This article is written by Siddharth Walawalkar and Srishti Agrawal.

Introduction

Recently, a three-judge Bench of the Supreme Court, in Asset Reconstruction Company (India) Limited v. Bishal Jaiswal^[1], settled the issue of whether entries made in balance sheets amount to acknowledgement of debt under Section 18 of the Limitation Act, 1963 (“Limitation Act”).

The Court, concurring with the law laid down by the Calcutta High Court in Bengal Silk Mills Co. v. Ismail Golam Hossain Ariff^[2], observed that “…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 Court also cited with approval a catena of judgments that refer to Bengal Silk Mills Co.^[3].

This decision was rendered in an appeal assailing the judgment of a five-member Bench of National Company Law Appellate Tribunal (“NCLAT”), which had turned down a reference to reconsider the judgment of another five-member Bench of the NCLAT in V. Padmakumar v. Stressed Assets Stabilization Fund^[4], which, prior to this judgment, was the latest authority on the issue.

In V. Padmakumar^[5], the NCLAT, by a 4:1 majority, had held that since the filing of balance sheet or annual return was mandatory under Section 92(4) of the Companies Act, 2013 (“Companies Act”), a disclosure made therein could not be treated as an acknowledgement under Section 18 of the Limitation Act and to hold otherwise would mean that no limitation would be applicable. The majority’s decision was in consonance with the NCLAT’s previous rulings in Akram Khan v. Bank of India Limited^[6] and G. Eswara Rao v. Stressed Assets Stabilization Fund^[7]. Justice A.I.S Cheema disagreed with the majority’s decision, pointing out that while the law required preparation and filing of financial statements and annual returns, there was no compulsion regarding their contents disclosing acknowledgement of debt and hence, the provisions of the Companies Act could not be construed as coercive. The Supreme Court, in Asset Reconstruction Company (India) Limited^[8], has set aside the majority’s verdict in V. Padmakumar^[9] and upheld the minority decision of Justice A.I.S Cheema.

In this article, we briefly examine the facts of the case, the relevant legislation and various judicial pronouncements that have emerged over the years leading up to this verdict, some of which were also relied upon by the Supreme Court while adjudicating this matter.

Facts of the Case

In 2009, Corporate Power Limited (“the Corporate Debtor”) availed credit facilities from various lenders in order to set up a thermal power project in Jharkhand, but defaulted on its payment obligations. The lenders issued loan recall notices against the Corporate Debtor in 2015 and subsequently assigned the debts owed to them to Asset Reconstruction Company (India) Limited, which in turn issued a notice under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (“SARFAESI Act”) to the Corporate Debtor and subsequently took actual physical possession of the project assets of the Corporate Debtor under the SARFAESI Act.

Thereafter, in 2018, Asset Reconstruction Company (India) Limited filed an Application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) before the National Company Law Tribunal, Kolkata (“NCLT”) for initiation of corporate insolvency resolution process against the Corporate Debtor. The Application was admitted by the NCLT, observing that the balance sheets of the Corporate Debtor, wherein it acknowledged its liability, were signed before the expiry of three years from the date of default, and entries in such balance sheets would act as acknowledgements of the debt due for the purposes of Section 18 of the Limitation Act. In an appeal before the NCLAT, the Corporate Debtor relied upon V. Padmakumar^[10], the correctness of which was doubted by the three-member Bench of the NCLAT. After a preliminary hearing, the Bench referred the matter for reconsideration to a larger bench^[11], which refrained from deciding the issue on merits, thereby leading to this Appeal.

Section 18 of the Limitation Act

The Limitation Act provides for the bar of limitation on the institution of legal proceedings in India. No suit, appeal or application filed after the expiration of the period prescribed in the Schedule to the Limitation Act may be entertained. However, such expiration is subject to certain exceptions, one of them being contained in Section 18, which provides for extension of the limitation period.

The essential ingredients for invocation of this provision are: (i) there must be an acknowledgement of liability in respect of a property or a right; (ii) the acknowledgement must be in writing, signed by the party against whom such right or property is claimed (or by any person through whom he derives his title or liability); and (iii) the acknowledgement must be made before the expiration of the prescribed limitation period.

Certain other essential requirements, prescribed by the Supreme Court in Khan Bahadur Shapoor Fredoom Mazda v. Durga Prosad Chamaria^[12], are that the acknowledgement must (i) relate to a subsisting liability; (ii) indicate the existence of a jural relationship between the parties; and (iii) be intended, either expressly or impliedly, to admit that jural relationship.

Judicial Interpretation with respect to Acknowledgement of Debt in Balance Sheet

Prior to this verdict, the Supreme Court had not ruled conclusively on the issue. However, it had touched upon it briefly in Mahabir Cold Storage v. Commissioner of Income Tax, Patna^[13], wherein it held that “entries in the books of accounts… would amount to an acknowledgement of the liability… within the meaning of Section 18 of the Limitation Act, 1963 and extend the period of limitation for the discharge of the liability as debt”. No opinion was expressed on whether this principle would extend to balance sheets as well. However, the Delhi High Court, in ESPN Software India (P) Ltd. v. Modi Entertainment Network Ltd.^[14], held that “[a]dmission in balance-sheet is per-se an admission of liability and it is not equivalent to an entry in the books of account…”.

