In B. K. Educational Services v. Parag Gupta Associates [AIR 2018 SC 5601], the Hon’ble Supreme Court has made an obiter comment in the closing paragraphs of the judgment, to the effect that Section 5 of the Limitation Act applies to an application filed under Section 7 and 9 of the Insolvency and Bankruptcy Code, 2016 for commencing insolvency resolution process against any debtor. That comment has created immense uncertainty in the law, for the obiter comment runs counter to the spirit of the entire judgment and creates an unusual situation where a creditor is barred from filing a suit for recovery of debt after 3 years, but can still pray for condonation of delay under the insolvency code and put the debtor in insolvency without through an extremely summary procedure.
An obiter dicta of the Supreme Court binds all lower Courts and tribunals under Article 141 of the Constitution, except the Supreme Court itself [Oriental Insurance Co. Ltd. v. Meena Variyal (2007) 5 SCC 428]. Unlike the general rule that only the ratio is binding and not the obiter dicta which applies to High Courts and lower courts, the effect of Article 141 is such that every “declaration of law”, whether ratio or obiter, when it comes from the Supreme Court, it becomes binding throughout the entire country. The only exception to this rule is that there must be a direct pronouncement of the Supreme Court in some other case conflicting with the obiter, and then and only then, will the obiter be obliterated.
In the article, I propose to examine the obiter in B. K. Educational holding that Section 5 of the Limitation Act applies to Section 7 and 9 of the Insolvency Code, particularly in respect of earlier pronouncements of the Supreme Court which hold otherwise.
B. K. Educational Services
Under Section 3 of the Limitation Act, no suit or application can be filed unless the same is done within the limitation provided under the said Act. The period for recovery of a debt is three years. The question which was put before the Supreme Court in B. K. Educational was whether the insertion of Section 238A in June 2018 which made the Limitation Act applicable to the proceedings under the Insolvency Code before the NCLT, was applicable from the inception of the Code or only from June, 2018.
Sections 7(1) and 9(1) of the Code read as follows:
“7. (1) A financial creditor either by itself or jointly with other financial creditors may file an application for initiating corporate insolvency resolution process against a corporate debtor before the Adjudicating Authority when a default has occurred.
Explanation.— For the purposes of this sub-section, a default includes a default in respect of a financial debt owed not only to the applicant financial creditor but to any other financial creditor of the corporate debtor.”
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.”
Section 238A reads as follows:
“238A. 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.”
Prior to the Supreme Court judgment, the National Company Law Appellate Tribunal had taken the view that since no limitation is prescribed for filing an application under Sections 7 and 9 of the Insolvency Code, the Limitation Act is not made applicable to the Insolvency code before Section 238A and the Insolvency code is a self-contained enactment, and therefore effectively an application for initiating insolvency under Section 7 and 9 of the Code can be filed even for debts which were time-barred long ago, at least prior to the enactment of Section 238A.
The Apex Court reversed and held that any amendment or any law affecting limitation is only a procedural amendment and will affect all existing debts which are alive and subsisting at the time of the amendment or the new law. To that extent, the amendments or new laws touching on limitation are always retrospective in nature. However, when a debt is already barred by the general law of limitation, such a debt cannot be revived by an amendment or a new law without express language by Parliament showing that the intention was that the new limitation or extended limitation must apply to debts which are already time-barred as on the date of the new law or amendment. Thus, any debt which was already time-barred as on the date on which the Insolvency Code was brought into force could not be revived or resurrected by way of the Insolvency code.
With respect to those debts which were not time-barred as on date of inception of the Code in 2016, it was held that though Section 238A was not on the books at that time, the general principle that amendments touching on limitation will apply to all existing rights and obligations retrospectively. Furthermore, since Section 433 of the Companies Act, 2013 applies to the proceedings under the Insolvency Code through Section 5(1) of the Insolvency Code. Section 433 of the Companies Act, 2013 itself provided that the Limitation Act applies to the proceedings before the NCLT and this was taken by the Supreme Court as indication that the intention was to apply the limitation act even before the insertion of Section 238A.
