The Impact Of Accounting Entries On Limitation Periods Under The Ibc Asset Reconstruction Company (India) Limited V Bishal Jaiswal & Anr1
According to §18 of the Limitation Act 1963, an acknowledgment of liability in writing before the expiry of the limitation period will reset the limitation clock to the date of the acknowledgment. The Supreme Court has held that entries in the books of account of a company, including a balance sheet, can amount to the acknowledgement of a debt and so reset the limitation period under §18.
The Supreme Court judgment overturns the contrary decision of a 5-Judge Bench order of the National Company Law Appellate Tribunal (NCLAT) in V Padmakumar v Stressed Assets Stabilisation Fund2 where, by a 4:1 majority, the NCLAT held that balance sheets entries do not amount to the acknowledgment of a debt and so would not extend limitation under §18.
The Appellant filed an IBC application before the National Company Law Tribunal (NCLT) on the strength of balance sheet entries made by the Respondent recording an amount of c. ₹6,000 crores/c. US$809m owed to it. The NCLT admitted the application and this decision was appealed to the NCLAT in reliance on V Padmakumar. A 3-Judge Bench of the NCLAT made a reference to the Acting Chairperson of the NCLAT to reconsider V Padmakumar. A 5-Judge Bench of the NCLAT refused to reconsider the earlier decision and the Appellant therefore appealed to the Supreme Court.
Supreme Court of India
The Supreme Court held:
- §238A of the IBC makes the provisions of the Limitation Act applicable to proceedings before the NCLT and the NCLAT. §18 of the Limitation Act is therefore applicable.
- There are a catena of judgments of various High Courts and the Supreme Court which have held that entries made in books of account, including a balance sheet, can amount to an acknowledgment of liability for the purposes of 18.
- While filing of a balance sheet is mandatory, and provisions of the Companies Act 2013 require certain particulars to be included, "the acknowledgment of a debt is not necessarily so. In fact, it is not uncommon to have an entry in balance sheet with notes annexed to or forming part of such balance sheet, or in the auditor's report, which must be read along with the balance sheet, indicating that such entry would not amount to an acknowledgment of debt for reasons given in the said note." As stated in Bengal Silk Mills3, the compulsion to prepare a balance sheet is not a compulsion to make an admission.
- Whether the requirements of 18 have been satisfied will depend on the nature of the entries and the qualifications made to the accounting entries.
1 Judgment dated 15 April 2021 passed by the Supreme Court of India in Civil Appeal No 323 of 2021
2 2020 SCC OnLine NCLAT 417
3 Bengal Silk Mills Co v Ismail Golam Hossain Ariff 1961 SCC OnLine Cal 128
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