India: Acknowledgement Of Debt

Last Updated: 4 July 2017
Article by Snehali Karkera and Sana Khan

'Acknowledgement' generally means acceptance or admission of something that exists. Section 18 of the Limitation Act, 19631 uses the term 'acknowledgement' to mean an admission of an existing liability in lieu of which the period of limitation is extended. A perusal through section 18 of the Limitation Act indicates certain conditions to be fulfilled in order to emphasize acknowledgement. They are:

  1. That the acknowledgement of liability must be in writing.
  2. That the acknowledgement of liability must be made before expiry of limitation period for filing the suit. If limitation has already expired, it would not revive under section 18 of the Limitation Act2.
  3. That the acknowledgement of liability must be unqualified3 and must be in unambiguous, clear terms4.
  4. That the acknowledgement must be signed by the person or his authorised agent admitting liability5.

It may be clarified that 'acknowledgement' under section 18 of the Limitation Act and 'promise to pay' under section 25(3) of the Contract Act, 1872 are different even though both have the effect of creating a fresh limitation period. Where section 18 grants a fresh period of limitation only in cases where acknowledgement is before expiry of limitation period; section 25(3) comes to the rescue in cases where period of limitation has already expired6. However, can we treat an acknowledgement of liability as a promise to pay? In affirmatively answering the question the Delhi High Court has held that any written acknowledgment after the confirmation of the balance amount can safely be treated as a promise to pay and not mere acknowledgement7.

It is to be noted that an acknowledgement of liability may be unilateral or bilateral8. A unilateral acknowledgment would, in most cases, be more reliable and convincing, because if the debtor makes a conditional or unconditional acknowledgment in the absence of a creditor, it cannot be urged by him as in the case of a bilateral agreement that it was obtained by any kind of fraud, coercion, threat, inducement or promise9.

Effect of acknowledgement in case of Guarantee:

An acknowledgment by a principal-debtor does not bind the surety10 but it has also been held that acknowledgements by the principal-debtor also keep the limitation saved against the surety11. In any case, where the surety has specifically empowered the principal-debtor to give consent on behalf of the surety in respect of all matters concerning the debt, the acknowledgement of liability given by the principal-debtor is binding on the surety, even though he has not signed the acknowledgements12.

Documents that constitute 'acknowledgement' vis-à-vis section 18 of the Limitation Act:

  1. E-mails acknowledging the debt constitute a valid and legal acknowledgement of debt though not signed as required under Section 18 of the Limitation Act13. If an acknowledgment is sent by an 'originator' to the 'addressee' by e-mail, without any intermediary, it amounts to electronic communication by e-mail which is an alternative to the paper based method of communication and is legally recognized by the Information Technology Act, 2000.
  2. Debentures are documents which either create debt or acknowledge it14. In modern commercial usage, a debenture denotes an instrument issued by the company, normally - but not necessarily - called on the face of it a debenture, and providing for the payment of, or acknowledging the indebtedness in, a specified sum, at a fixed date, with interest thereon. It usually--but not necessarily--gives a charge by way of security, and is often--though not invariably--expressed to be one of a series of like debentures15. Therefore, debentures are 'acknowledgment' under the purview of section 18 Limitation Act, 1963.
  3. Balance sheets are an admission of indebtedness and sufficient acknowledgment under the Indian Limitation Act16. The limitation period is calculated from the date it is signed17. In the case of a company, Section 215(i)(ii) of the Indian Companies Act, 1956 requires that every balance sheet shall be signed on behalf of the Board of Directors by the managing agent, secretaries and treasurers, manager or secretary, if any, and by not less than two directors of the company one of whom shall be a managing director where there is one. Section 133 (i) (ii) of the Indian Companies Act, 1913 also provided that the balance sheet should be signed by two directors or, when there were less than two directors, by the sole director and by the manager or managing agent (if any) of the company. Without such authentication, an admission of liability in a balance sheet will not be authorised and will not amount to an acknowledgment of liability within the meaning of Section 19 of the Limitation Act, 190818.
  4. Cheque given by a debtor to pay his dues is an acknowledgement, even though the Cheque is dishonoured19.
  5. An acknowledgement of a payment made in the written statement in an earlier suit operates as an acknowledgement within the meaning of Section 18 of the Limitation Act20.
  6. In a suit for redemption of a mortgage, acknowledgement of liability must be made by the mortgagee whereas in a suit for foreclosure of mortgage, acknowledgement muse b made by the mortgagor21. This reflects that an acknowledgement must be made by the person against whom the liability is sought.
  7. An insufficiently stamped document which contains an admission of liability can be relied upon only for the purpose of extending limitation period22.

