Section 238A of the Insolvency and Bankruptcy Code, 2016 (“IBC”) provides for the provisions of the Limitation Act, 1963, to apply to the IBC. While hearing an appeal petition in the case of Bishal Jaiswal v. Asset Reconstruction Company (India) Ltd & Anr. the three-judge bench referred to the case of V. Padamakumar v. Stressed Assets Stabilization Fund for reconsideration. The latter’s verdict was decided by a five-judge bench in the appellate court without giving due consideration for the precedent laid down by the Supreme Court as well as various High Courts. One of the key reasons why new investments are not currently being made on the scale needed to encourage greater growth and improve jobs is the Indian debt overhang issue. Most debts in the current economy are in the steel, power and infrastructure sectors. The paper analyses the recent judgements by the NCLT, DRT and the Supreme Court regarding Section 238A of the Code, and the changing circumstances under which ARCs are operating along with their impact on the steel, power and infrastructure sectors.


A line of recent cases argued before the Supreme Court and different benches of the National Company Law Tribunal (“NCLT”) and the National Company Appellate Law Tribunal (“NCLAT”) have resulted in the articulation of a legal position that could soon drive an important part of the financial services industry out of business – Asset Reconstruction Companies (“ARC”). This has severe consequences for the future of credit flow in an economy already strapped for cash because of the COVID-19 pandemic and could throttle recovery just when the health-related concerns begin to alleviate.


In appreciating the legal quagmire before us, it is important to take a shallow dive into the world of banking finance. All banks are supposed to periodically demonstrate their solvency by testing available equity capital against their assets and liabilities. A loan where the debtor is no longer servicing at least the interest costs for a specified period of time becomes a non-performing asset. This period is specified by the Reserve Bank of India and is generally pegged at 90 days, but varies for certain loans which may be in more risky sectors of the economy. Regardless, once a loan is declared an NPA, its existence on a bank’s balance sheet drags down the required ratio of available equity to the asset-liability balance, thereby reducing the bank’s solvency margin and bringing it closer to the brink. Pertinent to remember is that banks regularly borrow vast sums of money from each other to settle transactions. These are short-term loans and therefore, average a high interest rate which too is linked to the solvency margins of a bank – akin to an individual’s credit score. A bank with a lower solvency margin would find the cost of raising this debt increase exorbitantly, to the point where it would be unable to settle its transactions at the end of a business day and render it bankrupt.

To remedy such a situation, banks are required by law to regularly “provision” bad loans. In plain speak, this means that the bank recognizes the loan as a loss and accordingly reduces its available equity, forcing itself to cut down on its liabilities, raise assets or raise fresh equity. RBI has legally mandated triggers where it can compel a bank with a critical solvency margin to stop lending altogether. Importantly, a provisioned loan is not a “write-off” meaning therefore that a bank can still continue recovery processes available under law – and most banks do so for a while. However, there comes a point in the recovery process where the cost-benefit balance no longer holds. At this point, the bank would ideally “write-off” the loan – a total loss. This is where ARCs come into the picture. They offer banks a last respite by buying off such loans at very inexpensive rates. As such, the bank is able to make some money on the loan and avoid expensive litigation. ARCs, on the other hand, buy bulk batches of such loans thereby hedging their chances of recovery.

This mechanism allows for sufficient liquidity in the system by periodically wiping off bad debt from a bank’s balance sheet for a value greater than the bank would have otherwise been able to realize from it. As such, they allow banks to remain solvent and continue their credit functions – which are imperative for the sustenance of our economy. However, for ARCs to perform this critical function, the risk of recovery needs to be manageable enough to provide them with a decent return in their business. Until recently, they were significantly aided in this through the Insolvency and Bankruptcy Code, 2016 (“IBC”).

After the enactment of IBC, ARCs have the option to file applications against errant corporate debtors under Section 7, as financial creditors. The time-bound mechanisms of IBC, coupled with the strict provisions of management control being transferred outside of the proprietors immediately after an application is accepted, provide a potent tool for recovery. The recent ruling of the NCLAT in V. Padmakumar v. Stressed Assets Stabilization Fund [1] threatens to derail it.

