An interesting issue keeps arising in relation to the powers of an Interim Resolution Professional or a Resolution Professional to reject time-barred claims of different creditors whose debt is owed by the Corporate Debtor. The issue keeps cropping up because of the observations of the Supreme Court in Swiss Ribbons case1 that the Resolution Professional is given administrative as opposed to quasi-judicial powers. This keeps the Interim Resolution Professionals or the Resolution Professionals in doubt if they have to accept claims of different creditors even when they are wholly time-barred. Let us examine the relevant provisions and arrive at a conclusion on this aspect.
Relevant provisions under the Code and CIRP Regulations
Once the Corporate Debtor undergoes insolvency and the Corporate Insolvency Resolution Process (CIRP) is initiated, an Interim Resolution Professional is appointed by the Adjudicating Authority i.e. the NCLT. Under Section 13 of the Insolvency and Bankruptcy Code, 2016 ('the Code'), the Adjudicating Authority causes a public announcement of initiation of CIRP and calls for submission of claims under Section 15 of the Code. The Interim Resolution Professional makes a public announcement under Section 15 read with Regulation 6 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 ('CIRP Regulations').
Regulation 6(2)(c) the CIRP Regulations requires submission of proofs of claim to be made within 14 days2 from the date of appointment of the IRP. The different categories of proofs of claims have been dealt with in Chapter IV of the CIRP regulations.
Regulation 10 of CIRP regulations empowers the Interim Resolution Professional or the Resolution Professional to call for such other evidence or clarification from a creditor for substantiating the whole or part of its claim.
Regulation 13 of the CIRP regulations deals with verification of claims which casts a duty on the Interim Resolution Professional or the Resolution Professional to verify every claim, as on the insolvency commencement date, within seven days from the last date of the receipt of the claims. It further requires the Interim Resolution Professional or the Resolution Professional to maintain a list of creditors containing names of creditors along with the amount claimed by them, the amount of their claims admitted and the security interest, if any, in respect of such claims, and update it.
Issue
From the reading of the above stated provisions, the issue that arises for consideration is whether the verification by an Interim Resolution Professional or the Resolution Professional requires him to also verify if the claim of creditors of the Corporate Debtor were time-barred as on the insolvency commencement date. If so, whether such Interim Resolution Professional or the Resolution Professional is empowered to reject the time barred claim.
Applicability of the Limitation Act to the Code
The provisions of the Limitation Act, 1963 were initially not made applicable to the Code. Later, Section 238A was inserted by the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 with effect from 06.06.2018. Interestingly, this Section 238A makes provisions of the Limitation Act applicable to the proceedings or appeals before the NCLT, NCLAT, DRT or DRAT, as the case may be. Verification of claims by the Interim Resolution Professional or the Resolution Professional under Regulation 13 of the CIRP regulations is not specifically covered by the provisions of Section 238A of the Code. Meaning thereby, the statute is silent in relation to the applicability of the Limitation Act on the process of verification of claims by the Interim Resolution Professional or the Resolution Professional.
Interim Resolution Professional or Resolution Professional can reject time-barred claims
We feel that the though the provisions of the Limitation Act have not been specifically made applicable to Regulation 13 of the CIRP Regulations, the same cannot be lost sight of. After all, once a claim becomes time barred, the debtor is protected by the law itself from any legal action for recovery of such claim against it. In support of our view, we give the following reasons:
- Regulation 13 (1) of the CIRP Regulations itself makes a distinction between the amount claimed by the creditors and the amount of their claims admitted. Therefore, the provision pre-supposes application of mind on behalf of the Interim Resolution Professional or the Resolution Professional to admit only such claims which are legally permissible.
- The Code defines "claim" under Section 3(6) to mean-
a) a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured;
b) right to remedy for breach of contract under any law for time being in force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgment, fixed, matured, unmatured, disputed, undisputed, secured or unsecured;
The definition of claim does not include a time-barred claim as the right to payment or the right to remedy as contemplated in clauses (a) and (b) of Section 3(6) are not available in respect of time-barred claims.
