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13 October 2017

Limitation Act not applicable for proceedings under IBC

The National Company Law Appellate Tribunal held that the Limitation Act, 1963 is not applicable to the Insolvency & Bankruptcy Code, 2016. NCLAT further held that debentures fall within the meaning of ‘Financial Debt’ irrespective of the amount of interest attached to them.

 

Contentions

The Appellant (Neelkanth Township and Construction Pvt. Ltd.) contended that the application filed by the Respondent (Urban Infrastructure Trustees Ltd) under Section 7 of IBC was defective, incomplete (since documents provided under Section 7(3) of IBC were not attached to the application) and time-barred (since the debt claimed related to the years 2011, 2012 and 2013). The Appellant further contended that the ‘default of debt’ as claimed by the Respondent has not been admitted by the Appellant and that the Respondent was not a ‘Financial Creditor’, but an investor. It was also contended that ‘Debenture Certificates’ do not fall within the definition of financial debt as provided under Section 5(8) of IBC as they cannot be said to be against consideration for time value of money due to them carrying only zero interest and one percent interest, respectively. The Appellant contended that the Respondent had only purchased the debenture certificates as an investment, and thus would not qualify as a financial creditor.

 

Observations

NCLAT observed that rules of procedure must be construed so as not to frustrate or obstruct the process of adjudication under the substantive provisions of law.
In respect of the time-bar, NCLAT observed that there was nothing on the record that the Limitation Act, 1963 is applicable to IBC. It also observed that in case there exists a debt which includes interest and there is a default of debt having a continuous course of action, the argument that such debt is barred by limitation cannot be accepted.
NCLAT further made an observation that Section 5(8)(c) of IBC stipulates that any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument would come within the meaning of ‘Financial Debt’. It observed that it was an admitted fact that the Respondent is a debenture holder and the Appellant has a liability in respect of amount which is due to the Respondent being the amount due on maturity of debentures, and that since the Appellant has accepted and not disputed the fact that the amount due to the Respondent has not been paid, there is a ‘default of debt’ under Section 3(12) of IBC. 

 

Judgment

NCLAT, while dismissing the appeal, held that the Limitation Act, 1963 will not be applicable to proceedings under IBC and that debentures would come within the meaning of ‘financial debt’, irrespective of the interest rate carried.

 

Analysis

NCLAT has provided a wider interpretation to Section 7 of IBC, thereby increasing the overall scope and effectiveness of IBC. It is of significant importance that debentures with zero or one percent rate of interest were held to fall within the meaning of ‘financial debt’ under IBC thereby providing remedy to debenture holders irrespective of the rate of interest applicable on such debentures. NCLAT’s observation that Limitation Act will not be applicable to IBC, since IBC relates to initiation of corporate insolvency resolution process and is not meant for recovery of money claims, must be noted.