The Quagmire

The case of V. Padmakumar concerns the applicability of Sections 18 and 19 of the Limitation Act, 1963, (“Limitation Act”) to the IBC. Conventionally, Section 238A of the IBC prescribes that the provisions of the Limitation Act apply to the IBC as well. As such, Article 137 of the Limitation Act prescribes limitations for applications made under the various provisions of the IBC, including Section 7. The period of limitation under Article 137 is provided as 3 years from the date “when the right to apply accrues”. Section 18 of the Limitation Act provides that the period of limitation starts again each time a written acknowledgment of the debt is made by the debtor, provided that such acknowledgment is within the period of limitation. Similarly, Section 19 provides that the period of limitation starts again whenever the debtor makes full or part payment (or of interest) on an old debt, provided such payment is within the period of limitation.

Since a bank will only sell the debt to an ARC which it has substantially attempted to recover on its own, the period of 3 years is usually well past the time an ARC receives a debt. Since the IBC, ARCs had been relying on the fact that a balance sheet of a corporate debtor which notes down all debts – including those not being paid – continuously reset the clock on limitation under Article 137 by virtue of Section 18 of the Limitation Act, thereby giving the ARC the right to sue under Section 7 of the IBC at any point of time. However, this position was decisively overturned by V. Padmakumar, where a 5-member bench of the NCLAT has interpreted certain rulings of the Supreme Court to mean that Sections 18 and 19 of the Limitation Act do not apply to applications under IBC. Therefore, the ruling inhibits virtually all ARCs from invoking the IBC in their recovery process – robbing them of the most efficient legal process currently available and threatening to derail their entire business model.

The Curious Interpretation of V. Padmakumar and Babulal Gurjar

In Babulal, the Supreme Court was hearing an appeal against an order made by the National Company Law Appellate Tribunal (“NCLAT”), [2] which provided that an application made by a financial creditor u/S 7 of the Code was not time-barred despite the passage of more than 3 years from the date of default of the borrower (“impugned order”). The NCLAT’s decision, according to the impugned order, was based on the following two reasons:

1. The Code was enforced in 2016, as such, the period of limitation shall be calculated afresh from the date of enforcement of the Code– In this context, the NCLAT borrowed from the SC judgement in BK Educational to observe that pursuant to Section 238-A of the Code, any application filed under the Code shall be subject to the period of limitation prescribed under the Act.

  • The NCLT further held that the judgement in BK Educational provided for the application of Article 137 of the Act for defining the period of limitation. Furthermore, the NCLT went on to hold that since the Code was enforced post-2016, this period prescribed under Article 137 of the Act, should only be calculated from the date of enforcement of the Code.
  • It noted that this was the first reason for its ruling that the application was not time-barred. The NCLT also relied on its own judgement in Binani Industries [3] to note that applications moved under the Code were not classified as a suit for the purposes of First Division (Suits), Second Division (Appeals) and Part – 1 of Third Division (Applications) under the Limitation Act, 1963. As such, the only avenue left for determining limitation is Part – II of the Third Division, which contains only one residuary provision in Article 137. [4] 
  • In Babulal, while holding that the said provisions of the Limitation Act could not be called into account, the NCLAT also clarified that this did not forestall the possibility of a debt being contented as “not due” by the alleged debtor. [5] 

2. Application of 12-year limitation period on account of mortgage– The NCLAT in ¶29 and 30, noted that since the facts involved a mortgaged property, the limitation period of 12 years would apply to the debt themselves (the question of whether the debt is due) in accordance with Article 61(1)(b) of the Act, even though First Division doesn’t apply to the Code applications. This appears to be because the fact of the debt existing is related to the existence of the mortgage, and therefore default would require for the debt to be in existence in the first place. Accordingly, the NCLAT noted that the debt is also not barred by limitation and therefore the application was rejected. 

The SC’s view in Babulal – The SC in Babulal conducted a detailed review of the NCLAT’s reasoning and submissions made by the two parties. In this regard, a few important submissions and the Supreme Court’s response should be noted:  

The appellant used the ruling to contend that time-barred debts could not be provided a new lease of life simply because the Code came into force in 2016. (¶13.5).

