IBC process: SC Limitation Act ruling will hit claims, say experts

The immediate effect will be on claims being made operational by creditors under the insolvency code

The Supreme Court, last week, held that the Limitation Act of 1963 was applicable to the Insolvency and Bankruptcy Code (IBC) since the inception of the new bankruptcy law, which has been in effect since December 2016. Legal experts say operational creditors’ claims against insolvent companies will get affected if they did not initiate legal action three years prior to the commencement of the code. 

The Limitation Act prescribes the rules concerning the ‘statute of limitations’ or timescales within which a legal action may be taken, when there are breaches of a law or contract between parties. 

While several benches of the National Company Law Tribunal (NCLT) differed on the applicability of the Limitation Act to the Corporate Insolvency Resolution Process (CIRP) of the IBC, the National Company Law Appellate Tribunal (NCLAT) in the Neelkanth Township and Speculum Plast case(s) held that the Limitation Act does not apply to the code. 

The NCLAT held that the right of creditors to initiate proceedings and file under sections 7 and 9 of the code begins only on December 1, 2016, when the IBC came into effect. 

In June, the government brought an amendment to the IBC namely, Section 238A, which enforced the rights financial and operational creditors to claim debts that became time-barred. 

Last Thursday, the division bench of Justice RF Nariman and Justice Navin Sinha, upheld that the law of limitation applies to the IBC from the beginning: December 2016. 

The apex court set aside the order of the NCLAT and directed it to consider applications afresh. 

A senior lawyer said that they do not think the cases, which have been completed (Bhushan Steel and Electrosteel Steels, for example) can be re-opened, since they have gone through the entire judicial process with third-party rights created and the share-transfer process underway. 

At the heart of the issue is what constitutes a “time-barred” debt. 

“The Limitation Act states that any loan or claim which is more than three years old, that is for which no legal proceedings have been initiated, is time-barred. This means that courts would not ordinarily admit any such old claim which is more than three years old,” said Subhodh Sadana, Partner at Advaita Legal. 

Essentially it means that if a term-loan given in 2007 turned ‘bad’ in 2013, the financial lender cannot file a claim under the IBC in 2017, for example, to recover dues of that loan. 

“The Limitation Act states that any loan or claim which is more than three years old, that is for which no legal proceedings have been initiated, is time-barred. This means that courts would not ordinarily admit any such old claim which is more than three years old,” said Subhodh Sadana, Partner at Advaita Legal. 

Justice Nariman and Justice Sinha held that, “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…”

Babu Sivaprakasam, Partner at Economic Laws Practice, explained that it is only in very rare cases when a loan-default of a bank become ‘time-barred’ under the Limitation Act. He says that banks have a well established and effective procedures when it comes to loan defaults such as obtaining from the borrower a letter acknowledging the debt or revival letter to ensure that their claims are not barred by limitation.  

“This will not have a major impact as far as financial creditors are concerned, especially for the banks, non-banking financial companies and financial institutions due to their better governance in this aspect. But it may affect operational creditors or companies who have lackadaisical procedures and allow their debts time-barred,” Sivaprakasam said.

Legal experts Business Standard spoke to clarified that, if a corporate debtor defaulted on a loan or a credit facility, provided that the bank or operation creditor took legal action under SARFESI, other debt-resolution mechanisms, or through a commercial suit three years prior to the implemented IBC, their application under the IBC against that loan or facility will be accepted. 

This means that operational creditors, many of which are small-medium enterprises, like suppliers will be affected by the Limitation Act, if one assumes they did not take legal action such as a commercial suit three years prior to the commencement of the IBC. 

Sadana said, “Corporate debtors can now strongly contest their pending cases before the NCLT where the creditors’ claims were admitted prior to June 2018 on the basis of time barred debts."