How Will the Limitation Act Be Applied To The Bankruptcy Law In India

The Limitation Act, 1963 reflected upon the terms of debt recovery in the civil suits. It inflicts a time-period, within which the creditor is supposed to file a case if he/she wants to recover the obliged sum of money. Failure to comply will lead to dismissal of the plea and hence, the debtor won’t be liable to pay the money back.

Stating the act, “– Subject to the provisions contained in sections 4 to 25 (inclusive), every suit instituted, appeal preferred, and application made, after the period of limitation prescribed therefor by the First Schedule shall be dismissed, although limitation has not been set up as a defence.”

However, after the enactment of the ‘Insolvency and Bankruptcy Code’ in 2016, the Limitation act ran into specific different scenarios due to the declaration of insolvency by the corporates. When the firm would declare insolvency, it was easy to get away with the debt stating a lack of financial resources to pay it back. Such cases gave rise to a lot of conflict and confusion. Several pleas and appeals were filed, cases had to be re-opened, and decisions were reconsidered. Many judicial benches had to be set up as well. Eventually, after a lot of arguments and discussions, the code was amended with the insertion of a particular section, over-riding all the inconsistencies. The section is called 238 A and is a pivotal amendment in the IBC.

Here is an overview of the developments so far:

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Insolvency vs the Limitation period

Insolvency is the situation where an organization cannot raise enough money to comply with all the obligations as imposed in it. Before the recent amendments, when a firm declared to have gone insolvent in front of the court of law, there was no way to recover the money, regardless of the validity of the limitation period. This caused a ruckus amongst the routine creditors as this projected debt recovery in a highly uncertain light.

At the same time, some firms used the Limitation act in their defence, claiming the debt to be time-barred and hence refusing to pay the money back, even if that was possible by seizing company assets. Before the enactment of Insolvency and Bankruptcy Code, the above-stated scenarios never showed up in the picture.

A look at the scenarios through the NCLT perspective

The NCLT or National Company Law Tribunal is an Indian judicial body that deals with all the issues concerning Indian companies. The institution stepped in clarified that the code and limitation period can’t be interpreted as a similar concept. The limitation period concerns the recovery of the debt, and on the other hand, the Insolvency and bankruptcy laws regard the initiation of CIRP (corporate insolvency resolution process). So, as per the NCLT, both of these concepts can’t be interpreted in the same way. Highlighting this anomaly leads to further discussions and ultimately to section 238 A.

Insertion of section 238 A

It is a non-obstante section which over-rules and dismisses any inconsistent provision concerning IBC. Primarily, this section was introduced to establish a retrospective application of the Limitation act. In other words, the Limitation Act applies to every lawsuit filed after the enactment of IBC in 2016. In such a case, it is insignificant if the debtor is insolvent at the time of debt recovery. Regardless of the fiscal state of the firm, the corporate insolvency resolution process will be initiated, and the obliged debt will be recovered by seizing assets.

The question of retrospective application

One of the major conflicts which saw the light of the day after the insertion of section 238 A, was the uncertainty regarding the consideration of the Limitation period. Initially, when questions were raised regarding the cases filed under section 7 and/or of the code, the appellate authority concluded that the Limitation Act does not apply to the suits filed in the time period between the enactment and the amendment. Later on, an appeal was filed against this order which led to a new decision.
The new conclusion stated that the act would apply to the cases filed in that time period too.