Limitation & Verification of claims in CIRP / Liquidation

Applicability of Limitation Act 

1. The statute of limitations, provides for time limitation for bringing a lawsuit to enforce payment of debt or obligation.This period of limitation starts from the date of unconditional promise to pay the debt or an acknowledgement of the debt. The time limitation on bringing a lawsuit to enforce payment of the debt is suspended until the time agreed for payment, established under the promise or acknowledgment, has arrived. Upon that due date, the period of limitations will start again. 

Filing of claim before IRP/ RP /Liquidator 

2. Let’s examine whether the law of limitation will be applicable on the following.

• a). Claims of creditors being filed with IRP / RP during the CIRP process.

• b). Claims of creditors being filed with Liquidator during the liquidation process.

3. As far as the Code is concerned, Section 238A of the Code, restricts the operation of the  provisions of the “Limitation Act,1963” to the proceedings or appeals before the Adjudicating Authority (AA) the National Company Law Appellate Tribunal (NCLAT), the Debt Recovery Tribunal (DRT) or the Debt Recovery Appellate Tribunal (DRAT) only, as the case may be.

# Section 238. Provisions of this Code to override other laws. -

The provisions of this Code shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.

# Section 238A. Limitation. –

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. (This section was inserted in the Code w.e.f. 06.06.2018)

4. As far as the claims of creditors filed with IRP / RP during CIRP process is concerned, Section 238A of the Code read with non obstante clause Section 238, limits the operation of the provisions of the Limitation Act, 1963 (36 of 1963) 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, 

5. Important SCI judgement on Limitation & right to debt.

i). Hon’ble SCI (20.04.1992) Punjab National Bank And Ors vs Surendra Prasad Sinha (Criminal Appeal No. 254 of 1992.) held that;

• "The rules of limitation are not meant to destroy  the rights of the parties.  Section 3 of  the Limitation Act only bars the remedy, but does not destroy the right which the remedy relates to. The right to  the debt continues to exist notwithstanding the remedy is barred by the limitation. Only exception in which the remedy also becomes  barred  by limitation is the right is destroyed.  Though the right to enforce the debt by judicial process  is barred, the right to debt remains. The time barred debt does not cease to exist by reason of s.3. That right can be exercised in any other manner than by means of a suit. The debt is not extinguished, but the remedy to enforce the liability is destroyed.  What s.3. refers only to the remedy but not to the right of the creditors. Such debt continues to subsists so long as it is not paid. It is not obligatory to file a suit to recover the debt."

ii). Hon’ble SCI (2018.10.11) in B.K. Educational Services Private Limited Vs. Parag Gupta and Associates [Civil Appeal  No.23988 of 2017] observed as under;

• # 19. Shri Dholakia also referred to and relied upon Section 60 and 61 of the Contract Act which are set out hereunder:

• “60. Application of payment where debt to be discharged is not indicated.—Where the debtor has omitted to intimate, and there are no other circumstances indicating to which debt the payment is to be applied, the creditor may apply it at his discretion to any lawful debt actually due and payable to him from the debtor, whether its recovery is or is not barred by the law in force for the time being as to the limitation of suits. 

• 61. Application of payment where neither party appropriates.—Where neither party makes any appropriation the payment shall be applied in discharge of the debts in order of time, whether they are or are not barred by the law in force for the time being as to the limitation of suits. If the debts are of equal standing, the payment shall be applied in discharge of each proportionably.”

• These Sections also recognize the fact that limitation bars the remedy but not the right. In the context in which Section 60 appears, it is interesting to note that Section 60 uses the phrase “actually due and payable to him….” whether its recovery is or is not barred by the limitation law. The expression “actually” makes it clear that in fact a debt must be due and payable notwithstanding the law of limitation. From this, it is very difficult to infer that in the context of the Contract Act, the expression “due and payable” by itself would connote an amount that may be due even though it is time-barred, for otherwise, it would be unnecessary for Section 60 to contain the word “actually” together with the later words, “whether its recovery is or is not barred by the law in force for the time being as to the limitation of suits”.

• # 20. Shri Dholakia went on to cite Bhimsen Gupta v. Bishwanath Prasad Gupta, (2004) 4 SCC 95, and In re Sir Harilal Nemchand Gosalia, AIR 1950 Bom 74, for the proposition that debts “due and payable” must be differentiated from debts “due and recoverable”. .