  • On the contrary, the respondents attempted to use ¶21 to note that the SC explicitly allowed for the application of Section 18 to the calculation of limitation period for applications made under the Code. 
  • The Supreme Court clarified this position in Babulal, explaining that Jignesh Shah created a distinction between applications filed under the Code and suits or petitions filed under other laws. Relying on its ruling in Innoventive Industries the SC held that a “default” under the Code occurs when a debt becomes due and is not paid – as such, it is a one-time event – and it triggers the Code if the amount of debt is at least one lakh. Therefore, it is at this point (of a default), that the right of a financial creditor to proceed under Section 7 is triggered. This position, according to the SC, is reiterated in its ruling in Swiss Ribbons, [7] and BK Educational [8] as well.  
  • The appellants (corporate debtor) and the respondents (financial creditors), both relied on the SC ruling in Jignesh Shah and Anr. v. Union of India & Anr. [6], to support their respective positions. 
  • Based on this, the SC clarified that Jignesh Shah was continuing this distinction, when it noted that a suit for recovery is based on a cause of action, for which the period of limitation is prescribed under the relevant provisions of the Act. The SC further borrowed from its rulings in S. Pujari and Ors. [9] to draw a distinction between a wrongful act, and a continuing wrong – which was akin to default, and a cause of action, respectively.
  • On the other hand, an application under Section 7 of the Code is initiated when there is a default – which is different from a “suit”. Thus, while Section 18 of the Act can allow for a resetting of the limitation period for a “suit”, the limitation period triggered at default would not be altered and continue to be bound by the same provisions of Article 137.
  • For this reason, the SC noted that provisions of Section 18 and 19 of the Act cannot be used to reset the time for the purposes of Section 7 of the Code.  

The Supreme Court next considered the two reasons for holding that the application was not barred by limitation and rejected them summarily:  

  • On Reason 1 (enforcement date of the Code) – The SC pointed out that this was a clear error and derogation of the explicit guidance provided in BK Educational among other cases, all of which had held that the Code did not act to revive time-barred suits.
  • On Reason 2 (12-year period using Article 61(b) of the Act) – SC held this as an erroneous application of the law, since it defined whether a debt existed – and did not relate to “default” under Section 7 of the Code. 

Application to Facts: Based on the above-mentioned scheme detailed by the SC in Babulal, a clear distinction has been drawn by the court between a “cause of action” and a “default”. Since the latter is used under the Code, an application u/S 7 of the Code would end up being declared time-barred if it is filed more than 3 years after the first default by the borrower. However, the court’s reasoning has not been based on an analysis of the textual position under the Act.  

Where Babulal left some room for interpretation – the NCLAT in an earlier ruling in V. Padmakumar made it nearly impossible for lower tribunals to correct the course. While adjudicating this case the NCLAT considered the cases of Jignesh Shah v. Union of India [10], Gaurav Hargovindbhai Dave v. Asset Reconstructions Company (India) Ltd. [11], Vashdeo R. Bhojwani v. Abhyudaya Co-operative Bank Ltd. [12], BK Educational Services Private Limited v. Parag Gupta and Associates [13] and its own decision in V. Hotels Ltd. v. Asset Reconstruction Company (India) Ltd. [14]  In the case of Vasudev Bhojwani, the Supreme Court held that the Limitation Act is applicable to applications filed under Sections 7 and 9 of the IBC. Since under Section 7 of the IBC the right to sue accrues when a default occurs, applying Article 137 of the Limitation Act, the period of 3 years begins to run from the date of declaration of the account as a non-performing asset (“NPA”).

Gaurav Hargovindbhai Dave v. Asset Reconstruction Company (India) Limited [15] was crucial in determining the importance of the date of NPA. The NCLAT observed that for the purposes of computing the period of limitation for an application under Section 7 of the IBC, the right to sue occurs from the date of default. Accordingly, in this regard, the date of classification as an NPA is crucial. This judgement was also relied on in V. Padmakumar. In Jignesh Shah, the court observed that when time starts to pass, it can only be expanded in the manner set out in the Limitation Act. A recognition of liability under Section 18 of the Limitation Act, for instance, would undoubtedly prolong the limitation period, but a petition for restitution, which is a distinct and distinct action separate from the remedy of liquidation, would in no way change the limitation time within which the winding-up proceeding is to be filed, by somehow keeping the debt alive for the purpose of the winding-up proceeding. The majority decision in V. Padmakumar, made by an unprecedented 5-member NCLAT bench with a 4:1 majority, ruled that the balance sheet/annual return entry needed to be prepared to conform with legislative provisions could not be regarded as an acknowledgment under Section 18 of the Limitation Act. Notably, the majority opinion reiterated the decision of the two-member NCLAT bench. of the earlier case of Sh G Eswara Rao v. Troubled Assets Stabilisation Fund, also authored by Justice S J Mukhopadhaya, who in the V. Padmakumar decision had written the majority judgment.

