Section 238A of the Insolvency and Bankruptcy Code 2016 (IBC) makes the provisions of the Limitation Act 1963 applicable, "as far as may be", to proceedings or appeals before the adjudicating authority (the National Company Law Tribunal (NCLT)) and the appellate tribunal (the National Company Law Appellate Tribunal (NCLAT)), among other things. It was introduced in the statutory books and has been in effect since 6 June 2018.(1)
The introduction of the provision, as set out in a report of the Insolvency Law Committee,(2) was prefaced on an understanding that the enactment of a new law or IBC was not meant to revive time-barred debts and therefore:
[g]iven 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.
After carrying out a thorough analysis of the provision in light of the objective behind its introduction, the Supreme Court clarified,(3) among other things, that the provisions of section 238A of the IBC are retrospective in their applicability – that is, they apply from the date that the provisions of the IBC took effect. Accordingly, it was clarified that any petition which may have been allowed prior to the introduction of section 238A under the IBC but was barred under the Limitation Act on the date of its introduction would not be maintainable. The provisions of section 238A of the IBC introduce and extend the principles of repose, peace and justice on which the Limitation Act is premised to proceedings under the IBC, thereby quickening diligence, preventing oppression and suppressing incidents of fraud.(4)
There have been several instances where corporate debtors have endeavoured to invoke the Limitation Act in order to evade corporate insolvency resolution processes. Objections premised on limitation are the usual defence invoked by corporate debtors to defeat the initiation of IBC proceedings and have proved to be quite effective. However, applicants can defeat defences based on limitation by resorting to the exclusionary and/or enlarging provisions under the Limitation Act, which various courts have confirmed to be fully applicable to proceedings under the IBC.
In Sesh Nath Singh v Baidyabati Sheoraphuli Coop Bank Ltd,(5) the Supreme Court observed that:
[the] IBC does not exclude the application of Section 6 or 14 or 18 or any other provision of the Limitation Act to proceedings under the IBC in NCLT/ NCLAT. All the provisions of the Limitation Act are applicable to proceedings in NCLT/ NCLAT, to the extent feasible.
Similarly, in Laxmi Pat Surana v Union Bank of India,(6) the Court noted, among other things, that:
[s]ection 18 of the Limitation Act gets attracted the moment acknowledgment in writing signed by the party against whom such right to initiate resolution process under Section 7 IBC enures. Section 18 of the Limitation Act would come into play every time when the principal borrower and/or the corporate guarantor (corporate debtor), as the case may be, acknowledge their liability to pay the debt… Further, the acknowledgment must be of a liability in respect of which the financial creditor can initiate action under Section 7 IBC.
In Asset Reconstruction Co (India) Ltd v Bishal Jaiswal,(7) the Court held that where the amount borrowed by a corporate debtor is reflected under its balance sheet – made or signed by a duly authorised agent of the company before the expiration of the prescribed period of limitation – this may amount to acknowledgement for the purpose of limitation.(8) In reaching its conclusion, the Court was not only guided by several precedents, but also based its reasoning on the scope and ambit of section 18 of the Limitation Act. Consequently, the Court, in unambiguous terms, observed that:
[the] statement of law contained in Bengal Silk Mills Co. v. Ismail Golam Hossain Ariff, AIR 1962 Cal 115, that there is a compulsion in law to prepare a balance sheet but no compulsion to make any particular admission, is correct in law as it would depend on the facts of each case as to whether an entry made in a balance sheet qua any particular creditor is unequivocal or has been entered into with caveats, which then has to be examined on a case by case basis to establish whether an acknowledgment of liability has, in fact, been made, thereby extending limitation under Section 18 of the Limitation Act.
In reaching this conclusion, the Court was aware of the fact that an acknowledgment does not renew debt, but rather creates a new right of action. At the same time, it was echoed, under the instant dictate, that for the provisions under section 18 of the Limitation Act to be made applicable in a given case, an acknowledgment need not be accompanied by the promise to pay either expressly or implicitly. However, an acknowledgment must "indicate the existence of jural relationship between the parties such as that of debtor and creditor, and it must appear that the statement is made with the intention to admit such jural relationship".
