Limitation & Verification of claims in CIRP / Liquidation

Applicability of Limitation Act 

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 

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.

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)

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, 

Important SCI judgement on Limitation & right to debt.

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."

Definition of Claim Section 3(6) of the Code;

# Section (6) “claim” means –

(a) a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured, or unsecured;

(b) right to remedy for breach of contract under any law for the time being in force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgment, fixed, matured, unmatured, disputed, undisputed, secured or unsecured;

 

Claims under CIRP, cannot be rejected on the grounds that it is time barred. 

NCLAT (31.07.2019) in Sunil Kumar Aggarwal Vs. New Okhla Industrial Development Authority & Ors.[Company Appeal (AT) (Insolvency) No. 775 of 2019] held that the Interim Resolution Professional will examine the claim submitted by the Applicant and the same will not be rejected on the basis that it is time barred or filed by an entity other than Financial Creditor. The Adjudicating Authority had already made it crystal clear that “the claim can’t be rejected because it is time barred or it is claimed by an entity other than financial creditor.”

 

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;

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”. 

However  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”

References;-   

1. Insolvency and Bankruptcy Code, 2016

2. The Limitation Act. 1963

3. eBook  "Claims of Creditors" by Arvind Mangla, a publication of Amazon Kindle Store..

Disclaimer: The sole purpose of this blog 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 blog.