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case_law:acknowledgement-of-liability-under-section-18

Whether an entry made in a balance sheet would amount to an acknowledgement of liability under Limitation Act ?

Case: Asset Reconstruction Company (India) Limited versus Bishal Jaiswal & Anr
Court: Supreme Court of India
Case No: Civil Appeal No.323 Of 2021

Head Note

Court held that acknowledgement of the debt in a balance sheet amounts to an acknowledgement of liability under Section 18 of the Limitation Act.

Facts

In 2009, Corporate Power Ltd. [“the corporate debtor”] set up a thermal power project in Jharkhand, and for so doing, availed of loan 1facilities from various lenders, including the State Bank of India [“SBI”]. The account of the corporate debtor was declared as a non-performing asset by SBI on 31.07.2013. On 27.03.2015, SBI issued a loan-recall notice to the corporate debtor in its capacity as the lenders’ agent. On 31.03.2015, some of the original lenders of the corporate debtor, namely, India Infrastructure Finance Company Limited, SBI, State Bank of Hyderabad, State Bank of Bikaner and Jaipur, State Bank of Patiala, and State Bank of Travancore assigned the debts owed to them by the corporate debtor to the appellant, the Asset Reconstruction Company (India) Limited.

On 20.06.2015, the appellant issued a notice under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 [“SARFAESI Act”] on behalf of itself and other consortium lenders to the corporate debtor. On 01.06.2016, the appellant took actual physical possession of the project assets of the corporate debtor under the SARFAESI Act. On 26.12.2018, the appellant filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 [“IBC”] before the National Company Law Tribunal, Calcutta [“NCLT”] for a default amounting to Rs.5997,80,02,973/- from the corporate debtor. As the relevant form indicating the date of default did not indicate any such date, this was made up by the appellant on 08.11.2019 by filing a supplementary affidavit before the NCLT, specifically mentioning the date of default and annexing copies of balance sheets of the corporate debtor, which, according to the appellant, acknowledged periodically the debt that was due. On 19.02.2020, the Section 7 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 being acknowledgements of the debt due for the purposes of Section 18 of the Limitation Act, 1963 [“Limitation Act”], the Section 7 application is not barred by limitation.

In an appeal filed to the National Company Law Appellate Tribunal [“NCLAT”], the corporate debtor relied upon the Full Bench judgment of the NCLAT in V. Padmakumar v. Stressed Assets Stabilisation Fund1) [“V. Padmakumar”], in which a majority of four members [Justice (Retd.) A.I.S. Cheema, Member (Judicial), dissenting] 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 passed an order on 25.09.2020 doubting the correctness of the majority judgment of the Full Bench 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 (supra).

A five-Member Bench of the NCLAT, vide the impugned judgment dated 22.12.2020, refused to adjudicate the question referred, stating that the reference to the Bench was itself incompetent.

Arguments by the Appellant

Shri Ramji Srinivasan, learned Senior Advocate appearing on behalf of the appellant, has assailed the impugned judgment, arguing that the majority judgment of the Full Bench of the NCLAT in V. Padmakumar (supra) was clearly per incuriam as it has not considered various binding judgments of this Court and that the said judgment was wholly incorrect in rejecting the reference out of hand at a preliminary stage. For this purpose, he referred to a number of judgments of this Court in which it has been made clear that vide Section 238A of the IBC, Section 18 of the Limitation Act is applicable to a proceeding under Section 7 of the IBC. Also, according to the learned Senior Advocate, the judgments of the High Courts and the judgments of this Court have expressly held that entries made in signed balance sheets of the corporate debtor would amount to acknowledgements of liability and have, therefore, correctly been relied upon by the NCLT on the facts of this case.

He argued, relying upon certain judgments, that the reference made to the five-Member Bench by the three Member Bench was perfectly in order and ought to have been answered on merits. He also argued that the constitution of the five-Member Bench which passed the impugned judgment was not in order as three out of the five members of the said Bench were members who assented with the majority opinion in V. Padmakumar (supra), the dissentient member not being made part of the Bench so formed. This, according to him, was contrary to the principles of natural justice.

He also argued 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, and for this purpose, he referred to two High Court judgments.

Arguments by the Respondents

Refuting the aforesaid submissions, Shri Abhijeet Sinha, learned Advocate appearing on behalf of the Respondents, argued that the Explanation to Section 7, read with the definition of “default” contained in Section 3(12) of the IBC, would preclude the application of Section 18 of the Limitation Act inasmuch as a default in respect of a financial debt would include a financial debt owed not only to the applicant-financial creditor, but to all other financial creditors of the corporate debtor.

