13 April 2021
The Supreme Court in the case of Laxmi Pat Surana vs Union Bank of India & Anr. [Civil Appeal No. 2734 of 2020] (“Laxmi Pat”) has settled the issue of the applicability of Section 18 of the Limitation Act, 1963 (“Limitation Act”) to applications for initiation of insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 (“IBC”). The Apex Court has held that Section 18 of the Limitation Act (“Section 18”) applies to extend the period of limitation for filing an application under Section 7 of the IBC.
Context
The provisions of the Limitation Act were made applicable to proceedings under the IBC by introduction of Section 238A[1] of the IBC (which was inserted by way of the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018[2]). This amendment has been held to be clarificatory by the Supreme Court [3] and hence applicable retrospectively given that the intent of the Code is not to revive time-barred debts.
The Supreme Court, in its earlier decisions, had also clarified that the period of limitation for filing applications for initiation of insolvency proceedings would be three years from the date of default, with Article 137 of the Limitation Act being applicable.[4]
Section 18 provides that if a written acknowledgement of liability is given prior to the expiry of the prescribed period of limitation, a fresh period of limitation shall be computed from the time of signing of such acknowledgement. The effect and operation of Section 18 is not to revive a debt, the recovery of which is time barred as per the Limitation Act, but only to extend an existing period of limitation.[5] The Courts in India lean in favor of a liberal construction of such acknowledgments.[6]
Ambiguity prior to Laxmi Pat
The Laxmi Pat verdict assumes significance in light of the judgment of the Supreme Court in Babulal Vardharji Gurjar vs Veer Gujjar Aluminium[7](“Babulal”), wherein it was dealing with the question of whether an application under Section 7 of the IBC is time-barred, given that the default had occurred in the year 2011. While in Babulal the Supreme Court examined the applicability of the principles of Section 18 to the case-specific facts (as clarified by the Supreme Court in Laxmi Pat), the observations made in judgment were relied upon in subsequent decisions of the National Company Law Tribunals (“NCLT”) and the National Company Law Appellate Tribunal (“NCLAT”) to hold that Section 18 would not apply to applications for initiation of insolvency proceedings under the IBC.
Several conflicting judgments on the issue came to be passed post Babulal. For instance, the NCLAT in the case of Jagdish Prasad Sarada vs Allahabad Bank[8] relied on Babulal to hold that the date of default cannot ‘shift’ on account of an acknowledgment (extension was sought under Section 19 of the Limitation Act in this case). In a subsequent decision, the NCLAT, in Yogesh Kumar Jashwantlal Thakkar vs Indian Overseas Bank[9], distinguished Babulal on facts and applied Section 18 to extend the period of limitation for filing an application under Section 7 of the IBC. Later, a five-judge bench of the NCLAT, in the case of Bishal Jaiswal vs Asset Reconstruction Company[10], relied on Babulal to hold that Section 18 is not applicable to proceedings under the IBC.
Findings in Laxmi Pat Case qua limitation
The brief facts in the Laxmi Pat case are that, in 2007 and 2008, Union Bank of India (“UBI”) extended credit facilities to Mahaveer Construction, a proprietary firm which was guaranteed by one Surana Metals Limited. The date of default was January 30, 2010, whereas, UBI filed an application under Section 7 of the IBC against Surana Metals Limited (as the corporate debtor in respect of the corporate guarantee given by it) before the NCLT on February 13, 2019. The application was admitted by the NCLT and the appeal against the order of admission was dismissed by the NCLAT. The order of the NCLAT was thereafter challenged in appeal before the Supreme Court.
While the Supreme Court reiterated and held that the intent of the IBC was not to reopen or revive time-barred debts, it clarified that accrual of fresh period of limitation in terms of Section 18 is under the Limitation Act itself and it will not be a case of giving new lease to time-barred debts. Accordingly, the Court held that there is no reason to exclude the effect of Section 18 to the proceedings initiated under the IBC. The Court also clarified that its decision in the Babulal did not rule out the application of Section 18 and observed that “.. this Court had not ruled out the application of Section 18 of the Limitation Act to the proceedings under the Code, if the fact situation of the case so warrants.”
