6 November 2017

LIMITATION UNDER THE INSOLVENCY CODE TO COMMENCE FROM 1 DECEMBER 2016

The National Company Law Appellate Tribunal (NCLAT), has in the case of Black Pearl Hotels vs. Planet M Retail Limited, held that the period of limitation under the Insolvency and Bankruptcy Code, 2016 (IBC) will commence from 1 December 2016 thereby bringing cases that would otherwise be barred by limitation within the ambit of the IBC and giving creditors an option to recover a time barred debt.

Facts of the Case:

1.    The Applicant, Black Pearl Hotels entered into a business conducting agreement with the Respondent, Planet M Retail Private Limited (Corporate Debtor) in February 2008 to conduct and manage the business of running a music concept store by name Planet M’ on behalf of Applicant, in consideration of which Corporate Debtor was liable to pay a fee of Rs 11 lakhs per month to the Applicant.

2.    However, in June 2009, on account of the representation of the Corporate Debtor that its business was not doing well, the monthly fee was reduced from Rs 11 lakhs to Rs 7 lakhs for a period of 26 months from 1 February 2009 to 31st March 2011 retrospectively.

3.  The Corporate Debtor continued to pay Rs 7 lakhs per month from April 2011 to September 2011 as fees instead of paying Rs 11 lakhs per month in terms of Business Conducting Agreement and the Addendum to the said agreement. Thereafter, since October 2011 the Corporate Debtor failed to pay the conducting fee and, therefore, the Applicant terminated the business conduct agreement.

4.    In May 2016 the Applicant filed an Application under the IBC against the Corporate Debtor, for the amounts due under the Business Conducting Agreement before the National Company Law Tribunal (NCLT), Mumbai.

5.    The NCLT Mumbai dismissed the application on the grounds that "it is to be noted that after the last payment in September 2011, neither there was an acknowledgement of liability nor any payment by the corporate debtor. In this situation, the whole debt as claimed by the operational creditor is time barred."

6.    Hence, the Applicant Black Pearl Hotels appealed the impugned judgement before the NCLAT. The NCLAT referred to its earlier judgement in the case of Neelkanth Township and Construction Pvt. Ltd. vs. Urban Infrastructure Trustee Ltd, where it had observed that there is nothing on record to show that the law of limitation is applicable to proceedings under the IBC. In that case, it had kept the question regarding the applicability of the Limitation Act to the IBC open.

7.    In the present case the NCLAT determined that, even if it were to be accepted that the Limitation Act is applicable to the IBC, it would be governed by Article 137 which states that the Limitation begins to run three years from when the right to sue accrues. Since the IBC came into force only on 1 December 2016, the right to sue accrues only from that date.

8.    Accordingly the Impugned Order of the NCLT Mumbai was set aside.

MHCO COMMENT:

The present judgement will enable creditors to file an application under the IBC, in respect of claims which are otherwise time barred and provide an opportunity to recover the same, provided the outstanding amount due is more than Rs 1 lakh. However, Supreme Court is still to give its view on same which should crystallise the position on the applicability of the law of limitation to matters under the IBC.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.com for any assistance.