Section 25 (3) of the Indian Contract Act vs. Limitation Act
The Corporate Debtor is a party to the Assignment Agreement signed later to resolve debt and the same is binding under section 25(3) of the Indian Contract Act, 1872 and the said section is an exception to the provisions of Section 18 of the Limitation Act.
This type of no-consideration contract falls under Section 25(3) and for invoking it, some essentials must be satisfied:
- There should be a written promise signed by a person or his appointed agent.
- A promise must be there, either to pay a whole or a part of the debt.
- The debt must have been enforced by the creditor for the limitation period.
A debtor can enter into a written agreement under Section 25 (3) for paying a part of the complete debt and a suit can lie in such cases when there is a written promise for paying it. Whereas section 18 of the Limitation Act deals with the effect of acknowledgement.
Section 18 of the Limitation Act, 1963 is applicable both for ‘Suit’ and ‘Application’ involving ‘Acknowledgment of Liability’, creating a fresh period of limitation, which shall be computed from the date when the ‘Acknowledgement’ was so signed.
Law regarding Time-Barred Debt
In Dinesh Chokshi vs. Rahul Vasudeo Bhaat (2012 SCC Online Bom 1585) and R. Suresh Chandra & Co. vs. Vadnere Chemical Works and Ors. (AIR 1991 BOM 44); Madishetti Shekhar vs. Pulivala Komureli (AIR 2008 AP 131) judgments reiterated the position when an acknowledgement was accompanied by an express promise to pay a time-barred debt; such acknowledgement revives the time-barred debt, despite being made beyond the prescribed period of limitation. Such acknowledgement constitutes an agreement to pay the time-barred debt. Such a debt continued to be enforceable by virtue of Section 25(3) of the Contract Act.
Based on the ratio laid in various judgments, it is no longer open for the Corporate Debtor to argue that the provisions of Section 18 of the Limitation Act are not applicable to a Petition under Section 7 of the Code.
Understanding Debt Due
The Hon’ble Supreme Court in the case of B.K. Educational Services Private Limited v. Parag Gupta & Associates [2018 SCC online SC 1921], wherein they held as below:
“34. …… The Code cannot be triggered in the year 2017 for a debt which was time-barred, say, in 1990, as that would lead to the absurd and extreme consequence of the Code being triggered by a stale or dead claim, leading to the drastic consequence of instant removal of the present Board of Directors of the corporate debtor permanently, and which may ultimately lead to liquidation and, therefore, corporate death. This being the case, the expression “debt due” in the definition Sections of the Code would obviously only refer to debts that are “due and payable” in law, i.e., the debts that are not time-barred.
The definition of “default” in Section 3(12) of the Insolvency & Bankruptcy Code uses the expression “due and payable” followed by the expression “and is not paid by the debtor or the corporate debtor…”. “Due and payable” in Section 3(12), therefore, only refers to the whole or part of a debt, which when referring to the date on which it becomes “due and payable”, is not in fact paid by the corporate debtor. The context of this provision is therefore actual non-payment by the corporate debtor when a debt has become due and payable.
It is thus clear that since the Limitation Act is applicable to applications filed under Sections 7 and 9 of the Code from the inception of the Code, Article 137 of the Limitation Act gets attracted. “The right to sue”, therefore, accrues when a default occurs. If the default has occurred over three years prior to the date of filing of the application, the application would be barred under Article 137 of the Limitation Act, save and except in those cases where, in the facts of the case, Section 5 of the Limitation Act may be applied to condone the delay in filing such application.”
The Hon’ble Supreme Court in the case of Babulal Vardharji Gurjar vs. Veer Gurjar Aluminium Industries Pvt. Ltd. (2020 SCC Online SC 647), after considering the following Judgments exhaustively:
Innoventive Industries vs. ICICI Bank (MANU/SC/1063/2017) (Para 27) (Wherein it was held that the Scheme of the Code is to ensure that when default takes place in the sense debt becomes due and is not paid, the Insolvency Resolution Process begins – The Code gets triggered when the amount defaulted. It is at the stage of Section 7(5), where the Adjudicating Authority is to be satisfied that a default has occurred, that the Corporate Debtor is entitled to point out a default has not occurred in the sense that “debt” which may also include disputed claim is not due. A debt may not be due if it is not payable in law or in fact.)
