Time-barred debts and the insolvency code

By Karthik Somasundram and Shreya Gupta, Bharucha & Partners

The Insolvency and Bankruptcy Code, 2016, has been construed as a complete code. Based on that construction and noting that the code contained no provision expressly making the Limitation Act applicable, and as the act could not be considered as applicable by necessary implication, time-barred debts were allowed to trigger insolvency proceedings. To remedy this, section 238A was introduced on the recommendations of the Insolvency Law Committee, making the act applicable to proceedings under the code with effect from 6 June 2018.

Karthik Somasundram
Bharucha & Partners

However, the question remained whether the amendment had retrospective effect. This was resolved by the Supreme Court in BK Educational Services Private Limited v Parag Gupta and Associates (2018).

According to the appellant, the amendment was clarificatory and had retrospective effect. Further, limitation was a matter of procedural law and therefore the amendment must operate retrospectively. Referring to definitions of “debt” and “default” under the code, the appellants argued that only claims for debts that were not barred by limitation were covered, as time-barred debts could not be considered “due”. The appellant also argued that the Limitation Act applied to proceedings before the National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) under the Companies Act, and it would be unreasonable to hold that it did not apply to proceedings under the code.

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Karthik Somasundram is a partner and Shreya Gupta is a senior associate at Bharucha & Partners.

Bharucha-&-PartnersBharucha & Partners

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