IBC Code and Limitation Act

Recently there is a controversy whether time-barred debt is admissible for initiation of insolvency proceedings under IBC Code.

On the very onset, it is very much indigestible to think even, that time-barred debt can be admissible for initiation of proceedings under IBC.

It is very much surprising to study the case of Neelkanth Township vs. Urban Infrastructure in which NCLAT has upheld the decision of NCLT but on different grounds. One of which is that Limitation Act does not apply to the proceedings under IBC.

Let me discuss the law in some details to reach some logical conclusion;

Section 8 of the IBC provides that.

“8. (1) An operational creditor may, on the occurrence of a default, deliver a demand notice of unpaid operational debtor copy of an invoice demanding payment of the amount involved in the default to the corporate debtor in such form and manner as may be prescribed.

(2) The corporate debtor shall, within a period of ten days of the receipt of the demand notice or copy of the invoice mentioned in sub-section (1) bring to the notice of the operational creditor -

(a) the existence of a dispute, if any, and record of the pendency of the suit or arbitration proceedings filed before the receipt of such notice or invoice in relation to such dispute;

(b) the repayment of unpaid operational debt -

…………….

Explanation - For the purposes of this section, a "demand notice" means a notice served by an operational creditor to the corporate debtor demanding repayment of the operational debt in respect of which the default has occurred.

9. (1) After the expiry of the period of ten days from the date of delivery of the notice or invoice demanding payment under sub-section (1) of section 8, if the operational creditor does not receive payment from the corporate debtor or notice of the dispute under sub-section (2) of section 8, the operational creditor may file an application before the Adjudicating Authority for initiating a corporate insolvency resolution process.

(21) "operational debt" means a claim in respect of the provision of goods or services including employment or a debt in respect of the repayment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority;

(20) "operational creditor" means a person to whom an operational debt is owedand includes any person to whom such debt has been legally assigned or transferred;

Section of 3(1) of Limitation Act, 1963 provides that:

3. Bar of limitation. -

(1) Subject to the provisions contained in sections 4 to 24 (inclusive), every suit instituted, appeal preferred, and application made after the prescribed period shall be dismissed although limitation has not been set up as a defence.

And under Limitation Act, 1963 a period of three years has been prescribed for recovery of debt subject to provisions contained under section 4 to 24 of the  Limitation Act.

Further, one more provisions has been provided in addition to section 4to 24 of Limitation Act, 1963, under section 60(1) of IBC Code.

Thus for initiation of proceedings under IBC code, conditions of section 8 and 9 of IBC code have to be complied with. Only when operational  Creditor have complied with conditions of section 8 and 9, only then he can initiate the process under IBC code. It means in case Operational Creditor does not fulfil the conditions under section 8 and 9 of IBC code, then he cannot initiate the proceedings under IBC code.

Now let us see the conditions to be complied under section 8 and 9 of IBC code.

As per section 8 and 9 of IBC code  the following conditions have to be complied with

1. There should be an occurrence of default of debt on the date of giving notice under section 8
2. He should have given 10 days notice to make the payment of debt involved in the default
3. Corporate Debtor does not receive payment or notice of dispute

In case all these conditions are fulfilled together only then proceedings under IBC code will commence.

Thus as per section only Operational Creditor can initiate the proceedings under IBC code. Operational Creditor has been defined under the Act itself and Act itself defines that Operation Creditor is a person means a  to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred.

It means that an Operational Creditor is a person only to whom some legal binding debt is due. Certainly, when the act deals with debt, it can only deal with debt which is legally due on the date of serving of notice by the Operational Creditor.  In case a person who wants to initiate a process under the IBC code must come under the definition of Operational Creditor that is a person to whom a legal and binding Debt is due. And in case a person himself very well knew that to whom no legal debt is due then he cannot even entitled to serve a notice under section 8 of IBC Code and he violating the law itself.

Section 8 of IBC code provides that when there is a default, then Operation Creditor is to serve 10 days notice on Corporate Debtor to pay that debt.

It means Section 8 presumes that there is a default of legal binding debt. Moreover, in case there is no legal binding debt is due, then there is no default but to talk of giving notice thereof. Moreover when a notice is given under section 8 and Corporate Debtor gives notice of existing of fact that that debt is not payable due to lapse of time then it cannot be presumed that Corporate Debtor has defaulted in making the payment and moreover he has satisfied condition mentioned under section 8 (2)a of Act.

Limitation Act, 1963 provides that Court has to dismiss the suit for recovery even on not limitation has not been set up as a defense. So any debt which is due for more than three years cannot be recovered legally, thus the debt which is due for more than three years is not a debt at all and in case a person  does not pay the  debt which is due more than three years due to its  time-barred,  is not at default at all.

Thus to initiate the process under the IBC code a person:

1. has  to be an Operational Creditor
2. there should a default of legally due default
3. he has served notice to make the payment of debt legally due
4. Corporate Debtor has failed to make the payment or give notice of the existence of the dispute

These are the conditions precedent to even initiate the proceedings under IBC code

In case of person to whom a  time-barred debt is due and he knows that fact, is not an Operational Creditor under the Act, but to talk about initiation of proceedings under the Act.

In case a debt is time-barred at the time of giving of notice, then notice is itself is bad as there is not default at all of making the payment, as before serving the notice there should be a default of legally enforceable debt.

Even when a person presuming himself as an Operational  Creditor and default of payment of debt, then he again losses to his right to initiate the process under IBC code when he is given a notice of the existence of dispute of time-barred debt. Existence of Dispute will be presumed only when there is some doubt whether a debt due is time bar or not due to certain unique circumstances.

But when the person himself knows that he is serving a notice for the time-barred debt, he should be punished severally as he is totally violating IBC process because of following reasons :

1. He is not an Operational Creditor under the IBC code
2. There is not default as mentioned under section 8 of IBC code
3. In case there is no default, then there is no question of serving of notice
4. And in case, Corporate Debtor gives notice of the existence of dispute regarding time-barred debt, then absolutely no question of initiation of the process as then Operational Creditor has to give an affidavit that he has received no notice of the dispute.

So question to raise whether Limitation Act is applicable or not is not a question at all. Because it goes even to root of defining even the Operational Creditor and Operational Debt and very much comes into the picture much before initiation of process under IBC Code.

But to talk about time-barred debt, IBC code even should not be exploited for other operational debts because it is not a process of recovery of dues but to enforce insolvency in case any corporate debtor is in real problems.