In the last one month, the Supreme Court has rendered three judgments1 that have settled the issue of applicability of statutory principles of the law of limitation on the proceedings initiated under the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as 'IBC'). First, the judgment in Sesh Nath Singh upheld the applicability of Section 14 of the Limitation Act on the insolvency proceedings initiated before the Adjudicating Authorities. Thereafter, in Laxmi Pat Surana, the applicability of Section 18 of the Limitation Act in relation to acknowledgment of liability was held to be applicable to the proceedings initiated under IBC.
Most recently, the much controversial majority opinion of NCLAT in V Padmakumar's case rendered on the issue whether entries made in the balance sheet can be treated as acknowledgment for the purpose of Section 18 of the Limitation Act has been set aside by the Supreme Court in Asset Reconstruction Company (India) Ltd v. Bishal Jaiswal and another.2
Also, the subsequent order of 5-member NCLAT bench3 refusing to adjudicate the question referred by the three-member Bench of NCLAT on the issue was set aside.
Issues dealt by the Supreme Court in Asset Reconstruction Company (India) Ltd v. Bishal Jaiswal
- Whether Section 18 of the Limitation Act, which extends the period of limitation depending upon an acknowledgement of debt made in writing and signed by the corporate debtor, is also applicable under Section 238A, given the expression "as far as may be" governing the applicability of the Limitation Act to the IBC.
- Whether an entry made in a balance sheet of a corporate debtor would amount to an acknowledgement of liability under Section 18 of the Limitation Act.
Supreme Court's findings
- The Supreme Court first adverted to the rationale for the enactment of Section 238A of IBC that makes the Limitation Act applicable to IBC proceedings and referred to the report of the Insolvency Law Committee of March 2018, which led to the introduction of Section 238A.4
- The Court observed that considering the Limitation Act applies only to courts, unless made statutorily applicable to tribunals, the Insolvency Law Committee was of the view that such Act should be made to apply to IBC as well, observing that though the IBC is not a debt recovery law, the trigger being "default in payment of debt" would render the exclusion of the law of limitation "counter-intuitive". Thus, it was made clear that an application to the IBC should not amount to resurrection of time-barred debts which, in any other forum, would have been dismissed on the ground of limitation.
- On the issue of applicability of Section 18 of the Limitation
Act, the court relied upon the following observations in its recent
Judgement in Sesh Nath Singh5:
"67...The IBC does not exclude the application of Section 6 or 14 or 18 or any other provision of the Limitation Act to proceedings under the IBC in the NCLT/NCLAT. All the provisions of the Limitation Act are applicable to proceedings in the NCLT/NCLAT, to the extent feasible. 68. We see no reason why Section 14 or 18 of the Limitation Act, 1963 should not apply to proceeding under Section 7 or Section 9 of the IBC. ....."
- The Court further relied upon its another recent judgment in
Laxmi Pat Surana that referred to
Babulal Gurjar's case and then
observed that Babulal Gurjar's case
had not ruled out the application of Section 18 of the Limitation
Act to the proceedings under the IBC. Laxmi Pat
Surana's case had further observed:
"36... After enactment of Section 238A of the Code on 06.06.2018, validity whereof has been upheld by this Court, it is not open to contend that the limitation for filing application under Section 7 of the Code would be limited to Article 137 of the Limitation Act and extension of prescribed period in certain cases could be only under Section 5 of the Limitation Act. There is no reason to exclude the effect of Section 18 of the Limitation Act to the proceedings initiated under the Code."
- On the second issue relating to an entry made in a balance sheet, the court relied upon many judgments6 indicating that an entry made in the books of accounts, including the balance sheet, can amount to an acknowledgement of liability within the meaning of Section 18 of the Limitation Act.
- After referring to the provisions of the Companies Act, 2013 showing statutory compliances to be made in relation to filing of financial statement, which includes the balance sheet, the Supreme Court further observed that "what is of importance is that notes that are annexed to or forming part of such financial statements are expressly recognised by Section 134(7) [of the Companies Act]. Equally, the auditor's report may also enter caveats with regard to acknowledgements made in the books of accounts including the balance sheet."
