This article is written by Sunkara Vishnu Ameya, pursuing Certificate Course in National Company Law Tribunal Litigation from LawSikho.
The Insolvency Bankruptcy Code, 2016 (IBC) undoubtedly brought a sea of change in the area of insolvency and bankruptcy from the erstwhile Sick Industrial Companies Act. The aim of IBC is to resolve and revive the corporate debtor in a timely mechanism and equitably balance the interests of all the stakeholders. However, the IBC being a special law prevails over other legislation which is repugnant to it. This has brought in many questions of law like the applicability of other laws like the Limitation Act, Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) and the Prevention of Money Laundering Act, 2002 (PMLA). Further, the Adjudicating Authorities (NCLT) under the IBC and the Companies Act, 2013 under the NCLT Rules are not bound by procedural laws like the CPC and the Limitation Act.
Under Section 18 of the Limitation Act; when a repugnant acknowledgement of liability has been made in writing signed by the party against whom such property or right is claimed, a fresh period of limitation shall be computed from the time such an acknowledgement is made.
Under Section 129(1) of The Companies Act, 2013 all companies are bound to prepare financial statements which give a true and fair view of the financial affairs of the company including the profits, losses, assets and liabilities of the company.
Since the financial statements are on record in writing and under the common seal of the company, the question arose whether the balance sheet being an acknowledgement of debt begins a fresh period of limitation under the Limitation Act. If yes, whether this extends to the IBC as well.
The present article would deal with the applicability of Section 18 of the Limitation Act, which pertains to the fresh period of limitation post acknowledgement of debt and the IBC.
Early jurisprudence on balance sheet entries as an acknowledgement of debt
In the case of South Asia Industries (P) Ltd. vs. General Krishna Shamsher Bahadur Rana, ILR (1972) Del 712; the Delhi High Court ruled that “entries in the balance sheet amount to acknowledgement of debt if the balance sheet is duly signed unless a contrary proof is shown by the company”.
In the case of State Bank of India Vs. Hegde & Gollay Ltd., 1983 SCC Online Kar 80; the Karnataka High Court ruled that “the acknowledgement of debt in the Balance Sheet amounts to an acknowledgement of debt in writing for the purposes of S. 18 of The Limitation Act, 1963.”
The Supreme Court in the case of A.V. Murthy v. B.S. Nagabasavanna, (2002) 2 SCC 642 ruled that “if 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.”
As previously stated, acknowledgement of debt u/s 18 of Limitation Act is not confined to Balance Sheets alone. Certain conditions to be fulfilled in order to acknowledge the debt as follows:
- That the acknowledgement of debt must be in writing.
- Such acknowledgement must be made before the expiry of the limitation period.
- Such acknowledgement must be signed by the person or his authorized person admitting liability.
- Such acknowledgement must be unequivocal or unqualified as it saves the period of limitation but also gives a cause of action to the plaintiff to base its claim. However, if the limitation period has already expired, it would not revive such acknowledgement and it is not necessary that such acknowledgement must contain a promise to pay within the ambit of section 18 of the Limitation Act.
Section 238A of IBC vis-à-vis the Limitation Act
Section 238A was inserted into the IBC in the year 2018, w.e.f 06-06-2018. Under Section 238A of IBC, the Limitation Act shall, as far as may be, apply to proceedings and appeals under the NCLT, NCLAT, DRT and DRAT.
The basis for insertion of Section 238A into the IBC can be found in the Report of the Insolvency Law Committee of March 2018; which observed that:
The intention of the Limitation Act, 1963 is “to prevent disturbance or deprivation of what may have been acquired in equity and justice by long enjoyment or what may have been lost by a party’s own inaction, negligence or latches”. The non-applicability of the Limitation Act could potentially lead to perverse consequences and the IBC could be potentially used as a means to circumvent the Limitation Act. Financial creditors and operational creditors can file applications for initiation of CIRP for time-barred debts or even file claims to the interim resolution professional for time-barred debts under the Limitation Act. It is pertinent to note that IBC is not just a mere debt recovery law, rather the entire edifice of IBC lies on reviving the corporate debtor and running the corporate debtor as a going concern. Prior to the insertion of Section 238A, there was nothing barring the filing of applications and claims for time-barred debts. This not only amounted to abusing the Limitation Act but also abusing the very object of IBC.
Further, the Supreme Court of India in the case of B.K Educational Services Pvt Ltd v. Parag Gupta and Associates (2019) 11 SCC 633, held that Article 137 of The Limitation Act applies when it comes to filing an application for initiating Corporate Insolvency Resolution Process (CIRP) on the occurrence of default. In the case of Sagar Sharma v. Phoenix ARC Civil Appeal No. 7673 of 2019, the Supreme Court ruled that the limitation period would commence from the date of default and not from the date of IBC coming into force. In the case of Jignesh Shah v. Union of India WRIT PETITION (CIVIL) NO.455 OF 2019, the Supreme Court of India ruled that “Time-barred debts are legally not enforceable.”
