BANKRUPTCY CODE: LIMITATION ACT NOT APPLICABLE!

The National Company Law Appellate Tribunal (NCLAT) has recently ruled that the Limitation Act, 1963 does not apply to the Insolvency & Bankruptcy Code (IBC), 2016. This judgment represents a significant departure from previous legal norms, allowing debts that are time-barred under the Limitation Act to form the basis for initiating insolvency proceedings. The ruling has wide-reaching implications, particularly in the context of debts that were previously not recoverable due to the expiration of the limitation period.

Facts of the Case:

The Neelkanth Township & Construction Pvt. Ltd. v. Urban Infrastructure Trustees Ltd. case involved a corporate debtor (Neelkanth Township) challenging the initiation of insolvency proceedings by a financial creditor (Urban Infrastructure Trustees Ltd.) for a set of optionally convertible debentures (OCDs) issued by the debtor.

• The OCDs matured in 2011, 2012, and 2013, and the insolvency petition was filed in 2017.
• The corporate debtor argued that since the debentures had matured several years earlier, the application for insolvency was time-barred.
• Additional challenges included the claim that the application was incomplete and that the financial creditor did not qualify as a “financial creditor” under the IBC.

Judgment Highlights:

1. Limitation Act Not Applicable to IBC:

   • The NCLAT held that the Limitation Act, 1963 does not apply to the initiation of insolvency proceedings under the IBC. This decision allows creditors to initiate insolvency proceedings on debts that have passed their usual limitation periods.
   • The NCLAT deemed the cause of action arising from non-payment of debts, including interest, as continuing, thus bypassing the limitation period.

2. Compliance with Section 7(3)(a) of IBC:

   • The NCLAT clarified that failure to provide a record of default under Section 7(3)(a) of the IBC does not invalidate the application for initiating insolvency. Even in the absence of specific regulations from the Insolvency & Bankruptcy Board of India (IBBI), the application could proceed with the evidence and documentation prescribed under Form 1.
   • The NCLAT emphasized that procedural shortcomings should not frustrate the substantive provisions of the IBC.

3. Financial Creditor Defined:

   • The NCLAT reaffirmed that OCD holders fall under the category of financial creditors, even if the interest rates on such instruments are low or nil. According to Section 5(8)(c) of the IBC, debts arising from instruments like debentures are considered financial debts.
   • The NCLAT dismissed the argument that the OCDs did not qualify as financial debt due to their low interest rates, reinforcing that the definition of financial debt includes debentures, irrespective of the rate of interest.

Implications of the Judgment:

1. Insolvency Proceedings for Time-Barred Debts:

   • The ruling allows creditors to initiate insolvency proceedings on debts that were previously considered time-barred under the Limitation Act, potentially opening the door for numerous insolvency petitions on old debts.
   • The judgment could lead to a surge in insolvency petitions, as creditors may now pursue claims for debts that were once too old to be legally enforced.

2. Investor and Debenture Structures:

   • The decision provides clarity on the classification of OCD holders as financial creditors, even when the debentures have low or no interest. This strengthens the position of OCD holders in the event of a default by the issuer.

3. NCLT and NCLAT’s Role:

   • The NCLAT’s decision reflects its approach to ensuring that the IBC operates effectively, even in the absence of certain regulatory frameworks.
   • The ruling aligns with the IBC’s objectives of timely insolvency resolution, which includes ensuring that debt recovery is not hindered by technicalities or outdated rules.

4. Cautionary Note on Limitation Act:

   • Although the NCLAT’s decision clarifies that the Limitation Act does not apply to IBC proceedings, it has not addressed the Companies Act, 2013‘s provision (Section 433) that applies the Limitation Act to proceedings before the NCLT and NCLAT.
   • This leaves room for potential ambiguity, and parties should remain cautious and initiate insolvency proceedings within the limitation period to avoid legal risks.

The NCLAT’s judgment has significantly altered the legal landscape for insolvency proceedings under the IBC. By ruling that the Limitation Act does not apply, the Tribunal has effectively made it possible for creditors to seek insolvency resolution on debts that were previously time-barred. This could result in a wave of new insolvency applications and a re-evaluation of how debentures and other financial instruments are treated in the context of insolvency. However, the lack of reference to the Companies Act in this context suggests that further clarifications might be needed.