Facts: With effect from 6-6-2018, Section 238A was inserted in the Insolvency and Bankruptcy Code, 2016 (Code) and the provisions of the Limitation Act, 1963 were made applicable to the Code. The present appeal was filed seeking clarification whether the provisions of the Limitation Act, 1963 were applicable to the applications filed under section 7 and/or 9 of the Code, on and from its commencement on 1-12-2016 till 6-6-2018. The NCLAT had held that if there was a delay of more than three years from the date of cause of action and no laches on the part of the applicant, the applicant could explain the delay. Where there was a continuing cause of action, the question of rejecting any application on the ground of delay did not arise.
Issue: Whether the Limitation Act, 1963 would apply to applications that were made under Section 7 and/or Section 9 of the Code on and from its commencement on 01.12.2016 till 06.06.2018 i.e. the date on which the Amendment Act came into force?
Held: The Hon’ble Supreme Court set out the reason for the introduction of Section 238A into the Code and it was traced to the Report of the Insolvency Law Committee of March, 2018. The intent of the Code could not have been to give a new lease of life to debts which were time-barred. It is settled law that when a debt is barred by time, the right to a remedy is time-barred. This requirement needs to be read with the definition of ‘debt’ and ‘claim’ in the Code. Further, debts in winding up proceedings cannot be time-barred, and there appeared to be no rationale to exclude the extension of this principle of law to the Code.
The Court observed that the purpose of the law of limitation is “to prevent disturbance or deprivation of what may have been acquired in equity and justice by long enjoyment or what may have been lost by a party’s own inaction, negligence or latches”.
The Supreme Court determined the applicability of the Limitation Act, by reading the Code together with a cognate legislation, the Companies Act, 2013 and considered various case laws on a similar point to observe that the change in law was merely a change of forum. It is a well-established proposition that such a change of law operates retrospectively and the person has to go to the new forum even if his cause of action or right of action accrued prior to the change of forum.
Though periods of limitation, being procedural law, are to be applied retrospectively, yet if a shorter period of limitation is provided by a later amendment to a statute, such period would render the vested right of action contained in the statute nugatory as such right of action would now become time-barred under the amended provision. It is however settled that limitation bars the remedy but not the right.
The reason for introduction of Section 238A as stated in the Report of Insolvency Law Committee inter alia stated that the intent of the Code could not have been to give a new lease of life to time-barred debts and given that the intent was not to package the Code as a fresh opportunity for creditors who did not exercise their remedy under existing laws within the prescribed limitation period, the Committee thought it fit to insert a specific section applying the Limitation Act to the Code. The Hon’ble Court further held that the law of limitation was to be applied retrospectively, save and except that the amended law of limitation by virtue of section 238A could not revive a dead remedy. It also held that the amendment of Section 238A would not serve its object unless it is construed as being retrospective, as otherwise, applications seeking to resurrect the time-barred claims would have to be allowed, not being governed by the law of limitation.
Therefore, if the default had occurred over three years prior to the date of filing of the application, the same would be barred as per Article 137 of the Limitation Act, save and except in those cases where, in facts of the case, Section 5 of the Limitation Act may be applied to condone delay in filing such application and the provisions of the Limitation Act applied from the inception of the Code i.e. to applications filed under the Code even prior to 6-6-2018.
The use of the expression “the right to sue” is at odds with Article 137 of the Limitation Act, because this expression is nowhere mentioned in the Article. The expression used in Article 137 is “the right to apply”. The expression “the right to sue” finds place in Article 113 of the Limitation Act. Both are residuary articles, providing for a limitation period of three years.
However, Article 113 applies only to “Suits” and not to any other legal proceeding. The “right to sue” arises when the “cause of action” arises i.e. “the right to prosecute to obtain relief by legal means.” Article 137, on the other hand, is a residuary article for applications or petitions which can be filed within three years “when the right to apply accrues.”
Thus the “right to sue” accrues when a default occurs and if the default occurred over three years prior to the date of filing of the application, the application would be barred by Article 137.
Editorial: In Shankar Vardharajan v. Dewachand Ramsaran Corporation Pvt. Ltd. and others, the appellant, while relying on the above judgment of the Supreme Court in BK Educational, contended that the claim of the respondent was time-barred as it arose in the year 2014. The NCLAT, while referring to BK Educational, held that the right to apply under Section 9 accrued to the respondent “since December 1, 2016 when the I&B Code came into force.”
Therefore, in the NCLAT’s opinion, the Section 9 application was filed on time. It is pertinent to note that though in the facts of the case, the NCLAT found that there was a continuous cause of action, in the NCLAT’s view, the right to apply under Section 9 accrued from the date on which the Code came into force i.e. from December 1, 2016.
It is submitted that this view of the NCLAT is directly contrary to the law laid down in BK Educational, which states that the “right to sue” accrues when a default occurs and if the default occurred over three years prior to the date of filing of the application, the application would be barred by Article 137. The same view was also taken in another judgment delivered by the NCLAT in Pushpa Shah and Ors. v. IL & FS Financial Services Limited and Ors.
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