- The Supreme Court then observed:
"22.... A perusal of the aforesaid would show that the statement of law contained in Bengal Silk Mills (supra), that there is a compulsion in law to prepare a balance sheet but no compulsion to make any particular admission, is correct in law as it would depend on the facts of each case as to whether an entry made in a balance sheet qua any particular creditor is unequivocal or has been entered into with caveats, which then has to be examined on a case by case basis to establish whether an acknowledgement of liability has, in fact, been made, thereby extending limitation under Section 18 of the Limitation Act."
The Supreme Court relied upon many other judgments7 dealing with the issue that the admission or acknowledgment in the balance sheet may extend the period of limitation, irrespective of the fact that it is not addressed to the creditor.
On the above reasoning, the Supreme Court has set aside the majority decision of the Full Bench of NCLAT in V. Padmakumar. It further observed that the minority judgment of Justice A.I.S. Cheema has reached the correct conclusion.
As insolvency law practitioners, we were observing a void being created on the applicability of the principles of the law of limitation on IBC proceedings. The judgments in Bishal Jaiswal, Sesh Nath Singh and Laxmi Pat Surana seem to have cleared the said void.
Besides settling the above, they have also answered some very basic issues on the applicability of Limitation Act on insolvency proceedings. In Sesh Nath Singh, the Supreme Court has even held that delay can be condoned irrespective of whether there is any formal application, if there are sufficient materials on record disclosing sufficient cause for the delay. This clarifies that a formal application for condonation of delay may not be needed in cases where sufficient cause for making delay is revealed from the record.
It had been observed that some benches were insisting on filing an application under Section 5 of the Limitation Act even for availing the benefit of Section 18 or Section 19 of the Limitation Act. The judgments have, in our opinion, made it clear that the question of condonation of delay will not arise if the benefit of Section 18 or 19 is given to the applicant as the period of limitation would run from such acknowledgment or part-payment.
1. Asset Reconstruction Company (India) Ltd v. Bishal Jaiswal and another Civil Appeal No. 323/2021, Sesh Nath Singh v. Baidyabati Sheoaphuli Co-operative Bank Ltd Civil Appeal No. 9198 of 2019 (decided on 22.03.2021) and Laxmi Pat Surana v. Union Bank of India, Civil Appeal No. 2734 of 2020.
2. Civil Appeal No. 323/2021. The refusal to entertain the reference
3. Order dated 22.12.2020.
4. which were also referred in the case of Jignesh Shah v. Union of India (2019) 10 SCC 750.
5. Sesh Nath Singh v. Baidyabati Sheoaphuli Co-operative Bank Ltd Civil Appeal No. 9198 of 2019 (decided on 22.03.2021).
6. Mahabir Cold Storage v. CIT, 1991 Supp (1) SCC 402; A.V. Murthy v. B.S. Nagabasavanna, (2002) 2 SCC 642; S. Natarajan vs. Sama Dharman, Crl. A. No. 1524 of 2014 (decided on 15.07.2014); Bengal Silk Mills Co. v. Ismail Golam Hossain Ariff, AIR 1962 Cal 115 [Calcutta High Court]. Supreme Court further held that the judgment in Vijayalakshmi v. Hari Hara Ginning and Pressing, Nandigaon, OS A No. 40 of 1998 (decided on 03.03.1999) (Karnataka HC) does not lay down the correct law.
7. South Asia Industries (P) Ltd. v. General Krishna Shamsher Jung Bahadur Rana, 1972 SCC OnLine Del 185 : ILR (1972) 2 Del 712 (Delhi HC); L.C. Mills v. Aluminium Corpn. of India Ltd., (1971) 1 SCC 67 : AIR 1971 SC 1482; Hegde & Golay Limited v. State Bank of India, 1985 SCC OnLine Kar 428 : ILR 1987 Kar 2673; Bhajan Singh Samra v. M/s. Wimpy International Ltd (2011) 185 DLT 428; Ambika Mills Ltd. Ahmedabad v. CIT Gujarat (1964) 54 ITR 167; Shahi Exports Pvt. Ltd. v. CMD Buildtech Pvt. Ltd., (2013) 202 DLT 735; Krishnan Assari v. Akilakerala Viswakarma Maha Sabha [1980 KLT 515 (DB)]; Agni Aviation Consultants v. State of Telangana, 2020 SCC OnLine TS 1462 : (2020) 5 ALD 561, (Telangana HC).
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