%2003.10.2018%20FINAL.pdf

[24] https://nclat.nic.in/Useradmin/upload/16775680115e1c63c1e0e34.pdf

[25] https://indiankanoon.org/doc/5114588/

5 replies
  1. Sharad Jejani
    Sharad Jejani says:

    Sir. NCLT given liquidation order ( wrong in typing) on 18.10.19 accordingly RP start liquidation process in jan 20 to sell Macine and land sepreatly. 2. Sell mc in feb 20 and collapsed all infrastructure. 3. Can MSMS plan to file SLP in SC on limitation barred grounds in SC? Please advice. Thanks jejani paper mills.

    Reply
    • Sharad jejani
      Sharad jejani says:

      Sir. Till date no response to my queries dt 22.06.20.1.Liquidatoar not file refund claims rs 20cr from Nagar parishad and put for liquidation. 2.UnderValuation assets. 3.0Admit after limitation barred.Please advice .

      Reply
    • Megha Mittal
      Megha Mittal says:

      Hi Sir,

      Thanks for your time and interest.
      In case of continuing correspondence with the debtor, the limitation period shall start afresh as and when the debtor issues a written acknowledgement of debt.

      Hope it clarifies.

      Reply

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