- According to the World Bank India’s overall ranking in 2017 was as follows:-
- One of the major reasons behind such poor ranking was failure of legal framework to help financial and operational creditors to recover monies they invested. Many countries in enacted provisions related to insolvency and bankruptcy in order to face this grave issue.
|United States of America||United Kingdom||China
- Thus it was necessary that some enactment empowers financial as well as operational creditors to initiate insolvency resolution process against those companies which have defaulted in making payment. The much needed enactment came in the form of Insolvency and Bankruptcy Code, 2016 helping to recover legitimate dues of the financial or operational creditor. This Code functions on the basis of default in making payment by the corporate debtor to the creditors under the Code. Since the inception of the Code, a total of 701 cases have been admitted out of which 310 cases are pertaining to operational debt. Over 2,000 applications have been closed, resulting in a recovery of about Rs 83,000 crore. (As published in the Insolvency and Bankruptcy Newsletter for the months of January to March 2018 by the Insolvency and Bankruptcy Board of India).
Significance of Section 8 And 9
- Section 8 – Demand Notice
- Under Section 8 (1) of the code, an operational creditor may upon the occurrence of a default by a corporate debtor towards payment of an operational debt, initiate the corporate insolvency process by delivering a notice of the unpaid invoices upon the corporate debtor.
- In the case of Era Infra Engineering Ltd. v. Prideco Commercial Projects Pvt. Ltd., the operational creditor had failed to issue a demand notice on the corporate debtor in accordance with sec 8 of the Code. Instead, the operational creditor contended that it had earlier issued a notice under sec 271 of the Companies Act. 2013 for winding up the corporate debtor and that the same should be considered as a demand notice for the purpose of sec 8 of the Code. The NCLAT rejected the submissions of the operational creditor and held that the provisions of sec 8 of the Code read with r 5 of the Adjudicating Authority Rules is mandatory, and that an operational creditor can file an application for initiation of corporate insolvency resolution process only after the expiry of the period of 10 days from the date of delivery of the demand notice under sec 8 of the Code.
- Demand Notice can be issued to the corporate debtor in terms of Form 3 or Form 4.
- Section 9 – Application
- In the event the corporate debtor does not avert the initiation of the corporate insolvency resolution process in accordance with sec 8(2) of the code within 10 days of the receipt of the demand notice under sec 8(1) of the code, the operational creditor may, under sec 9(1) of the code file an application with the NCLT for initiation of the corporate insolvency resolution process against the said corporate debtor.
Applicability of the limitation act to Insolvency & Bankruptcy Code
- Hazy area in the Insolvency and Bankruptcy Code, 2016 was the applicability of Limitation Period on procedures under the Code
- In case Neelkanth Township and Construction Pvt. Ltd. v. Urban Infrastructure Trustees Ltd (Neelkanth case) Arguments on behalf of the Appellants was IBC is a special Act and constitutes a ‘self-contained code’, independent of other laws, as borne out by the report of the Bankruptcy Law Reforms Committee. As such, in the absence of any specific provision incorporating the Limitation Act, it shall not be applicable. And Respondent contested that in Sub-section 1 of Section 5 of the IBC states that the Adjudicating Authority under the IBC shall be the NCLT, which in turn has been constituted under Section 408 of the Companies Act, 2013 (Companies Act). Therefore, it was submitted that the provision of the Companies Act including Section 433 were applicable to the IBC, as the same were not in conflict with the IBC. In the absence of any contrary provisions, IBC should be read with the provisions of the Companies Act including Section 433, which expressly makes the Limitation Act applicable to proceedings before the NCLT. Case went into appeal to NCLAT, where it was held that the Limitation Act shall not apply to the IBC.
- In the case of Speculum Plast Pvt. Ltd. PTC Techno Pvt. Ltd., wherein it was held that Limitation Act, 1963 is not applicable for initiation of Corporate Insolvency Resolution Process, though the doctrine of Limitation and Prescription is necessary to be looked into for determining the question that whether an application under section 7 or section 9 can be entertained after a long delay. Nevertheless, the NCLAT was of the opinion that if such an application is filed before the Adjudicating Authority after a delay of more than three years, the Adjudicating Authority may give an opportunity to the applicant to explain the delay within a reasonable period and failure to explain the delay the application won’t be entertained. Altogether, the law in past for initiation of CIRP was that even after exhaustion of limitation period of 3 years anybody who had a claim was able to approach Adjudicating Authority after completing the formalities provided under the Code. As a result of this adjudicating authorities got flooded with such applications. In some cases, the claim/debt is found to be 10 to 12 years old.
- The above view of NCLAT was a departure from the traditional view that ‘a time barred debt is not a debt at all’, leading to a concern that NCLAT is opening the floodgate of time barred debt due to the non-applicability of Limitation Act. The Ordinance clears this uncertainty as it clearly states that Limitation Act is applicable to the proceeding under the Section 238A Limitation – The provisions of the Limitation Act, 1963 (36 of 1963) shall, as far as may be, apply to the proceedings or appeals before the Adjudicating Authority, the National Company Law Appellate Tribunal, the Debt Recovery Tribunal or the Debt Recovery Appellate Tribunal, as the case may be.
- Thus Defendants can often raise the “Doctrine of Laches” as an affirmative defense in answers, but it is seldomly applied by the Court.
Disclaimer: Information contained above is for general information purposes only and no liability express or implied is assumed by the Author or the firm he is associated with. The Author, Sagar Bansal is an Associate lawyer with Veda Legal, Advocates & Solicitors and views expressed are personal.