India: Acknowledgment Of Debt In Balance Sheet Can Result In Extension Of Limitation Period Under Section 18 Of The Limitation Act.

The Supreme Court in its recent judgment settled a live issue pertaining to the interplay between the Insolvency and Bankruptcy Code, 2016 ("Code") and the Limitation Act, 1963 ("Limitation Act"). The primary issue the Supreme Court was tasked with in the matter titled, 'Asset Reconstruction Company (India) Limited v. Bishal Jaiswal & Anr.'¹, was to adjudicate whether an entry made in the balance sheet of a corporate debtor would amount to an acknowledgment of liability under Section 18 of the Limitation Act.

Background

Corporate Power Ltd. ("Corporate Debtor") availed a loan from various lenders in 2009 for the purpose of setting up a thermal power project in Jharkhand. State Bank of India, one of such lenders, declared the Corporate Debtor as a non-performing asset and the numerous lenders assigned the debts owed to them by the Corporate Debtor to the Asset Reconstruction Company (India) Limited ("Appellant"). Subsequently a section 7 application under the Code was filed by the Appellant before the NCLT. This application was admitted and held to be within limitation, observing that the balance sheets of the Corporate Debtor acknowledged the debt, thereby extending the period of limitation as envisaged under Section 18 of the Limitation Act.

The Corporate Debtor preferred an appeal before the National Company Law Appellate Tribunal ("NCLAT"), placing reliance on an earlier judgment of the NCLAT, i.e., 'V. Padmakumar v. Stressed Assets Stabilization Fund'² ("V. Padmakumar"), which specifically held that entries in balance sheets would not amount to acknowledgement of debt for the purpose of extending limitation under Section 18 of the Limitation Act.

After a preliminary hearing, a three-member bench of the NCLAT passed an order dated 25 September 2020, doubting the correctness of the decision in V. Padmakumar and referred the matter to the acting chairman of the NCLAT to constitute a bench of coordinate strength to reconsider the judgment in V. Padmakumar.

Consequently, a five-member bench of the NCLAT, vide the impugned judgment dated 22 December 2020, refused to adjudicate the question referred, stating that the reference to the bench was itself incompetent. Thus, the present appeal to the Supreme Court.

Contentions of the parties

The Appellant contended that the majority judgment of the full bench of the NCLAT in V. Padmakumar was clearly per incuriam, as it had not considered numerous binding precedents of the Supreme Court and that the impugned order was wholly incorrect in rejecting the reference out of hand at a preliminary stage. The Appellant drew support from numerous judgements of the Supreme Court which had ruled on the applicability of Section 238A and Section 18 of the Limitation Act to the Code and further submitted that numerous High Courts were of the same opinion as the NCLT, as to entries in balance sheets constituting acknowledgement as per Section 18 of the Limitation Act. The Appellant further stated that the fact that a balance sheet has to be filed under compulsion of law does not mean that an acknowledgement of debt has also to be made under compulsion of law.

The Corporate Debtor on the other hand, placed reliance on judgments of the Andhra Pradesh High Court>³ and the Guwahati High Court⁴ which supported the view adopted by the NCLAT in its decision in V. Padmakumar. The Corporate Debtor further submitted that the applicability of Section 18 would only extend to recovery proceedings and not proceedings under the Code, which are not meant to be recovery proceedings at all. Finally, it was submitted that there was no acknowledgment in the balance sheets in light of caveats entered by way of notes in the auditor's report.

Findings

The Supreme Court adverted to the rationale for the enactment of Section 238A⁵, so as to make the Limitation Act statutorily applicable to tribunals and to ensure that an application to the Code should not amount to resurrection of time-barred debts which, in any other forum, would have been dismissed on the ground of limitation. It was observed that the question as to applicability of Section 18 of the Limitation Act under Section 238A of the Code was no longer res integra, with the court having applied the provisions of Section 14 and 18 of the Limitation Act to the Code in its recent judgments.⁶

The Supreme Court then adverted to the question, whether an entry in the balance sheets of the Corporate Debtor would amount to an acknowledgment as envisaged under Section 18 of the Limitation Act. The Court took note of numerous judicial precedents⁷ in this regard, with specific reliance on the judgment in Bengal Silk Mills Co. v. Ismail Golam Hossain Ariff⁸ ("Bengal Silk Mills"), wherein the Supreme Court observed that an admission of indebtedness in a balance sheet is sufficient to construe an admission as under Section 18 of the Limitation Act.

The Supreme Court noted that as per Bengal Silk Mills, even though the filing of a balance sheet is a compulsion of law, the acknowledgment of a debt is not necessarily so. It was observed that the Bengal Silk Mills judgment recognized that it is common practice to have an entry in the balance sheet with notes annexed to or forming part of such balance sheet, or in the auditor's report forming part of the balance sheet, indicating that such entry would not amount to an acknowledgment of debt for reasons stated therein.

The Supreme Court then drew support from specific provisions of the Companies Act, 2013 to hold that the statement of law contained in Bengal Silk Mills is in fact correct, that while law mandates preparation of balance sheets, there is no compulsion in law to make any particular admission.

The Supreme Court thus observed that entries in the balance sheets of a corporate debtor would amount to an acknowledgment as envisaged under Section 18 of the Limitation Act. However, this finding would depend on the facts of each case as to whether such an entry qua any particular creditor is unequivocal or has been entered into with caveats, which then has to be examined to establish existence of an acknowledgement of liability, thereby extending limitation under Section 18 of the Limitation Act.

Accordingly, the Supreme Court set aside the majority judgment in V. Padmakumar dated 12 March 2020 as bad in law.

Footnotes

1 Civil Appeal 323 of 2021

2 Company Appeal (AT) (Insolvency) No. 57 of 2020 (decided on 12 March 2020)

3 Vijayalakshmi v. Hari Hara Ginning and Pressing, Nandigaon [OS A No. 40 of 1998 (decided on 03.03.1999)]

4 Ajit Chandra Bagchi v. Harishpur Tea Company (P.) Ltd. [1990 SCC OnLine Gau 24]

5 238A. Limitation - The provisions of the Limitation Act, 1963 (36 of 1963) shall, as far as may be, apply to the proceedings or appeals before the Adjudicating Authority, the National Company Law Appellate Tribunal, the Debt Recovery Tribunal or the Debt Recovery Appellate Tribunal, as the case may be.

6 Sesh Nath Singh v. Baidyabati Sheoraphuli Co-operative Bank Ltd. (Civil Appeal No. 9198/2019); Laxmi Pat Surana v. Union Bank of India (Civil Appeal No. 2734/2020)

7 Mahabir Cold Storage v. CIT [1991 Supp (1) SCC 402]; A. V. Murthy v. B. S. Nagabasavanna [(2002) 2 SCC 642]

8 AIR 1962 Cal 115

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.