Condonation of delay
The application of the Limitation Act to proceedings under the Insolvency Code has created a new controversy altogether. While Section 3 of the limitation act bars the institution of a suit or application after the limitation period, the same is subject to exceptions under Sections 4 to 24. The limitation period for recovering amounts due on a debt is 3 years. Section 5 of the Limitation Act provides for condonation of delay, but Section 5 applies only to “applications” and “appeals” and not to suit proceedings. Therefore, it is not possible to condone any delay in filing suit proceedings
However, Sections 7 and 9 of the Insolvency Code use the word “application” and hence the Supreme Court has held in B. K. Educational that a condonation application can be filed even after 3 years from the date of the default.
Is B. K. Educational per incuriam?
In State of Kerala v V. R. Kalliyanikutty (1993) 3 SCC 657, the Supreme Court was confronted with provisions of the Kerala Revenue Recovery Act, 1968 which allowed speedy recovery of “amounts due” as covered by the Act. The Supreme Court held that after the lapse of period specified in the Limitation Act, the amounts cannot be said to be “due” any more. Any other interpretation, the Court has held, would lead to a situation where a creditor uses the Act meant for “speedy” recovery after failing for 3 years in instituting civil proceedings and failing to prove his debt according to civil procedure in a civil court and directly use the draconian summary proceedings for recovery under the Kerala Revenue Recovery Act, 1968. This, the Court held, would deprive the debtor of his defense of time-bar and his rights under the normal civil procedure and would offend Article 14. In words of Sujata Manohar J:
“5. Explaining analogous provisions of the U.P. Public Moneys (Recovery of Dues) Act, 1965, this Court in Director of Industries, U.P. v. Deep Chand Agarwal [(1980) 2 SCC 332 : AIR 1980 SC 801] held that the said Act is passed with the object of providing a speedier remedy to the State Government to realise the loans advanced by it or by the Uttar Pradesh Financial Corporation. Explaining the need for speedy recovery, it says that the State Government while advancing loans does not act as an ordinary banker with a view to earning interest. Ordinarily it advances loans in order to assist the people financially in establishing an industry in the State or for the development of agriculture, animal husbandry or for such other purposes which would advance the economic well-being of the people. Moneys so advanced have to be recovered expeditiously so that fresh advances may be made for the same purpose. It is with the object of avoiding the usual delay involved in the disposal of suits in civil courts and providing for an expeditious remedy that the U.P. Act had been enacted. It was on this ground that this Court upheld the classification of loans which are covered by the said U.P. Act in a separate category. It held that this is a valid classification and the provisions of the Act are not violative of Article 14.
8. Looking to the object of Section 71 we have to examine whether time-barred claims of the State Financial Corporation and the banks can be recovered under it. Is the object only speed of recovery or is it also enlargement of the right to recover? The respondent-institutions rely on the words “amount due” in Section 71 as encompassing time-barred claims also. Now, what is meant by the words “amounts due” used in Section 71 of the Kerala Revenue Recovery Act as also in the notifications issued under Section 71? Do these words refer to the amounts repayable under the terms of the loan agreements executed between the debtor and the creditor irrespective of whether the claim of the creditor has become time-barred or not? Or do these words refer only to those claims of the creditor which are legally recoverable? An amount “due” normally refers to an amount which the creditor has a right to recover. Wharton in Law Lexicon defines “due” as anything owing; that which one contracts to pay to another. In Black’s Law Dictionary, 6th Edn., at p. 499 the following comment appears against the word “due”:
“The word ‘due’ always imports a fixed and settled obligation or liability; but with reference to the time for its payment there is considerable ambiguity in the use of the term, the precise signification being determined in each case from the context. It may mean that the debt or claim in question is now (presently or immediately) matured and enforceable, or that it matured at sometime in the past and yet remains unsatisfied, or that it is fixed and certain but the day appointed for its payment has not yet arrived. But commonly and in the absence of any qualifying expressions, the word ‘due’ is restricted to the first of these meanings, the second being expressed by the term ‘overdue’ and the third by the word ‘payable’.”
There is no reference in these definitions to a time-barred debt. In every case the exact meaning of the word “due” will depend upon the context in which that word appears.
