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Supreme Court : ‘Limitation Act’ applies to all Creditor Filings under IBC

October 12, 2018:

Supreme Court
Supreme Court

On Friday, while cancelling a Judgment passed by the NCLAT, Supreme Court held that the ‘Limitation Act’ will continue to apply to on applications filed by creditors, and if 3 Years have passed since the default date, application would be closed.

Bench comprising of Justice Rohinton Nariman & Justice Navin Sinha held,“The right to sue, therefore, accrues when a default occurs. 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.”

Case was pending with the Supreme Court since January 2018 but Section 238A was inserted in the IBC just recently in June 2018.

It clarified that provisions of ‘Limitation Act’ will continue to apply ‘as far as may be’ to proceedings before the NCLT & NCLAT.

Respondents in this case, in whom favour the NCLAT ruling was passed, though argued against the Retrospective Application of this provision & asserted that for creditor filings made between December 1, 2016 & June 6, 2018, NCLAT ruling would carry on.

Otherwise, it would take away the Vested Right of the persons who have filed under Sections 7 & 9 prior to the introduction of Section 238A.

NCLAT acts as a Common Appellate body for 3 Laws – Competition Act, Companies Act & IBC.

Respondents argued that an inappropriate situation would arise if the NCLAT had to apply the Limitation Act for one law, while another Competition Act does not require it to do so.

Supreme Court responded on this by stating that when the NCLAT decides an appeal under the Competition Act, it is a continuation of the application filed before the Competition Commission & NCLAT decides the appeal on the griping that the Limitation Act did not apply before the Competition Commission. It’s not the case for Section 7 & 9 applications as in it, the law of limitation applies from the beginning.

After the constitution of NCLT, proceedings of Companies Act pending before various Courts also got transferred to the NCLT.

This included winding up petitions under the Companies Act as well, to which provisions of Limitation Act expressly apply.

Court observed on this that it would be absurd to say that merely because such proceedings are now transferred, law of limitation would cease to apply. At the same time, it would also be equally absurd to say that the Limitation Act will apply only to fresh filings made under IBC and not cases which were transferred from Companies Act.

Court held that limitation, being procedural in nature, would ordinarily be applied retrospectively, except that the new law of limitation cannot revive a dead remedy, relying on precedents.

“In the present case also, it is clear that the amendment of Section 238A would not serve its object unless it is construed as being retrospective, as otherwise, applications seeking to resurrect time-barred claims would have to be allowed, not being governed by the law of limitation.”

Court further observed reflection of the Insolvency Law Committee Report of March 2018, wherein it found that 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 IBC.

“The IBC 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 IBC 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.”

It also asked to set aside the order of the NCLAT & asked it to consider the afresh applications .

BK Educational Services, the appellant, was represented by Robin David, Dhiraj Philip and Febin Mathew Verghese from Dua Associates.

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