- The CIRP regulations further expect the Interim Resolution Professional or the Resolution Professional to determine or make best estimate of the amount of the claim based on the information available with him and even revise the amounts of claims admitted when he comes across additional information warranting such revision. [Regulation 14 of CIRP Regulations]. Therefore, the CIRP Regulations itself cast a duty on the Interim Resolution Professional or the Resolution Professional to either estimate the amount of claim where the claim of a creditor is not precise and even revise the amounts of claim admitted.
- The distinction drawn between the amount claimed by the creditors and the claims admitted seems self-explanatory. The claim which is going to be admitted would be a claim supported by documents showing the existence of right to payment or remedy as mentioned in Section 3(6) of the Code. Therefore, a time-barred claim cannot be said to be a claim admitted for this purpose.
- The Insolvency Law Committee (Second Report) dated March 26, 2018 has specifically dealt with the question of applicability of the Limitation Act to the Code. It has further observed as under:
"28.1The committee deliberated on the issue and unanimously agreed that the intent of the Code could not have been to give a new lease of life to debts which are time barred. It is settled law that when a debt is barred by time, the right to a remedy is time barred. This requires being read with the definition of 'debt' and 'claim' in the Code. Further, debts in winding up proceedings cannot be time barred, and there appears to be no rationale to exclude the extension of this principle of law to the Code.
28.2Further, non application of the law on limitation creates the following problems: first, it re-opens the right of financial and operational creditors holding time barred debts under the Limitation Act to file for CIRP, the trigger for which is default on a debt above INR one lakh. The purpose of the law of limitation is "to prevent disturbance or deprivation of what may have been acquired in equity and justice by long enjoyment or what may have been lost by a party's own inaction, negligence or laches". Though the Code is not a debt recovery law, the trigger being 'default in payment of debt' renders the exclusion of the law of limitation counter intuitive. Second, it re-opens the right of claimants (pursuant to issuance of a public notice) to file time barred claims with the Insolvency Resolution Professional or Resolution Professional, which may potentially be a part of the resolution plan. Such a resolution plan restructuring time-barred debts and claims may not be in compliance with the existing laws for the time being in force as per Section 30(4) of the Code.
28.3Given that the intent was not to package the Code as a fresh opportunity for creditors and claimants who did not exercise their remedy under existing laws within the prescribed limitation period, the committee thought it fit to insert a specific section applying the Limitation Act to the Code."
(emphasis added)
Therefore, as can be gleaned from the Report itself, it was never intended that the claims which are time-barred be admitted by the Interim Resolution Professional or the Resolution Professional when the creditors of such time-barred claims did not exercise their legal remedies against the Corporate Debtor during the period of limitation.
- By taking a view that an Interim Resolution Professional or the Resolution Professional has no option but to admit time-barred claims would make a difficult proposition warranting logic. When the claimants whose claims are barred by the law of limitation cannot trigger insolvency against the Corporate Debtor, such a claimant should not be allowed to file his time-barred claim with the Interim Resolution Professional or the Resolution Professional pursuant to the public announcement made under Section 15 of the Code read with Regulation 6 of the CIRP regulations. After all, what cannot be done directly should not be allowed to be done indirectly. If a creditor with a time-barred claim cannot trigger insolvency by filing an application under Section 7 or Section 9 of the Code, he cannot indirectly be a part of the Insolvency Resolution Process of the Corporate Debtor by filing time-barred claims before the Interim Resolution Professional or the Resolution Professional.
- Allowing satisfaction of a time-barred claim would unnecessarily burden a prospective resolution applicant who intends to revive the Corporate Debtor.
- Section 30(2)(e) of the Code casts a duty on the Resolution Professional to examine each resolution plan to confirm that it does not contravene any of the provisions of the law for the time being in force. A resolution plan seeking to satisfy time-barred claims would be in contravention of the law of limitation.
In view of the above reasons, we are of the view that an Interim Resolution Professional or a Resolution Professional can reject time-barred claims of creditors under Regulation 13 of the CIRP Regulations. The Supreme Court's finding that a Resolution Professional has only administrative powers and not quasi-judicial powers should have no bearing on the issue raised herein. Since the Code is a relatively new law and is developing through different judicial decisions, it is expected that a decision on these lines would be taken by the courts in future.
Footnotes
1 Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17.
2 Regulation 12(2) w.e.f 4th July, 2018 now allows submission of claim with proof on or before 90th day of the Insolvency commencement date.
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