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Limitation Act on IBC cases: SC clears the air

KR Srivats New Delhi | Updated on August 17, 2020

The Limitation Act provides a time limit within which suits can be initiated against someone by aggrieved parties.   -  istock.com/Zerbor

Sets aside both NCLAT and NCLT orders in the Veer Gurjar Aluminium Industries case

The Supreme Court has ruled that National Company Law Tribunal (NCLT) cannot admit applications for corporate insolvency resolution process (CIRP) initiations where more than three years (as prescribed by the Limitation Act) have passed since the date of debt default.

Put simply, the apex court has confirmed the operation of law of limitation over IBC proceedings and reaffirmed that three-year time period as prescribed under the Limitation Act for recovery of debt would apply for admission of CIRP.

This would mean that financial creditors may not be able to invoke IBC provisions for debt defaults more than three years old, say experts. The Limitation Act provides a time limit within which suits can be initiated against someone by aggrieved parties.

The Supreme Court has while setting aside the orders of both the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) in the Veer Gurjar Aluminium Industries Pvt Ltd matter also rejected the CIRP application filed by JM Financial Assets Reconstruction Company Ltd (JM Financial ARC), stating that application is barred by limitation.

JM Financial ARC, as a financial creditor, had in March 2018 filed the application for CIRP for a debt that was defaulted on July 8, 2011. JM Financial ARC was the assignee of the loans and advances extended by the creditor bank in 2007 to Veer Gurjar Aluminium Industries, an Aurangabad-based maker of Aluminium Ingots.

The NCLT had admitted the CIRP application in August 2018, against which Veer Gurjar Aluminium moved NCLAT. NCLAT too later confirmed the NCLT decision, following which the Supreme Court was moved.

The Supreme Court has now outright rejected NCLAT findings on the plea of bar of limitation on two considerations — a) right to apply under Section 7 of the Code accrued only on December 1 2016 when the Code came into force; and (b) period of limitation for recovery of possession of the mortgaged property is 12 years.

Experts’ take

Sandeep Grover, Partner, Ortis Law Offices, said that Supreme Court’s verdict is in tune with its earlier decisions on the issue of the applicability of the Limitation Act on proceedings under IBC.

“Although, some may argue that this decision may adversely impact the resolution process of certain entities and defeat the purpose for which the special code was enacted, however, to my understanding, the Supreme Court has rightly settled the law that if any action is to be taken against a default, the same has to be taken in the specific timeframe as intention of the Code is not to give a new lease of life to debts which are time-barred,” he said.

Vidisha Krishan, Partner, MV Kini & Co, a law firm, said this distinction between the applicable Limitation Act provision for recovery of possession of mortgage property which is much longer I.e. 12 years and the provision for recovery of debt which is 3 years is correct. The intention of the code is not to give a new lease of life to time barred debts, she added.

Published on August 17, 2020

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