Shakti Bhog v. State Bank of India [16] elaborated on the difference between Article 58 and 113 of the Limitation Act, stating that whereas in terms of Article 58 the period of three years is to be counted from the date when “the right to sue first accrues”, in terms of Article 113 thereof, the period of limitation would be counted from the date “when the right to sue accrues”. They emphasized further that the distinction between Article 58 and Article 113 is, thus, apparent in as much as the right to sue may accrue to a suitor in a given case at different points of time and, thus, whereas in terms of Article 58 the period of limitation would be reckoned from the date on which the cause of action arose first, in the latter the period of limitation would be differently computed depending upon the last day when the cause of action therefore arose.

Bishal Jaiswal upheld the view of V. Padmakumar, additionally stating that the reference to reconsider the V. Padmakumar decision is ‘incompetent’ and ‘no longer relevant’. The judgement considered V. Padmakumar’s position as settled, with no objections. The majority opinion in holding that balance sheet entries will not amount to an acknowledgment of liability for the purpose of limitation, has unsettled a position of law that various courts and tribunals have always accepted. However, in the case of Kesavan Namboodiri v. B S Radhakrishnan, where it was held that an entry under statutory coercion cannot be brought under the jurisdiction of Section 18 of the Limitation Act, there is a recent judgment of a single bench of the Kerala High Court as to whether statutory compulsion can obtain an otherwise legitimate recognition beyond the jurisdiction of Section 18 of the Limitation Act. Interestingly, the decision, which pertained to the mortgagor-mortgagee relationship, did not cite a single authority in support of the proposition. Notably, in the V. Padmakumar ruling, NCLAT neither quoted any decision in favor of the suggestion it referred to nor did it deem any of the decisions referred to in the preceding paragraphs to differentiate the judgments which were now the basis of the decision.

Interpreting the Limitation Act

Another challenge that arises from the above is how courts read the various provisions of the Limitation Act. The scheme of the statute therein is fairly simple, Sections 3-25 provide the substantive compendium of the Limitation Act, while the actual periods of limitation are delineated in Articles 1 through 137 divided into three divisions. The Third Division is further divided into Part A and Part B – the latter being home to Article 137. A curious thing about the Limitation Act is the interaction between divisions and the provisions. Section 3 of the Limitation Act provides that Sections 4 through 25 are aides to interpreting how the various Articles are supposed to be read. As such, it may be argued that they must all be read together and where the Code via Section 238A applies the provisions of the Limitation Act, they ought to apply in full.

However, the legal position that cases such as V. Padmakumar and Bishal Jaiswal seem to indicate is that certain sections of the Limitation Act can be selectively plucked out and made inapplicable. This would go against the express language of Section 3 of the Limitation Act which expressly requires all the provisions of the Limitation Act to be read alongside the Articles for a correct calculation of the period of limitation. In none of the cases we have discussed, have the courts undertaken a statutory analysis of the Limitation Act in this light. As such, an important aspect of the law has been missed.

Impact of ARCs on the Economy

The Ease of Doing Business Report, 2020 stated that India made resolving insolvency easier by promoting reorganization proceedings in practice. On the other hand, however, it has also made it tougher by not allowing dissenting creditors to receive as much under reorganization as they would receive in liquidation. In the late 1990s and early 2000s the banking industry was saddled with non-performing assets (NPAs). The Narasimham Committee I and II and the Andhyarujina Committee had proposed laws allowing banks and financial institutions to take ownership of and sell shares without court interference. Based on these recommendations, the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act was approved, which only secured borrowers. Banks will themselves adjudicate the course of action after the notice period (60 days) given to non-performing secured borrowers expires. The Act permits financial institutions to assume control of collateralized securities, maintain assets, sell or lease a portion or more of the borrower’s business.

In short, and without the infusion of additional international money, ARCs may be a qualitative part of the equation and, to a certain degree, a quantitative part. In specific, ARCs will provide investor input on NNPA valuations and provide consolidation alternatives to the debt overhang issue that is compounded by Indian legal procedures that are unnecessarily long. It is not easy to estimate the value of correct valuations, turnaround options plus quicker legal solutions.


