Application Of Limitation Law In Ibc Cases

KEY TAKEAWAYS

A limitation is the end of the legal period during which a party may bring a claim and get compensation, or a restriction on the purported right of the plaintiff to recover in legal action. According to the Limitation Act, of 1963, "period of limitation" refers to the deadline set forth by the Schedule for any application, and "prescribed period" refers to the deadline calculated in accordance with the requirements.

The Insolvency and Bankruptcy Code, 2016 has been passed by the government to codify and modernize the current rules controlling how partnerships, corporations, limited liability companies, individuals, and other entities handle bankruptcy. It seeks to ensure due process and achieve a balance between the interests of all parties concerned.

Judicial rulings on the Limitation Act and the IBC have been established, and the most recent case, V. Padmakar v. Stressed Assets Stabilization Fund, has added more clarification. By establishing clear and open regulations for debt collection and insolvency resolution, these laws significantly contribute to the promotion of an effective business atmosphere in India. Corporations and other interested parties must understand these laws and their effects in order to successfully negotiate the complicated legal environment surrounding it.

INTRODUCTION

A limitation is the end of the legal period during which a party may bring a claim and get compensation, or it is a restriction on the purported right of the plaintiff to recover in legal action. In accordance with the common law principle that a right never expires, actions based on contracts were not subject to a statute of limitations.

The fundamental idea of limitation relates to setting or dictating the time range for preventing legal activities. According to Section 2 (j) of the Limitation Act, 1963, "period of limitation" refers to the deadline set forth by the Schedule for any lawsuit, appeal, or application, and "prescribed period" refers to the deadline calculated in accordance with the requirements of this Act.

According to the Act, when a complaint is made to the proper authorities and the person is broke, a lawsuit is started. If the claim is presented in the form of a set-off or counterclaim, it is deemed to have begun on the day that the set-off is pleaded. When the application is sent to the proper authority, a request by notice of motion is submitted to the High Court. Accordingly, an appeal or application may be permitted if the plaintiff can demonstrate insufficient reason after the court has closed on the deadline for filing a suit or application. {Section 3(1)}

Furthermore, if a person is juvenile, insane, or retarded at the time of filing, they may be initiated to submit a lawsuit or application within the same time after their handicap has ended or at the period during which the stipulated term is to be regarded. If a person's incapacity lasts until the time of his or her death, the person's powers of attorney are given to the representatives of that person, who have the same amount of time following the person's death to file any applications or begin legal proceedings.

The Limitation Act is divided into 10 parts, relating to accounts, contracts, declarations, decrees, immovable property, movable property, torts, trusts, miscellaneous matters, and suits for which there is no prescribed period.

Before suing foreign leaders, ambassadors, or envoys, the Central Government must provide its approval under the Civil Procedure Code, and the Limitation Act of 1963 eliminates time gained for the purpose of calculating the statute of limitations.

Balakrishnan v. M.A. Krishnamurthy is a landmark case in India that deals with the applicability of the Limitation Act to a suit for the specific performance of a contract. In this case, the plaintiff, Balakrishnan, entered into a contract to purchase a property from the defendant, Krishnamurthy, but Krishnamurthy failed to transfer the property to Balakrishnan as per the terms of the contract. Krishnamurthy argued that the suit was barred by the Limitation Act, which sets a time limit for filing a suit. The Supreme Court of India, in its ruling in 1998, held that the suit was not barred by the Limitation Act.

The court held that the time limit for filing a suit for specific performance of a contract is not fixed and depends on the terms of the contract and the conduct of the parties.

According to the Supreme Court, the Limitation Act is founded on public policy and establishes a legal remedy's lifespan in the interest of the public good. It has been noted that the Law of Limitation is intended to look to the parties who do not resort to tactics but instead generally seek redress rather than just destroying the rights of the parties.

[Balakrishnan V. M.A. Krishnamurthy,(1998) 7 SCC 123. ]

When a person or business is unable to pay their creditors when they become due, they are said to be insolvent. A change in the loan repayment schedule or partial debt cancellation might end insolvency. If it cannot be settled, the insolvent may be subject to legal action, and its assets will be liquidated to settle the obligations owed.