• In the former case, Section 11(1)(d) of the Bihar Buildings (Lease, Rent and Eviction) Control Act, 1982 provided for eviction of a tenant where the amount of two months’ rent “lawfully payable by the tenant and due from him” was in arrears. This Court followed Bombay Dyeing (Bombay Dyeing & Mfg. Co. Ltd. v. State of Bombay, AIR 1958 SC 328 ), stating as follows:

• “6. Section 11 of the said Act, 1982 deals with eviction of tenants. It begins with non obstante clause. It states that notwithstanding anything  contained in any contract or law to the contrary, no tenant shall be liable to be evicted except in execution of a decree passed by the court on one or more of the grounds mentioned in Sections 11(1)(a) to (f). In this case we are concerned with the ground of default which falls under Section 11(1)(d) and which states that where the amount of two months’ rent, lawfully payable by the tenant and due from him is in arrears by reason of non-payment within the time fixed by the contract or in the absence of such contract by the last day of the month next following that for which rent is payable then such default would constitute ground for eviction. It is interesting to note that the expression used in Section 11(1)(d) is “lawfully payable” and not “lawfully recoverable” and therefore, Section 11(1) (d) has nothing to do with recovery of arrears of rent. On the contrary, Section 11(1)(d) provides a ground for eviction of the tenant in the eviction suit. It is well settled that law of limitation bars the remedy of the claimant to recover the rent for the period beyond three years prior to the institution of the suit, but that cannot be a ground for defeating the claim of the landlord for decree of eviction on satisfaction of the ingredients of Section 11(1)(d) of the said Act, 1982. In the case of Bombay Dyeing & Mfg. Co. Ltd. v. State of Bombay [AIR 1958 SC 328] it has been held that when the debt becomes time-barred the amount is not recoverable lawfully through the process of the court, but it will not mean that the amount has become not lawfully payable. Law does not bar a debtor to pay nor a creditor to accept a barred debt.”

• It is clear that this judgment will have no application to the present case as Section 11(1)(d) had nothing to do with  recovery of arrears of rent, but furnished a ground for evicting the tenant, this being the context in which the words “lawfully payable by the tenant and due from him” had been used. This Court correctly held that the right to evict the tenant cannot be affected as the law of limitation has reference only to the remedy of recovery of arrears of rent, and such law cannot be held to stand in the way of the right to evict the tenant.

• Similarly, in Sir Harilal Nemchand Gosalia (supra), the expression used is “amount of debts due and owing from the deceased, payable by law out of the estate” which appeared in the third schedule of the Court Fee Act, 1870. It was held that an executor of a will is entitled to pay time-barred debts and cannot be confused with a creditor who may sue the executor in relation to those debts. The creditor would fail in his action because although the debt subsists, the remedy has been extinguished due to the law of limitation. Since the executor is duty bound to pay the amounts due and owing under the will without going to Court, he is entitled to pay a time-barred debt. This, the Court held, is made clear by Section 323 of the Succession Act, 1925, which made no exception in case of time-barred debts. It is in this context that the Court noted the difference between “payable” and “recoverable”.

iii). Hon’ble SCI (2024.12.20) in China Development Bank Vs. Doha Bank Q.P.S.C. and Ors.  [(2024) ibclaw.in 340 SC, Civil Appeal No.7298 of 2022 with Civil Appeal No. 7407, 7615 and 7328 of 2022 and Civil Appeal No. 7434 of 2023] held that;

• # 48.  . . . . . .In terms of sub-section (11) of Section 3, debt is a liability or obligation in respect of a claim which is due from any person and includes a financial debt or operational debt. As noted earlier, a claim is a right to payment whether or not, such right is reduced to judgment and whether it is disputed or undisputed. The right to payment can be legal, equitable, secured or unsecured. Therefore, if there is a liability or obligation in respect of a payment which is disputed, it still becomes a claim. Once there is a liability or obligation in respect of a claim, it becomes a debt. Once there is a financial debt, the person to whom a debt is owed, becomes a Financial Creditor.

• # 65. Another argument was canvassed based on the definition of ‘claim’ under Section 3(6) of the IBC. If the right to payment exists or if a breach of contract gives rise to a right to payment, the definition of ‘claim’ is attracted. Even if that right cannot be enforced by reason of the applicability of the moratorium, the claim will still exist. Therefore, whether the cause of action for invoking the guarantee has arisen or not is not relevant for considering the definition of ‘claim’.

iv). SCI (2024.12.13) in Municipal Corpn. of Greater Mumbai Vs. Vivek V. Gawde [2024 INSC 985, Arising out of SLP (Civil) Nos. 19602-19619 of 2022] held that;

• # 25. The third and fourth points touch upon the aspect as to whether the proceedings initiated under section 105B of the Act are barred by limitation. Reference has been made by the High Court to section 3 of the Limitation Act, 19639 . We are at a loss to comprehend as to how section 3, scope whereof is relatable to proceedings like suits, appeals and applications before judicial fora, could have been attracted to eviction proceedings before the Inquiry Officer which, though obliging the Inquiry Officer to discharge quasi-judicial functions in course thereof, yet, are basically administrative in character. Additionally, in referring to Article 137 , the High Court ignored and/or overlooked the Preamble of the Limitation Act and the heading of the Third Division under the Schedule read with sections 2(j) and section 3. 