The authors create the fact that the key argument for confusion in the views of the Adjudicating Authorities traces its origins back to Section 92 of the Companies Act, 2013, which mandates the filing of annual reports, after the thorough review of Indian and international jurisprudence pertaining to the acknowledgment of debt across the Balance Sheet. The writers recommend that the balance sheet has a strong evidentiary significance and that the company’s accurate and honest financial statements be considered to be presented, but the Appellate Tribunal erred in not considering the same. The jural relationship between the creditor and the debtor would also be influenced by such a faulty precedent which will place them in a situation that the debtor would take excessive advantage of the creditor. Generally, the prosecution is a last resort. Without going to court, any borrower would like to get paid. There will often be times where a default happens and the defaulty in writing accepts the debt and pleads for additional time to resolve the debt or to restructure the loan. Such duration may stretch past the initial restriction span of three years.

There are actual situations in which, if ample time is given, the defaulter succeeds to settle the unpaid debt. Such restructuring/extension of time is necessary when Section 18 covers borrowers and offers a new limitation date, of course under the initial limitation period when the defaulter recognizes the debt. If Section 18 is taken out of the question, everything will come to an end. Genuine situations where defaults may be fixed which lead to insolvency proceedings because the laws did not give the parties any more time to fix the problem.

About the Authors

Prashant Khurana is an attorney based out of Mumbai working with private equity and debt funds and in the domain of technology enabled services. He holds an LL.M., with specialization in Business Laws from the University of California – Los Angeles and undertakes work in structured finance and associated dispute resolution.

Sushruti Verma is a 4th Year Law Student at Jindal Global Law School. 


Views expressed are personal and do not reflect those of the institution with which the authors may be associated.

Editorial Team

Managing Editor: Naman Anand

Editors-in-Chief: Akanksha Goel and Aakaansha Arya

Senior Editor: Akanksha Goel

Associate Editor: Utkarsh Tyagi

Junior Editor: Adhya Sarna

Preferred Method of Citation 

Prashant Khurana and Sushruti Verma, “The Insolvency Code: Bankrupting ARCs” (IJPIEL, 29 July 2021)



[1] V. Padmakumar v. Stressed Assets Stabilisation Fund (SASF), Company Appeal (AT) (Insolvency) No. 57 of 2020, dated March 12, 2020, National Company Law Appellate Tribunal (India).

[2] Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries, (2019) 15 SCC 209 (India).

[3] Binani Industries Ltd v. Bank of Baroda & Anr., Company Appeal (AT) (Insolvency) No. 82 of 2018, dated November 14, 2018, National Company Law Appellate Tribunal (India).

[4] India Const, art. 137.

[5] Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries, (2019) 15 SCC 209 (India).

[6] Jignesh Shah v. Union of India, (2019) 10 SCC 750 (India).

[7] Swiss Ribbons Pvt. Ltd. v. Union of India, (2019) 4 SCC 17 (India).

[8] B.K. Educational Services Private Limited v. Parag Gupta And Associates, (2019) 11 SCC 633 (India).

[9] Yogeshkumar Jashwantlal Thakkar v. Indian Overseas Bank, Company Appeal (AT) (Insolvency) No. 236 of 2020, dated September 14, 2020, National Company Law Appellate Tribunal (India).

[10] Jignesh Shah v. Union of India, (2019) 10 SCC 750 (India).

[11] Gaurav Hargovindbhai Dave v. Asset Reconstruction Co. (India) Ltd., (2019) 10 SCC 572 (India).

[12] Vashdeo R Bhojwani v. Abhyudaya Co-operative Bank Ltd., (2019) 9 SCC 158 (India).

[13] B.K. Educational Services Private Limited v. Parag Gupta And Associates, (2019) 11 SCC 633 (India).

[14] V Hotels Ltd. v.  Asset Reconstruction Company (India) Ltd., Company Appeal (AT) (Insolvency) No. 525 of 2019, National Company Law Appellate Tribunal (India).

[15] Gaurav Hargovindbhai Dave v. Asset Reconstruction Co. (India) Ltd., (2019) 10 SCC 572 (India).

[16] State Bank of India v. Shakti Bhog Foods Limited, Civil Appeal No. 4536 of 2018, Supreme Court of India (India).

error: Content is protected !!