Understandably, the applicability of section 18 of Limitation Act is subject to several inbuilt restraints and would have no relevance where such acknowledgment is made after the expiry of the statutorily prescribed time period. Nevertheless, the situation is starkly different where a borrower and/or any person or agent thereof makes a promise as envisaged under the provisions under section 25(3) of the Indian Contract Act 1872. In Kotak Mahindra Bank Ltd v Kew Precision Parts (P) Ltd,(9) the Court noted as follows, while appreciating the dichotomy between section 18 of the Limitation Act and section 25 of the Contract Act, among other things:
acknowledgment under Section 18 of the Limitation Act has to be made within the period of limitation and need not be accompanied by any promise to pay. If an acknowledgment shows existence of jural relationship, it may extend limitation even though there may be a denial to pay. On the other hand, Section 25(3) is only attracted when there is an express promise to pay a debt that is time-barred or any part thereof. Promise to pay can be inferred on scrutinising the document. Only the promise should be clear and unconditional.
Section 25(3) of the Contract Act sets out one of the exceptions to the general rule of contracts – namely, that an agreement devoid of consideration is void, unless:
it is a promise, made in writing and signed by the person to be charged therewith, or by his agent generally or specially authorized in that behalf, to pay wholly or in part a debt of which the creditor might have enforced payment but for the law for the limitation of suits.
Section 25(3) of Contract Act applies where a debt would be enforceable against the "defendants" were it not for the law of limitation. However, where a debt is not binding on a party for other reasons, and consequentially not enforceable against it, the question of the applicability of section 25(3) of Contract Act does not arise. Nonetheless, it cannot be overemphasised that while an acknowledgment under section 18 of the Limitation Act is bounded within the confines of the "prescribed period" under law, a promise under section 25(3) of Contract Act transgresses such limitations. Under the latter instance, a fresh period of limitation commences only when a promise, in a prescribed manner under law is made. However, even under such cases, the right may be confined only to the extent of the promised amount. Therefore, where a corporate debtor and/or its agent(s) make a promise for even time-barred claims as prescribed under section 25(3) of the Contract Act, proceedings under the IBC may be initiated and held to be maintainable provided that the promised amount under such situations exceeds or meets the statutorily prescribed limits.
On the one hand, section 238A of the IBC has proved to be of immense significance in warding off redundant claims and proceedings. On the other hand, the exclusionary and/or enlarging provisions under the IBC have proved to be a saving grace for justifiable claims. In particular, acknowledgment by or on behalf of corporate debtor within the prescribed period or a promise to pay time-barred claims, made as per the provisions under law, may and have successfully been devised to elude the severities of the Limitation Act. In fact, the Supreme Court's decisions in the Bishal Jaiswal and Kew Precision cases have cleared up any uncertainty existing under the law. The only thing that remains is for the litigants and the relevant authorities to appreciate and apply these dictates with paramount circumspection and prudence; only then can the provisions under the law come to fruition.
For further information on this topic please contact Varun Sharma or Abhishek Goyal at Clasis Law by telephone (+91 11 4213 0000) or email ([email protected] or [email protected]). The Clasis Law website can be accessed at www.clasislaw.com.
Endnotes
(1) Insolvency and Bankruptcy Code (Second Amendment) Act, 2018/ Act 26 of 2018.
(3) BK Educational Services (P) Ltd v Parag Gupta & Associates, (2019) 11 SCC 633.
(4) Refer to; Basawaraj v Land Acquisition Officer, (2013) 14 SCC 81:
The statute of limitation is founded on public policy, its aim being to secure peace in the community, to suppress fraud and perjury, to quicken diligence and to prevent oppression. It seeks to bury all acts of the past which have not been agitated unexplainably and have from lapse of time become stale.
(8) Section 18(1) of the Limitation Act, 1963 provides:
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.