6. Hon’ble Supreme Court in China Development Bank Vs. Doha Bank Q.P.S.C. and Ors., emphasised that though the right to invoke the guarantee is restricted due to moratorium, the claim still exists. Similarly, with the same analogy, due to expiry of limitation, the right to enforce the debt is restricted, but the claim still exists. Further Hon’ble Supreme Court in Municipal Corpn. of Greater Mumbai Vs. Vivek V. Gawde has specifically ruled that the scope of section 3, of Limitation Act is relatable to proceedings like suits, appeals and applications before judicial fora only.

7. In light of the definition of the “claim” & other provisions of the Code read with the observations of the Hon’ble Supreme Court of India in various judgements mentioned supra above, it can be safely deduced that the claims received during CIRP are Debts Due and Payable”, irrespective of limitation.

8, Case Law - Claim under CIRP, cannot be rejected  by IRP/RP on the grounds that it is time barred. 

i). NCLT Indore (2024.11.20) in Hotline Glass Limited Majdoor Sangh Vs. Mr. Jigar Pradipchandra Shah  [IA/308/MP/2023 in IA/280/MP/2022 In TP/152/MP/2019, CP(IB)/99/2019] held that;

• RP’s contention that the claim pertains to year 2007 and is barred by limitation is not acceptable, as the limitation act provides limitations for filing an appropriate application before a Tribunal or Court and does not specify a period to file a claim before the resolution professional in case of initiation of CIRP. 

ii). NCLT Mumbai-V (2024.04.24) in Gokul Anilkumar Aggarwal Vs. Shailesh Bhalchandra Desai (IRP) and Anr. [ (2024) ibclaw.in 468 NCLT, I.A. 3272 of 2023 in C.P. No. (IB) 115 of 2021 ] held that; 

• "The rules of limitation are not meant to destroy the rights of the parties. Section 3 of the Limitation Act only bars the remedy, but does not destroy the right which the remedy relates to. The right to the debt continues to exist notwithstanding the remedy is barred by the limitation.

• Though the right to enforce the debt by judicial process is barred, the right to debt remains. The time barred debt does not cease to exist by reason of s.3. That right can be exercised in any other manner than by means of a suit. 

• The debt is not extinguished, but the remedy to enforce the liability is destroyed. What SC.3. refers only to the remedy but not to the right of the creditors. Such debt continues to subsists so long as it is not paid. It is not obligatory to file a suit to recover the debt. 

• Therefore, the Claim under CIRP, cannot be rejected on the grounds that it is time barred.

iii). NCLAT (2019.07.31) in Sunil Kumar Aggarwal Vs. New Okhla Industrial Development Authority & Ors.[Company Appeal (AT) (Insolvency) No. 775 of 2019] held that;

• However, we find that the ‘Interim Resolution Professional’ is already directed to examine the claim of the NOIDA, who is the Applicant before the Adjudicating Authority and no final decision has been taken and the Adjudicating Authority has made it clear that the claim of the NOIDA cannot be rejected on the ground that it is time barred or the claim is by an entity other than the ‘financial Creditor’.  

9. As far as the claims of creditors being filed with Liquidator during the liquidation process are concerned, the following is an interesting  provision of the “The Limitation Act, 1963.

# Section 3. Bar of limitation.

(1) Subject to the provisions contained in sections 4 to 24 (inclusive), every suit instituted, appeal preferred, and application made after the prescribed period shall be dismissed, although limitation has not been set up as a defence.

(2) For the purposes of this Act,- 

• (a) a suit is instituted,-

 - (i) in an ordinary case, when the plaint is presented to the proper officer; 

 - (ii) in the case of a pauper, when his application for leave to sue as a pauper is made; and 

 - (iii) in the case of a claim against a company which is being wound up by the court, when the claimant first sends in his claim to the official liquidator;

10. Section 3(2)(a)(iii)] of the “The Limitation Act. 1963, provides that the claim of a creditor submitted to the Liquidator in the liquidation process of a company, will fall under the definition of the institution of a suit, hence will attract the provisions of “The Limitation Act”. 

11. However in absence of any case law, it is still debatable whether Section 238A of the Code read with non obstante clause Section 238, prevents the applicability of the provisions of “The Limitation Act, 1963” on the claims of creditors being submitted to Liquidator during liquidation process under “IBC, 2016”

12. Here it is worthwhile to note that the Regulation 16 of Liquidation Regulations (Insolvency and Bankruptcy Board of India (Liquidation Process) Regulations, 2016.) permits stakeholders to update their claims filed during CIRP period & Regulation 30 of Liquidation Regulations provides that liquidator shall also verify the claims collated during the corporate insolvency resolution process but not submitted during the liquidation process, and may either admit or reject the claim, in whole or in part.

Disclaimer: The sole purpose of this write-up  is to create awareness on the subject and must not be used as a guide for taking or recommending any action or decision. A reader must do his own research and seek professional advice if he intends to take any action or decision in the matters covered in this write-up.

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Updated on 2024.12.31.