There are documents which do not constitute an acknowledgement of liability under the Limitation Act. Issuance of TDS certificate does not amount to the acknowledgment of liability23 as TDS certificate is primarily to acknowledge the deduction of tax at source. Also, C – Forms are not due acknowledgement of debt24 as there is no acknowledgement of a present and subsisting liability. This is because no intention to acknowledge a liability can be inferred from the contents of the C form. Also, one cannot establish a jural relation of debtor and creditor from the contents of the C form. Similarly, a letter in reply to a demand notice cannot be held as acknowledgment as long as it does not admit the liability.

Date from which limitation period is calculated

S. 18(1) of Limitation Act, 1963 provides that the fresh period of limitation shall be computed from the time when the acknowledgment was so signed. In view of Section 12(1) of the Limitation Act and Section 9(1) of General Clauses Act, 1897 it was held that the day on which acknowledgment is made will have to be excluded in computing the period of limitation25. In case of a minor, where an acknowledgement is made in favor of a minor, then the fresh period of limitation is to be computed from the date when the plaintiff attains majority26.

Conclusion:

Limitation bars the remedy; it does not extinguish the right. Therefore, provisions under section 18 of the Limitation Act aid in restoring such rights.

Footnotes

1. Section 18: Effect of acknowledgement in writing:

(1) Where, before the expiration of the prescribed period for a suit of application in respect of any property or right, an acknowledgement of liability in respect of such property or right has been made in writing signed by the party against whom such property or right is claimed, or by any person through whom he derives his title or liability, a fresh period of limitation shall be computed from the time when the acknowledgement was so signed.

(2) Where the writing containing the acknowledgement is undated, oral evidence may be given of the time when it was signed; but subject to the provisions of the Indian Evidence Act, 1872, oral evidence of its contents shall not be received.

2. Sampuran Singh & Ors. Vs. Niranjan Kaur & Ors. AIR 1999 SC 1047

3. Syndicate Bank vs. R. Veeramma (2003) 2 SCC 15

4. Ghulam Murtaza vs Mt. Fasiunnissa Bibi AIR 1935 All 129, 152 Ind Cas 370

5. Ibid

6. Sama Dharman vs. S. Natarajan 2013 ALLMR(Cri) 225

7. State Bank Of India vs Kanahiya Lal & Anr RSA No. 248 / 2015 decided on 2nd May, 2016

8. Jeevraj And Anr. vs Lalchand And Ors. AIR 1969 Raj 192

9. Ibid

10. Hazara Singh Gujjur Singh vs. Bakhish Singh Mula Singh AIR 1962 Punj 495

11. Pollock & Mulla 'The Indian Contract Act, 1872' 14th Edition Pg. 1398-1399

12. Ibid and R. Lilavati vs. Bank of Baroda AIR 1987 Kant 2

13. Sudarshan Cargo Pvt. Ltd vs. M/S Techvac Engineering Pvt Ltd. [C.O.P. No.11/2013 Decided: 25.06.2013]

14. Commissioner Of Income-Tax vs Cochin Refineries Ltd. 1983 142 ITR 441 Ker

15. Palmer's Company Law, 20th Edn., pp. 367-368

16. Bengal Silk Mills Co. vs Ismail Golam Hossain Arif AIR 1962 Cal 115, 65 CWN 856

17. Vijaya Kumar machinery & Electrical Stores vs. Alaparthi LakshmiKanthamma [1969] 74 ITR 224

18. Babulal Rukmanand vs. Official Liquidator, Bharatpur Oil Mills Pvt. Ltd. AIR 1968 Raj 214

19. Hindusthan Apparel Industries vs. Fair Deal Corporation AIR 2000 Guj 261 (FB)

20. C. K. Xavier vs. S. Kasi AIR 1990 Ker 271

21. Kanakamma vs. B.Banerjee Babu AIR 2010 Ker 136

22. Kempegowda vs. Mahalingaiah AIR 1972 Mys 152

23. Actal vs. India Infoline Ltd. [Decided on 9.10.2012 Bombay High Court]

24. Taipack Limited and Ors. vs. Ram Kishore Nagar Mal 2007 (3) ARBLR 402 Delhi

25. Someshwar Nilakhe v/s. Nivrutti Gholave AIR 1973 BOM 147

26. Venkataramayyar v. Kothandaramayyar, [13 Mad. 135]

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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