Does Initiation of DRT Proceedings Extend Limitation under IBC? A Legal Analysis
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Limitation is critical under the Insolvency and Bankruptcy Code, 2016 (IBC) because it prevents the revival of time-barred debts, ensuring the IBC functions as a rehabilitation mechanism, not a mere debt recovery tool. The period for filing an application under section 7 of the IBC is governed by Article 137 of the Limitation Act, 1963, which provides a 3 year limitation period from the date of default. The Supreme Court has ruled that the filing or continuation of proceedings before the Debt Recovery Tribunal (DRT) does not constitute a civil proceeding before a court of first instance of appeal, and therefore, the time spent in such proceedings cannot be excluded from the limitation period under section 14(2) of the Limitation Act. Consequently, a judgement or decree from a DRT Proceedings cannot shift the date of default or extend the limitation period for an insolvency application, as IBC proceedings are fundamentally different from recovery suits and cannot be used to revive time-barred claims.
Understanding the Law on Limitation in IBC
The Limitation Act is applicable to proceedings under sections 7 and 9 of the IBC. This application is retrospective from the commencement of the IBC. The period of limitation for filing an application is governed by Article 137, which provides a 3 year limitation period for any application where no specific period is provided elsewhere. The right to apply for initiating proceedings under the IBC accrues when a default occurs, meaning the 3 year period begins from the date of default. Consequently, if the default occurred more than 3 years prior to the date of filing the application would be barred under Article 137 of the Limitation Act, unless the delay is condoned under section 5 of the Limitation Act. Further, an acknowledgment of debt under section 18 of the Limitation Act can extend the limitation period if it is in writing, signed by the debtor or their authorized agent, and made before the expiration of the prescribed period for the suit or application. Similarly, a part payment on account of a debt under section 19 can extend the limitation period, provided the payment is acknowledged by the debtor’s signature of handwriting.
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Role of DRT Proceedings in Limitation
The National Company Law Appellate Tribunal (NCLAT) has held that filing a case before the DRT Proceedings does not extend the limitation period for initiating proceedings under the IBC. The pendency of DRT proceedings, whether under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) or the Recovery of Debts and Bankruptcy Act, is considered an independent remedy and does not suspend or extend the limitation period under the IBC. Judicial observations clergy that while DRT proceedings can serve as evidence of the existence of a debt, they do not automatically extend the limitation period for filing an IBC application. Acknowledgement of debt by the corporate debtor, such as through letters or balance sheet entries, can extend the limitation period under action 18 of the Limitation Act, but mere pendency of litigation does not constitute such acknowledgement. The Supreme Court has affirmed that a recovery certificate from the DRT Proceedings provides a fresh cause of action, allowing a 3 year period from the date of certification to initiation CIRP, distinguishing it from the mere pendency of proceedings.
Judicial Precedents
The Supreme Court in B.K. Educational Services v. Parag Gupta held that the Limitation Act applies to applications filed under Section 7 and of the IBC from the inception of the IBC on December 1, 2016. This means that if a default concurred more than 3 years prior to filing an application, it is barred under Article 137 of the Limitation Act, unless section 5 is invoked to condone the delay. Further, in Jignesh Shah v. Union of India, the court held that the pendency of a civil suit for specific performance does not extend the limitation period for filing a winding-up petition, as such proceedings are separate and independent remedies. The Court emphasized that the limitation period for winding-up proceedings begins to run from the date of default, not from the filing of a related suit, and cannot be extended by the mere existence of another pending proceedings. The court in Dena Bank v. C. Shivakumar Reddy held that in final judgment, decree, or recovery certificate issued in favour of a financial creditor gives rise to a fresh cause of action to initiate proceedings under section 7 of the IBC within 3 years from the date of the judgment, decree, or issuance of the recovery certificate, if the debt remains unpaid. This ruling extends the limitation period for filing a section 7 petition,a s the issuance of such a certificate constitutes a fresh right to recover the specified amount. Hence, the Supreme Court emphasised that the IBC is not a mere money recovery legislation and its primary intent is to rehabilitate the corporate debtor, not to provide a new lease of life to time-barred claims.
Critical Analysis
Filing a case in the DRT Proceedings alone does not revive the limitation period for initiating CIRP under the IBC, as such proceedings are considered independent and do not extend the limitation period under the IBC. However, if a debtor acknowledges the debt or enters into a settlement agreement during DRT proceedings, such as acknowledgement can extend the limitation period for initiating CIRP, as per the principles of the Limitation Act. A recovery certificate issued by the DRT Proceedings acts as a deemed decree and provides a fresh cause of action, with the date of the certificate serving as the new date of default for the purpose of limitation. This means a financial creditor has 3 years from the date of the recovery certificate to initiate CIRP and 12 years to lodge a claim in CIRP if pursued as a deemed decree. There is a significant risk of misuse, as creditors might rely on old DRT litigation and recovery certificates to bypass the statutory limitation period, potentially undermining the fairness and predictability of the insolvency process.
Conclusion
DRT proceedings themselves do not automatically extend the limitation period for initiating IBC proceedings. The limitation period can only be extended if a DRT recovery certificate is issued, as such a certificate provides a fresh cause of action, and a new starting point for the 3 year limitation period under Article 137 of the Limitation Act. Similarly, a written acknowledgement of debt by the corporate debtor, or a fresh default arising from DRT proceedings, can also restart the limitation period. The Supreme Court has also clarified that a recovery certificate issued by a DRT is treated as a deemed decree, allowing a financial creditor 12 years to lodge a claim in CIRP if pursued as such. Therefore, creditors must act diligently within the prescribed limitation period, as relying solely on DRT proceedings without a recovery certificate or acknowledgement will not prevent an IBC application from being time-barred.
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