He then referred to the rationale for enacting Section 238A by referring to the Insolvency Committee Report which introduced the aforesaid Section and strongly relied upon the fact that in all these cases, recovery proceedings were ongoing before the Debt Recovery Tribunal and/or the appellate authority under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 [“Recovery of Debts Act”] and that, by not applying Section 18 of the Limitation Act to the IBC, recoveries will not be thwarted. He also added that the main plank of the submission of the appellant was that a huge sum of Rs.12,000 crore would otherwise go down the drain if acknowledgements in balance sheets were not to be looked at, and stressed the fact that this would be relevant only in recovery proceedings and not in proceedings before the IBC, which are not meant to be recovery proceedings at all, as has been held in several judgments of this Court.

He then relied upon two High Court judgments, from the Andhra Pradesh High Court and Gauhati High Court, to buttress his submission that via Section 18 of the Limitation Act, entries made in balance sheets do not amount to acknowledgement of debt. He also stressed the fact that no date of default has been mentioned in the original form that was submitted with the Section 7 application, and that this would, therefore, be a non-curable defect, on account of which the Section 7 application should have been dismissed at the threshold. He then took us to various judgments of this Court which made it clear that if a period of three years had elapsed from the date of declaration of the account of a corporate debtor as a non performing asset, the claim filed by a creditor is a dead claim which cannot be resurrected having recourse to Section 18 of the Limitation Act.

Finally, he argued that the balance sheets in the present case did not amount to acknowledgement of liability inasmuch as the auditor’s report, which must be read along with the balance sheets, would make it clear that there was no unequivocal acknowledgement of debt, but that caveats had been entered by way of notes in the auditor’s report.

Ratio Decidendi

In Mahabir Cold Storage v. CIT2) the Hon’ble Supreme Court held: “The entries in the books of accounts of the appellant would amount to an acknowledgement of the liability to M/s Prayagchand Hanumanmal 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. …”

An exhaustive judgment of the Calcutta High Court in Bengal Silk Mills Co. v. Ismail Golam Hossain Ariff3) [“Bengal Silk Mills”] held that an acknowledgement of liability that is made in a balance sheet can amount to an acknowledgement of debt. Importantly, this judgment holds that though the filing of a balance sheet is by compulsion of law, the acknowledgement of a debt is not necessarily so. In fact, it is not uncommon to have an entry in a 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 acknowledgement of debt for reasons given in the said note.

Bengal Silk Mills (supra) also dealt with the judgment in Kashinath Sankarappa v. New Akot Cotton Ginning & Pressing Co. Ltd.4) [“Kashinath”] by distinguishing the said judgment on the ground that the balance sheet in that case was not made or signed by a duly authorised agent of the company. Quite apart from this, if the said judgment is perused, what becomes clear is that the observation made in paragraph 20 is really an obiter observation, as the High Court went on to hold in paragraph 26 that the balance sheets that were produced were never proved in accordance with law, apart from being validly rejected by the shareholders, as a result of which, such balance sheets could not, therefore, operate as acknowledgements of liability under Section 19 of the Limitation Act, 1908.

A perusal of Sections 2, 92, 128, 129, 134, 137 of the Companies Act would show that there is no doubt that the filing of a balance sheet in accordance with the provisions of the Companies Act is mandatory, any transgression of the same being punishable by law. However, 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). Equally, the auditor’s report may also enter caveats with regard to acknowledgements made in the books of accounts including the balance sheet. 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.

Decision

It is, therefore, clear that the majority decision of the Full Bench in V. Padmakumar (supra) is contrary to the aforesaid catena of judgments. The minority judgment of Justice (Retd.) A.I.S. Cheema, Member (Judicial), after considering most of these judgments, has reached the correct conclusion. We, therefore, set aside the majority judgment of the Full Bench of the NCLAT dated 12.03.2020.

The NCLAT, in the impugned judgment dated 22.12.2020, has, without reconsidering the majority decision of the Full Bench in V. Padmakumar (supra), rubber-stamped the same. We, therefore, set aside the aforesaid impugned judgment also. 35. On the facts of this case, the NCLT, by its judgment dated 19.02.2020, recorded that the default in this case had been admitted by the corporate debtor, and that the signed balance sheet of the corporate debtor for the year 2016-2017 was not disputed by the corporate debtor. As a result, the NCLT held that the Section 7 application was not barred by limitation, and therefore, admitted the same. We have already set aside the majority judgment of the Full Bench of the NCLAT dated 12.03.2020, and the impugned judgment of the NCLAT dated 22.12.2020 in paragraphs 33 and 34. This appeal is, therefore, allowed, and the matter is remanded to the NCLAT to be decided in accordance with the law laid down in our judgment.

1)
Company Appeal (AT) (Insolvency) No. 57 of 2020 (decided on 12.03.2020)
2)
1991 Supp (1) SCC 402
3)
1961 SCC OnLine Cal 128 : AIR 1962 Cal 115
4)
1949 SCC OnLine MP 123 : AIR 1951 Nag 255


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