Insolvency law cannot escape Limitation Act, says Supreme Court
In a big setback to the insolvency and bankruptcy code (IBC) in the country, the Supreme Court in a major judgement has said that only existence of debt and default is not good enough for initiating an insolvency proceeding against a corporate debtor, and that the limitation act must be applicable on the matter related to IBC.
With this verdict, the apex court has set aside both NCLT and NCLAT orders admitting insolvency application against the corporate debtor Veer Gurjar Aluminium Industries, an Aurangabad, Maharashtra-based maker of aluminium ingots.
JM Financial Asset Reconstruction Company had filed insolvency petition against the corporate debtor, who according to the application filed by the creditor had defaulted on a loan of Rs 101 crore on 8 July 2011. The NCLT admitted the application on 9 August 2018.
However, the corporate debtor had argued against the application of insolvency as it was barred by limitation. After it failed to get a favourable decision in NCLT, the corporate debtor moved NCLAT, which also summarily dismissed the appeal of the debtor on 17 September 2019.
Later the matter went to Supreme Court, which asked the NCLAT to look into limitation raised by the debtor. The debtor had argued before the NCLAT that limitation period for an application under Section 7 of the Code is three years as per Article 137 of the Limitation Act, where the date of the default – 8 July 2011 — is the starting point of limitation.
However, the NCLAT observed that the IBC having come into force on 1 December 2016, the application made in the year 2018 is within limitation.
The Appellate Tribunal also argued that the mortgage security having been provided by the corporate debtor, the limitation period of 12 years is available for the claim made by the financial creditor as per Article 61 (b) 3 of the Limitation Act, 1963 and hence, the application is within limitation.
The Appellate Tribunal in an order dated 14 May 2019, thus, held that the insolvency application is not barred by limitation and hence again dismissed the appeal.
The debtor once again moved the Supreme Court, which in its order dated 14 August 2020 said that the financial creditor’s application in March 2018 for initiating insolvency proceeding against a default in 2011 is clearly barred by limitation for having been filed much later than the period of three years from the date of default as stated in the application.
It also observed that the NCLT admitted the case without examining the question of limitation, while the NCLAT decided the question of limitation on entirely irrelevant considerations. Based on these assertions the Supreme Court rejected the insolvency petition against the corporate debtor.
The Limitation Act, 1963 prescribes a time limit within which a suit can be filed against someone. The time limit prescribed for most suits is three years, but there are others like recovery of immovable properties, it is 12 years and for foreclosure of a mortgage, the limit prescribed is 30 years.