B.K. Educational Services Private Limited (supra) (Para 42) (Wherein it was held it is thus clear that since the Limitation Act is applicable to Application filed under Section 7 and 9 of the Code from the inception of the Code, article 137 of the Limitation Act gets attracted. “The right to sue”, therefore, accrues when the default occurs. If the default occurred over 3 years prior to the date of filing of the Application, the Application would be barred under Article 137 of the Limitation Act, save and except in those cases where, in the facts of the case, section 5 of the Limitation Act may be applied to condone the delay in filing such Application.).
Swiss Ribbons Private Limited and Another vs. Union of India and Others (MANU/SC/0079/2019) (Para 64) (Wherein it was held that the trigger for the Financial Creditor’s Application is non-payment of dues when they arise under the loan agreement. It is for this reason that Section 433(e) of the Companies Act, 1956 has been repealed by the Code and a change in approach has been brought about. The legislative policy now is to move away from the concept of “inability to pay the debt to the determination of default”.
K. Shashidhar vs. Indian Overseas Bank (Para 56) (MANU/SC/0189/2019) (Wherein the Hon’ble Supreme Court undoubtedly restated principles laid down in B.K. Educational Services and reaffirmed that the right to sue under the Code accrues on the date when default occurs and if the default occurred 3 years prior to the date of filing of the Application, the same would not amount to debt due and payable under the Code.)
Sagar Sharma and Another vs. Phoenix ARC Private Limited and Another (MANU/SC/1357/2019) (The Hon’ble Supreme Court disapproved the proposition that the date of commencement of the Code can be the starting point of limitation and further Article 62 of the Limitation Act is not applicable.) held as below:
“30. When Section 238-A of the Code is read with the above-noted consistent decisions of this Court in Innoventive Industries, B.K. Educational Services, Swiss Ribbons, K. Sashidhar, Jignesh Shah, Vashdeo R. Bhojwani, Gaurav Hargovindbhai Dave and Sagar Sharma respectively, the following basics undoubtedly come to the fore:
(a) that the Code is beneficial legislation intended to put the corporate debtor back on its feet and is not a mere money recovery legislation;
(b) that CIRP is not intended to be adversarial to the corporate debtor but is aimed at protecting the interests of the corporate debtor;
(c) that intention of the Code is not to give a new lease of life to debts which are time-barred;
(d) that the period of limitation for an application seeking initiation of CIRP Under Section 7 of the Code is governed by Article 137 of the Limitation Act and is, therefore, three years from the date when right to apply accrues;
(e) that the trigger for initiation of CIRP by a financial creditor is default on the part of the corporate debtor, that is to say, that the right to apply under the Code accrues on the date when default occurs;
(f) that default referred to in the Code is that of actual non-payment by the corporate debtor when a debt has become due and payable; and
(g) that if default had occurred over three years prior to the date of filing of the application, the application would be time-barred save and except in those cases where, on facts, the delay in filing may be condoned;
(h) an application Under Section 7 of the Code is not for enforcement of mortgage liability and Article 62 of the Limitation Act does not apply to this application.
CONCLUSION
The sine qua non for application of Section 18 of the Limitation Act is that the acknowledgement of liability in writing must be before the expiration of the prescribed period (of limitation) for a Suit or Application.
The Hon’ble Supreme Court in the case of Sagar Sharma K. (supra) held at para 3 as below “Article 141 of Constitution of India mandates our judgements are followed in letter and spirit. The date of coming into force of IB Code does not and cannot form a trigger point of limitation for Applications filed under the Code. Equally since Applications are Petitions which are filed under the Code, it is Article 137 of Limitation Act which will apply to such Applications