9. In the case of Hansraj Gupta v. Dehra Dun-Mussoorie Electric Tramway Co. Ltd. [AIR 1933 PC 63 : 60 IA 13] the Przivy Council was required to interpret the words “money due” under Section 186 of the Companies Act, 1913. Section 186 dealt with the recovery of any money due to the company from a contributory. Interpreting the words “money due”, the Privy Council said that the phrase would only refer to those claims which were not time-barred. It noted that the section is concerned only with moneys due from a contributory. A debtor who is not a contributory is not affected by it. Moneys due from him can be recovered only by a suit in the company’s name. Secondly, the section creates a special procedure for obtaining payment of moneys. It is not a section which purports to create a foundation upon which to base a claim for payment. It creates no new rights. Thirdly, the power of the court to order payment under that section is discretionary. It may refuse to act under that section, leaving the liquidator to sue in the name of the company. Therefore, the respondent under the procedure of Section 186 cannot be deprived of some defence or answer open to him in a suit for the same moneys.
10. The same reasoning would apply in the present case also. The Kerala Revenue Recovery Act does not create any new right. It merely provides a process for speedy recovery of moneys due. Therefore, instead of filing a suit, (or an application or petition under any special Act), obtaining a decree and executing it, the bank or the financial institution can now recover the claim under the Kerala Revenue Recovery Act. Since this Act does not create any new right, the person claiming recovery cannot claim recovery of amounts which are not legally recoverable nor can a defence of limitation available to a debtor in a suit or other legal proceeding be taken away under the provisions of the Kerala Revenue Recovery Act.”
The judgment in V. R. Kalliyanikutty is by a bench of 3 learned judges, whereas B. K. Educational is a judgment by 2 judges. If the obiter of B. K. Educational is taken to be binding law, it will directly contradict V. K. Kalliyanikutty. A creditor who has waited for 3 years and not filed a suit and proved his debt according to the normal civil process, will suddenly get up one day and file a condonation application. The debtor will have no chance to defend himself according to the normal legal process and must answer the claim in extremely summary procedure adopted by the NCLT under Insolvency code. This would lead to a clear-cut infraction of Article 14 rights of the debtor.
It is true that condonation may or may not be granted. However, the debtor is placed at the mercy of the Court in cases of condonation. Furthermore, the law under Section 5 of the Limitation Act is that an applicant need not explain why he did not act within the allowed time, he must only explain what happened after the due date had elapsed [Shrimant Jadhavrao Anandrao Pawar v. Dilip Balvantrao (2002) 9 SCC 593]. As such, a creditor will not have to explain why he did nothing for 3 years, but only explain what he did after 3 years. This is a complete negation of the Article 14 rights of the debtor. The consequences under Insolvency Code are much more disastrous than the ones under the Kerala Act. The bar under the Insolvency Code must therefore be higher.
Can this conundrum be resolved?
The obiter in B. K. Educational allowing condonation applications to be filed in case of applications under Section 7 and 9 of the Insolvency Code is therefore directly contrary to V. K. Kalliyanikutty. In due time, the Supreme Court must clarify the law once and for all. However, till then, the Courts must take up the mantle and interpret the condonation provision in a strict manner. For starters, the creditor must be asked to satisfy the Court what prevented him from filing a suit in 3 years. The NCLT has thankfully been strict towards those creditors who were negligent or who were not genuinely prevented from filing a suit. As long as the NCLT is alert about not letting creditors abuse the condonation process, the constitutional and fundamental rights of the debtors would be protected. Any liberal interpretation of the condonation provision in this context would lead to unconstitutional results.
NCLAT creating further chaos after B. K. Educational
While the uncertainty over condonation provision persists, the NCLAT has held in A. J. Agrochem v. Duncans Industries [Judgment dated 20.6.2019 in Company Appeal (AT) (Insolvency) No. 710 of 2018], that since the Insolvency code came in December 2016, the limitation period for filing petitions should run upto December 2019 for all debts. Obviously, this judgment flies in the face of B. K. Educational which says that 3 years should be counted from the date of default. However, till the Supreme Court sets aside this judgment, debtors have another fire to fight and another frontier to defend.