 A person files for bankruptcy when they voluntarily proclaim themselves insolvent and go before the court. When someone is declared "bankrupt," the court must sell their personal belongings and distribute the proceeds to their creditors. 

The government developed a strategy to replace the Indian Partnership Act of 1932, The Companies Act of 2013, with a single, comprehensive statute that makes business dissolution simple and time-bound. The Insolvency and Bankruptcy Code, 2016 was approved by the Rajya Sabha and Lok Sabha on May 11 and May 5, respectively.

The (2016) Insolvency and Bankruptcy Code seeks to codify and reform existing laws governing the resolution of bankruptcy for partnerships, corporations, limited liability companies, individuals, and other organizations. It has proposed a comprehensive structure to help struggling enterprises close their doors or devise a recovery plan, and it has given operational creditors the authority to start the insolvency resolution procedure in the event of default. It aims to strike a balance between the interests of all parties involved and does not distinguish between the rights of local or foreign creditors or between different kinds of financial organizations. Instead of deciding the merits of the bankruptcy settlement, the adjudicating authorities' responsibility is restricted to maintaining due process.

INSOLVENCY AND LIMITATIONS LAWS

The Insolvency and Bankruptcy Code, 2016 has been passed by the government to codify and modernize the current rules controlling how partnerships, corporations, limited liability companies, individuals, and other entities handle bankruptcy. It seeks to ensure due process and achieve a balance between the interests of all parties concerned. In England and Wales, a legislative hierarchy governs the payment of claims during insolvency. In general, secured creditors are paid first, then preferred creditors, and lastly unsecured creditors. In contrast, in the United States, the filing of a bankruptcy petition automatically pauses all collection activities against the debtor, including legal processes to collect on a debt. If two or more creditors have claims of equal priority, the claim that was not time-barred would be paid first. The limitation period may also be put on hold until the stay is removed or the bankruptcy case is resolved.

The limitation rules have a major effect on the Insolvency and Bankruptcy Code (IBC)'s determination of the legality of creditors' claims. A creditor must file a lawsuit in order to recover a debt that is owed to them within a certain period of time, which is referred to as the limitation period. The creditor could forfeit their ability to collect the debt if they fail to take such action under the statute of limitations and risk having their claim dissolved.

The limitation laws are implemented in the following manner under the IBC:

According to Section 238 of the IBC, actions brought under the IBC must adhere to the constraints established by the Limitation Act of 1963. This indicates that the IBC's creditors' claims will be subject to the limitation period outlined in the Limitation Act.

The usual statute of limitations for bringing legal action to recoup a debt is three years, as per the Limitation Act. This implies that the claim may be time-barred and the creditor may lose the ability to pursue legal action if no legal action is taken within three years of the debt being due. The IBC, however, has particular guidelines dictating how bankruptcy procedures affect the statute of limitations. A moratorium period—a time frame in which no legal action may be taken against the corporate debtor—is stipulated under Section 14 of the IBC.

The IBC also stipulates a deadline by which claims must be submitted to the resolution professional or liquidator, as applicable. The deadline is 30 days after the public notification of the corporate insolvency resolution procedure was published. A creditor may forfeit their ability to collect the debt if they do not submit their claim within this window of time.

In accordance with the IBC, the corporate debtor may be subject to a moratorium period during which no legal action may be conducted. The moratorium period is intended to provide the debtor some breathing room and to make it feasible for the bankruptcy resolution process to go smoothly and work out a resolution plan with its creditors. 

The moratorium period typically lasts for a period of 180 days, which can be extended up to a maximum of 270 days by the National Company Law Tribunal (NCLT) if it is satisfied that the extension is necessary for the completion of the insolvency resolution process.

During the moratorium period, the following actions are prohibited:

• Any legal action or proceedings against the company, including recovery of any debt by creditors or the initiation of any legal proceedings by any party.
• The transfer, sale, or disposal of any assets of the company, except as part of the resolution plan.
• Any change in the management or control of the company, except as part of the resolution plan.

 The moratorium period is also intended to protect the value of the assets of the company and prevent them from being sold at a distressed price.

However, the moratorium period does not prolong the due date for filing a lawsuit. As a result, if the statute of limitations runs out during the moratorium period, the creditor may lose the opportunity to get the debt back.