Subsequently, in A.V. Murthy v. B.S. Nagabasavanna^[15], the Supreme Court held that “[i]f the amount borrowed by the respondent is shown in the balance sheet, it may amount to acknowledgement and the creditor might have a fresh period of limitation from the date on which the acknowledgement was made.” The Court, however, refused to express a final view.

Besides the Supreme Court, the issue has also come up before several High Courts. Some notable decisions have been discussed below.

The Calcutta High Court, in Bengal Silk Mills Co.^[16], exhaustively dealt with the issue, holding that while there was a compulsion to prepare a balance sheet, there was no compulsion to make any particular admission. An honest admission of the company’s liability in a balance sheet, though made in discharge of statutory duty, was nevertheless a conscious and voluntary admission of subsisting liability, made with the intention to continue the jural relationship of the debtor and the creditor. It was a definite representation of a present intention to keep the liability alive until it is lawfully determined by payment or otherwise. Therefore, such an admission could not be taken out of the purview of Section 18 of the Limitation Act merely on the ground that it was made under a compulsion of law. It was also held that the acknowledgment of debt need not be made to the creditor, nor need it amount to a promise to repay the debt, in order for it to extend limitation.

Subsequently, the Calcutta High Court, in Re Pandam Tea Co. Ltd.^[17], drawing a corollary to Bengal Silk Mills Co.^[18], held that financial statements must be read along with the statement of the directors made to shareholders as directors’ report in order to discern their true meaning and purport.

The Delhi High Court, in The Commissioner of Income Tax v. Jain Exports Pvt. Ltd.^[19], held that an assessee company, having reflected an amount as outstanding in its balance sheets successively over the years, could not defend any claim made against it on behalf of the liquidator regarding the said amount. The decision of the Bombay High Court in Ultramatix  Systems Pvt. Ltd. v. State Bank of India^[20], wherein it was held that “the statement contained in the balance sheet and profit and loss account of the petitioner company would be an admission of its liability, unless subsequent balance sheets were filed to show that either the amounts have been paid or were not due and payable and/or any other material was produced to hold otherwise” is of relevance here.

The Delhi High Court, in Shahi Exports Pvt. Ltd. v. CMD Buildtech Pvt. Ltd.^[21] considered it a “well-established position” that an entry made in a company’s balance sheet would amount to an acknowledgement of debt and would have the effect of extending the period of limitation. It also briefly referred to the Court’s decision in Bhajan Singh Samra v. Wimpy International Ltd.^[22], which compiles all the relevant authorities on the issue.

In a departure from the otherwise unanimous position taken by all other High Courts, the Andhra Pradesh High Court, in Vijayalakshmi v. Hari Hara Ginning and Pressing^[23] held that merely showing a debt in balance sheet did not “prima facie” amount to an acknowledgement in terms of the Limitation Act. Not only that, the Court also expressed its doubts as to the correctness of the law laid down by the Karnataka High Court in State Bank of India v. Hegde & Golay Ltd.^[24]. The Vijayalakshmi^[25] decision was reinforced by the Andhra Pradesh High Court in Walnut Packaging Pvt. Ltd. v. The Sirpur Paper Mills Ltd.^[26], wherein it held that “when the very debt is disputed in a bona fide manner, mentioning in balance sheet does not amount to acceptance or admitting debt.”

Conclusion

The issue of the consequences of admission of liability in a balance sheet is of great importance and has widespread implications, particularly in the context of the IBC, where creditors heavily rely upon the corporate debtor’s balance sheet to prove the existence of debt as well as to seek the benefit of Section 18 of the Limitation Act. The decision of the NCLAT in V. Padmakumar^[27] had created much debate on the issue. The Supreme Court’s decision in Asset Reconstruction Company (India) Limited^[28] has, thus, settled the matter conclusively.

References

[1] MANU/SC/0279/2021.

[2] AIR 1962 Cal 115.

[3] Ibid.

[4] [2020] 221 Comp Cas 153.

[5] Ibid.

[6] [2020] 218 Comp Cas 111.

[7] [2020] 219 Comp Cas 231.

[8] Supra 1, at 1.

[9] Supra 4, at 1.

[10] Ibid.

[11] Bishal Jaiswal v. Asset Reconstruction Company (India) Limited. [2020] 222 Comp Cas 508.

[12] AIR 1961 SC 1236.

[13] AIR 1991 SC 1357.

[14] [2012] 173 Comp Cas 465 (Delhi).

[15] AIR 2002 SC 985.

[16] Supra 2, at 1.

[17] AIR 1974 Cal 170.

[18] Supra 2, at 1.

[19] ILR (2013) IV Delhi 3156.

[20] 2007 (4) MhLJ 847.

[21] [2013] 181 Comp Cas 111 (Delhi).

[22] [2012] 173 Comp Cas 455 (Delhi).

[23] [1999] 96 Comp Cas 723.

[24] ILR 1987 Kar 2364.

[25] Supra 21.

[26] [2008] 144 Comp Cas 454 (AP).

[27] Supra 4, at 1.

[28] Supra 1, at 1.

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