LIMITATION PERIOD NOT APPLICABLE FOR RECOVERY OF DUES UNDER IBC

Under the Insolvency and Bankruptcy Code, 2016 (IBC), the National Company Law Appellate Tribunal (NCLAT), very recently passed a judgement upholding the order passed by the National Company Law Tribunal, Mumbai Bench (NCLT), which admitted the application for initiation of the corporate insolvency resolution process by a financial creditor against the corporate debtor despite the fact that the limitation period for making a claim on the debt had expired. The corporate debtor appealed against the judgement of NCLAT to the Supreme Court. The Supreme Court passed an order dismissing the appeal on the ground of having no merit and keeping the question of law open as to whether Limitation Act applied to the present case.

Overview: 

• Urban Infrastructure Trustees Limited (Financial Creditor) had subscribed to debentures of Neelkanth Township and Construction Private Limited (Corporate Debtor) which were redeemable in 2011, 2012 and 2013 respectively. These debentures were not redeemed within the time period for redemption. The Financial Creditor then made an application to the NCLT to initiate the corporate insolvency resolution process against the Corporate Debtor. The application made by the Financial Creditor was not within the limitation period for such claims. The NCLT had admitted the said application commencing the insolvency proceedings against the Corporate Debtor.

• Thereafter the Corporate Debtor preferred an appeal to NCLAT against the NCLT order admitting the application, inter alia, on the ground that the debt was barred by limitation as the debt claimed related to the years 2011, 2012 and 2013.

• The NCLAT held that there is no provision in the IBC which makes the Limitation Act, 1963 (Limitation Act) applicable to IBC. The NCLAT further held that if there is a debt which includes interest and there is a default of debt having continuous course of action, then the Limitation Act shall not apply.

• Thereafter, the Supreme Court confirmed the order passed by the NCLAT, however leaving the question open as to whether the Limitation Act applied to proceedings under the IBC.

Analysis: 

• The order passed by the Supreme Court in the aforesaid case has created considerable ambiguity on the application of the Limitation Act to proceedings initiated under the IBC.

• It is to be noted that there are several orders passed by different benches of NCLT, such as in M/S Deem Roll-Tech Limited, Western Refrigeration Pvt Ltd etc, rejecting applications for initiation of the corporate insolvency resolution process on the ground of the debt being barred by limitation. Under the said orders, the NCLT had held that the IBC had amended various sections of the Companies Act 2013 (Companies Act), but Section 433 of the Companies Act has not been amended. Therefore, section 433 of the Companies Act, which makes the Limitation Act applicable to proceedings before the NCLT and NCLAT remains effective. Under these orders, it was further held that under Section 424 of the Companies Act, the NCLT and NCLAT shall be guided by the principles of natural justice, subject to other provisions of the Companies Act. These decisions seem to have been ignored by the NCLAT when it concluded that the Limitation Act would not apply to proceedings under the IBC.

MHCO COMMENT:

 

The aforesaid order passed by the Supreme Court is rather ambiguous on the applicability of the Limitation Act to insolvency proceedings in the future as it has kept the question of law open in respect of the present case. It is difficult to understand how the decision of the NCLAT was upheld by the Supreme Court without deciding the main question in the case which was whether the Limitation Act would apply to proceedings under the IBC. It seems implied that the Limitation Act would not apply to insolvency proceedings under the IBC since the order of the NCLAT could not have been upheld otherwise, although the Supreme Court has specifically kept the question open thereby creating considerable confusion. It is hoped that this issue will be clarified soon. 

 

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.

 

GUARANTOR CAN RECOVER DUES UNDER IBC

Under the newly legislated Insolvency and Bankruptcy Code 2016 (IBC), the New Delhi bench of National Company Law Tribunal (NCLT) passed a recent order dated 1 August 2017 admitting an application for initiating corporate insolvency resolution process by a guarantor of a corporate debtor.

Facts of the Case

• Sumit Aviation Private Limited (Corporate Debtor) had taken a loan from Punjab National Bank (Bank) and the petitioner, Mr Davinder Ahluwalia (Guarantor) was the guarantor for the said loan and had mortgaged his immovable property with the Bank. To redeem the aforesaid mortgage of his property and reduce the liability of the Corporate Debtor, the Guarantor paid a sum of Rs 1.05 crores to the Bank.

• On the failure of the Corporate Debtor to repay the abovementioned amount to the Guarantor, he invoked proceedings against the Corporate Debtor by filing an application to initiate the corporate insolvency resolution process for recovery of his dues from the Corporate Debtor.

• In support of its application, the Guarantor attached its bank statements evidencing the loans aggregating to around Rs 29 lacs earlier advanced by the Guarantor to Corporate Debtor. The Guarantor furthermore relied on the cheque issued by the Corporate Debtor to Guarantor for the aforesaid amount, which was returned dishonoured.

• On account of the above facts, the NCLT admitted the application of the Guarantor and appointed the interim resolution professional proposed by the Guarantor, (IRP) directing the IRP to make a public announcement and declaring moratorium for prohibiting certain actions as prescribed under IBC including stay of pending proceedings etc against the Corporate Debtor during the moratorium period

 

MHCO COMMENT:

 

The aforesaid order passed by NCLT under the IBC gives guarantors an opportunity and gleam of hope to recover their dues in a timely manner, i.e. 270 days, as compared to the recovery of dues prior to the enactment of the IBC which would be a rather lengthy process resulting in, more often than not, creditors bearing a loss of the time value of money recoverable by them.

 

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.