In what could be another blow to the Insolvency and Bankruptcy Code (IBC), the Supreme Court has said that the insolvency law is not out of purview of the Limitation Acts as it rejects an application for a default committed more than three years from the date of insolvency petition.
The apex court said in its 14 August verdict that only existence of a debt and a default on that debt is not enough for admitting an insolvency plea. It also stated that the NCLT cannot admit cases of default more than three years (as prescribed by the Limitation Act) before the filing of insolvency application.
The Limitation Act prescribes a time limit within which a suit can be filed against someone. The time limit prescribed for most suits is three years. The objective of the Limitation Act is to avoid lengthy proceedings.
The case pertains to an Aurangabad-based maker of aluminium ingots -- Veer Gurjar Aluminium Industries - which defaulted on a loan in 2011 taken from Corporation Bank in 2008 and 2009. The loan was later taken over by JM Financial ARC, which filed an insolvency application against the debtor in March 2017. The NCLT admitted the application in August 2018, against which the debtor moved NCLAT.
The debtor's appeal against the NCLT order was based on the fact that the financial creditor cannot file an insolvency application in 2018 for a default committed in 2011. However, NCLAT rejected the plea of the debtor and upheld the NCLT order.
The debtor than moved the Supreme Court, which held that insolvency proceeding against a default in 2011 is clearly barred by limitation for having been filed much later than the period of three years from the date of default as stated in the application.
It also said that both NCLT and NCLAT overlooked the question of limitation and hence set aside the NCLAT order which allowed the insolvency proceeding against the debtor.
Divakar Vijayasarathy, managing partner, DVS Advisors, termed the judgement a big jolt to the IBC amidst rising cases of NPAs. He says: "Though IBC was introduced with a view to expedite resolution of NPAs, but by virtue of this judgement the same wouldn't be applicable to defaults which more than 3 years old. These cases would have to be settled under existing laws through DRT, which is time consuming and largely ineffective. The response of the government to this decision would be interesting as this puts a serious blot on the overall resolution process and the entire financial ecosystem is the loser."