The Supreme Court held that when the principal borrower and/or the corporate guarantor (as the case may be) admits and acknowledges the liability, a fresh period of limitation is required to be computed from the time when the acknowledgment was so signed by the principal borrower or the corporate guarantor, provided the acknowledgment is before expiration of the prescribed period of limitation.
In relation to the liability of a guarantor[11], the Supreme Court reiterated that such liability is coextensive with the principal borrower under Section 128 of the Contract Act, 1872. Therefore, when the principal borrower acknowledges its liability, the period of limitation for enforcing rights under such a guarantee would also stand extended, subject to the contract of guarantee.
Conclusion
The Laxmi Pat judgment has provided much-needed clarity on whether provisions for extension of limitation periods under the Limitation Act are applicable to proceedings under the IBC. The Supreme Court has interpreted Section 238A as intended, by making all provisions of the Limitation Act, as applicable, available to proceedings under the IBC. The Supreme Court found no reason to exclude the applicability of Section 18. Article 137 of the Limitation Act (which provides that the period of limitation runs for a period of three years from “when the right to apply accrues”) is applicable for computation of the limitation period for initiating proceedings under the Code).[12]
Hence, where there is an acknowledgment of debt within the period of limitation, with the intention to establish a jural relationship such as that of a debtor and creditor, such acknowledgment would extend the period of limitation for initiating proceedings under the IBC. Further, in case of continuing guarantees, subject to the guarantee agreement, an acknowledgement of debt by the borrower could also save the limitation period qua the guarantor.[13]
From the findings and reasoning given by the Supreme Court in Laxmi Path it would also follow that other provisions of the Limitation Act providing for extension or exclusion of time period, such as Section 19 of the Limitation Act, can be equally made applicable to the proceedings under the IBC.
For further information, please contact:
Animesh Bisht, Partner (Co-Head – Fintech)
animesh.bisht@cyrilshroff.com
[1] “The provisions of the Limitation Act, 1963 (36 of 1963) shall, as far as may be, apply to the proceedings or appeals before the Adjudicating Authority, the National Company Law Appellate Tribunal, the Debt Recovery Tribunal or the Debt Recovery Appellate Tribunal, as the case may be.”
[2] With effect from June 6, 2018.
[3] B.K. Educational Services (P) Ltd. vs Parag Gupta & Associates [AIR 2018 SC 5601]; Gaurav Hargovindbhai Dave vs Asset Reconstruction Company (India) Ltd. and Anr [(2019) 10 SCC 572]; Babulal Vardharji Gurjar vs Veer Gujjar Aluminium [(2020) 15 SCC 1]
[4] B.K. Educational Services (P) Ltd. vs Parag Gupta & Associates [AIR 2018 SC 5601]
[5] Sampuran Singh and Ors. vs Niranjan Kaur and Ors. (1999) 2 SCC 679
[6] Khan Bahadur Shapoor Freedom Mazda vs Durga Prosad Chamaria & Ors. AIR 1961 SC 1236
[7] (2020) 15 SCC 1
[8] 2020 SCC OnLine NCLAT 621
[9] Company Appeal (AT) (Insolvency) No. 236 of 2020
[10] Reference made by Three Member Bench in Company Appeal (AT) (Insolvency) No. 385 of 2020
[11] Supreme Court in Laxmi Pat also held that an application under Section 7 of the Code can be filed against a corporate guarantor in respect of a guarantee give for a loan where the principal borrower is not a “corporate person” within the meaning of the Code as ‘the status of the guarantor, who is a corporate person, metamorphoses into corporate debtor, the moment principal borrower (regardless of not being a corporate person) commits default in payment of debt which had become due and payable’.
[12] It is important to note that under Article 137 of the Limitation Act limitation runs each time the right to apply accrues. Article 137 as well as Article 113 of the Limitation Act use the expression “when the right to sue accrues” as distinct from Article 58 which uses the expression “when the right to sue first accrues”.
[13] Subash Chand vs State Bank of India [AIR 2014 Del 82]; Union Bank of India, Ernakulum vs TJ Stephen & Ors. [AIR 1990 Ker 180]