In conclusion, the validity of claims filed by creditors under the IBC is significantly influenced by the applicable limitation restrictions. In order to avoid having their claim become time-barred and losing their ability to recover, creditors must be aware of the limitation period and take action within the allotted window of time.

NCLT AND THE SUPREME COURT

In India, the National Company Law Tribunal (NCLT) is a quasi-judicial tribunal that renders decisions on issues pertaining to insolvency and company law. The Limitation Act of 1963, which establishes the statute of limitations for filing a lawsuit, also applies to NCLT proceedings.

The limitation period is significant for filing petitions pertaining to business law and insolvency in the context of proceedings before the NCLT. For instance, if a creditor wants to start bankruptcy proceedings against a corporate debtor, they have three years from the day the debt became due or three years from the day the debt was designated as non-performing to submit a petition with the NCLT.

The NCLT previously held that entries in a balance sheet do not constitute acknowledgment of liability under the Limitation Act and that Sections 14 and 18 have no applicability to proceedings under IBC. This was followed across various cases, albeit reluctantly. However, a 3-member Bench attempted to reconsider the Order in the case of V Padmakumar and referred the issue again to a 5-member Bench. The 5 Member Bench reaffirmed its decision and reasoning, cementing the view of the NCLAT on these issues.

In this significant ruling, the Supreme Court determined that actions brought under the IBC must adhere to the limitations set down in the Limitation Act, of 1963. The Limitation Act would be applicable to the submission of applications, petitions, and appeals under the IBC, the Court made clear.

The Court additionally decided that the statute of limitations for starting legal action under the IBC would start on the day the default occurred rather than the day the account was designated as a non-performing asset (NPA). This is a major clarification since there was previously considerable doubt surrounding the start of the limitation period for starting legal action under the IBC.

A creditor's time spent seeking remedies under the Recovery of Debts and Bankruptcy Act of 1993 or the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act of 2002 (the "SARFAESI Act") would be disregarded.

For the purposes of limitation, entries in a debtor's books of accounts and/or balance sheets would be considered an acknowledgment of obligation. This implies that a new statute of limitations will start each year if a debtor continues to include a debt in its balance sheet.

The Court further noted that the IBC is a comprehensive regulation in and of itself and that the Limitation Clause couldn't be admitted under IBC.

[ V. Padmakar Vs Stressed Assets Stabilization Fund (Supra).]

Additionally,

1) In TATA Consultancy Services Limited v. Vishal Ghisulal Jain, Resolution Professional, SK Wheels Private Limited, the Supreme Court determined that the NCLT lacked residual jurisdiction to decide the parties' contractual dispute and was unable to impose an ad-interim stay against the termination of the Facilities Agreement. It was made clear that a party can be prevented from terminating a contract if it is essential to the success of the CIRP, even if the contractual dispute occurs in connection with the bankruptcy.

[Tata Consultancy Services Limited V. Vishal Ghisulal Jain. 2018.]

2. In V Nagarajan v. SKS Ispat and Power Ltd & Ors., Civil Appeal No. 3327 of 2020, the Supreme Court ruled that an appeal should be filed right away without waiting for a free copy and that there is no requirement to request and get a certified copy in order to submit an appeal. The certified copy must be added to an appeal under NCLAT Rule 22(2), and it is still binding on parties under the Code.

[“V Nagarajan V. SKS Ispat and Power Ltd and Ors.” NCLAT, 2018]

CONCLUSION

Finally, it should be noted that the Limitation Act of 1963 and the Insolvency and Bankruptcy Code (IBC) of 2016 are two key statutes that have a big influence on the legal system controlling debt collection and bankruptcy processes in India. While the IBC offers a comprehensive framework for the settlement of insolvency and bankruptcy cases, the Limitation Act specifies a time limit during which a claimant may bring a lawsuit or application for the recovery of debts.

Several of the aforementioned judicial rulings have addressed the interaction between the Limitation Act and the IBC, with the aim of defining how the Limitation Act applies to cases brought under the IBC. 

To successfully traverse the complicated legal system, it is crucial for businesses and other stakeholders to comprehend these rules and their ramifications