Analysis of varying decisions pertaining to the applicability of Section 18 of the Limitation Act to the IBC
Despite Supreme Court and High Court rulings pertaining to entries in the balance sheet amounting to an acknowledgement of debt for the purposes of Section 18 of the Limitation Act, there have been varying decisions regarding the same in the context of IBC.
In the case of Sh. G Eswara Rao v. Stressed Assets Stabilisation Fund Company Appeal (AT) (Insolvency) No. 1097 of 2019, the Hon’ble NCLAT ruled that entries into the annual return and the balance sheet are mandated by law, thus made under a statutory compulsion. In this premise, the NCLAT further observed that as this is mandatory and any failure in doing so would attract penal action, the said entries cannot be said to be voluntary and an acknowledgement for the purposes of Section 18 of the Limitation Act.
In the case of V Padmakumar v. Stressed Assets Stabilisation Fund (SASF) & Anr. Company Appeal (AT) (Insolvency) No. 57 of 2020, it was contended by the corporate debtor that the application under Section 7 is barred by the Limitation Act, which is three years from the date of occurrence of default, which in the instant case had lapsed. However, the financial creditor’s contention was that a fresh period of limitation commenced every time the corporate debtor acknowledged the liability in writing in the balance sheet and in the annual report. The NCLAT dismissed the contention of the financial creditor on the ground that, firstly entries into the balance sheet and the annual report is a statutory requirement and cannot be regarded as an ‘Acknowledgement’ for the purposes of Section 18 of the Limitation Act. Secondly, companies file annual reports and balance sheets every year and if the balance sheet is treated as an acknowledgement of debt under Section 18 of the Limitation Act, there would practically be no limitation.
However, the minority judgement delivered by Justice Cheema observed that acknowledgement under Section 18 does not create any new right but only extends the period of limitation. The minority judgement relied on the case of Mahabir Cold Storage v. CIT AIR 1991 SC 1357, wherein the Supreme Court ruled that entries in books of accounts amount to an acknowledgement of liability u/s 18 of the Limitation Act thereby extending the period of limitation under Section 18. The judgement of L.C. Mills v. Aluminium Corpn. of India Ltd. 1971 SCC (2) 623, was also noted where it was observed that the acknowledgement of debt under section 18 does not create a new right of action, but only extends the period of limitation.
Final word of law
The recent decision of the Supreme Court of India in the case of Bishal Jaiswal v. Asset Reconstruction Company (India) Ltd CIVIL APPEAL NO.323 OF 2021, cleared the mist regarding Balance Sheet as an acknowledgement of debt for the purposes of S. 18 of The Limitation Act, 1963 and its applicability to IBC. The issues before the Supreme Court were twofold namely:
- Whether Section 18 of the Limitation Act is applicable to the IBC.
- Whether an Entry made in the Balance Sheet of the Corporate Debtor amounts to an acknowledgement of debt.
Pertaining to the first issue, the Supreme Court observed that Section 238A was inserted to the IBC to make the Limitation Act applicable to proceedings under the IBC ‘as far as may be’. To this effect, the Supreme Court cited the recent judgement of Sesh Nath Singh (2021 SCC OnLine SC 244) and Laxmi Pat Surana (2021 SCC OnLine SC 267). Further, the Supreme Court observed that for the Balance Sheet to fall under the purview of Section 18 of the Limitation Act and IBC, the same must be duly audited and fulfil other requirements of Section 134 of the Companies Act like the annexation of Boards Report, approval by shareholders and notes to the financial statements. The Supreme Court even clarified that for the purposes of applicability Section 18 of the Limitation Act to proceedings under the IBC, the date shall be taken as the date of default and not the date of IBC coming into force. Entries into the balance sheets further extend the limitation period under Section 18.
Pertaining to the second issue, the Supreme Court observed that concurring with the catena of precedents, ruled that an entry made in the balance sheet of the corporate debtor does amount to an acknowledgement of debt. However, the Supreme Court with a slight note of caution observed that even a balance sheet entry has to be judged on a case-to-case basis to determine if that constitutes an ‘acknowledgement of liability’, per se. For this, the auditor’s report is to be referred. Therefore, in cases where an entry is disputed, the same may not be treated as an acknowledgement of liability.
Conclusion and analysis
The decision of the Supreme Court in the case of referred Bishal Jaiswal v. Asset Reconstruction Company (India) Ltd CIVIL APPEAL NO.323 OF 2021 comes as a great clarification in light of conflicting judgements by the NCLAT and previous precedents propounded by the High Courts. The judgement of the NCLAT in V Padmakumar was focused solely on providing a speedy mechanism. The judgement in the case of Bishal Jaiswal would ensure that bona fide creditors can file for initiation of CIRP and for claims under CIRP and the balance sheet would be looked at as a whole and has to be judged on a case-to-case basis to determine if that constitutes an ‘acknowledgement of liability’, per se.
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