The Doctrine of "Debts due and payable"

This article is with particular reference to “Debts due and payable” in context to Claims filed by creditors with IRP/RP in response to public announcement. 

1. Definitions under Section 3 of the Code;

# Section 3(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;

# Section 3(11) “debt” means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt;

# Section 3(12) “default” means non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not 1[paid] by the debtor or the corporate debtor, as the case may be;

 

# 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.

 

What is conspicuous by its absence in this Section (238A) are the expressions “under this Act” or “subject to the provisions of this Act”. Thus Section 238A restricts the application of The Limitation Act 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 only.

 

2. Important SCI judgements on Limitation & debts due and payable.

i). SCI (20.12.1957) in Bombay Dyeing & Mfg. Co. Ltd. v. State of Bombay & Ors. (Civil Appeal No. 167 of 1954) held that;

“ . . . On this, the question arises for consideration whether a debt which is time-barred can be the subject of transfer, and if it can be, how it can benefit the Board to take it over if it cannot be realised by process of law. Now, it is the settled law of this country that the statute of Limitation only bars the remedy but does not extinguish the debt. Section 28 of the Limitation Act provides that when the period limited to a person for instituting a suit for possession of any property has expired, his right to such property is extinguished. And the authorities have held-and rightly, that when the property is incapable of possession, as for example, a debt, the section has no application, and lapse of time does not extinguish the right of a person thereto. Under S. 25(3) of the Contract Act, a barred debt is good consideration for a fresh promise to pay the amount. When a debtor makes a payment without any direction as to how it is to be appropriated, the creditor has the right to appropriate it towards a barred debt. (Vide s. 60 of the Contract Act). It has also been held that a creditor is entitled to recover the debt from the surety, even though a suit on it is barred against the principal debtor. .  . .”

 

ii). 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 36 of 1963, for short "the 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 that right itself is destroyed. For example under s.27 of the Act a suit for possession of any property becoming barred by limitation, the right to property itself is destroyed. Except in such cases which are specially provided under the right to which remedy relates in other case the right subsists. Though the right to enforce the debt by judicial process is barred under S.3 read with the relevant Article in the schedule, the right to debt remains. The time barred debt does not cease to exist by reasons 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 is 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. It is settled law that the creditor would be entitled to adjust, from the payment of a sum by a debtor, towards the time barred debt. It is also equally settled law that the creditor when he is in possession of an adequate security, the debt due could be adjusted from the security in his possession and custody. . . .”

 

iii). SCI (11.10.2018) 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”. . . . . .

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”.

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3. 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.

 

4. 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;

• ‘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’

 

Disclaimer: The sole purpose of this article 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 article.

 

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