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Ergo Update

08-May-2020

In the judgement V. Padmakumar v Stressed Assets Stabilisation Fund (Respondent) & Anr (12 March 2020, Company Appeal (AT) (Insolvency) No 57 of 2020), a four member bench of the National Company Law Appellate Tribunal (NCLAT) has, inter alia, held that entries in the balance sheet of the company do not constitute an acknowledgement of liability in terms of Section 18 of the Limitation Act, 1963 (Limitation Act). This is for the purpose of filing an application for initiation of the corporate insolvency resolution process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (IBC).

In a dissenting opinion, Hon’ble Justice AIS Cheema has, relying on decisions of the Supreme Court and Delhi High Court, held that entries in balance sheets/ annual returns which are duly approved by the shareholders and supported by a director’s report may constitute an acknowledgement of liability under Section 18 of the Limitation Act. The dissenting opinion further records that annual returns, audited balance sheets and even one-time proposals may tantamount to acknowledgement of debt for the purposes of limitation.

BACKGROUND

The matter was originally before a three-member bench of the NCLAT. However, the Respondent relied upon the judgment M/s Ugro Capital Limited v M/s Bangalore Dehydration and Drying Equipment Co Pvt Ltd (BDDE) (22 January 2020, Company Appeal (AT) Insolvency) NO. 984 of 2019) (Ugro Capital). In Ugro Capital, it was held that the decreeing of a suit would amount to “committing default” in terms of Section 3(12) of the IBC for calculating the limitation period in terms of Article 137 of the schedule to the Limitation Act. The three-member bench doubted the view expressed in Ugro Capital. Accordingly, the matter was referred to a larger four-member bench.

The debt in question was incurred in March 2000, when Uthara Fashion Knitwear Limited (Corporate Debtor) availed a loan of INR 600 lacs from the Industrial Development Bank of India (IDBI), the original lender. The loan was classified as a Non-Performing Asset (NPA) on 29 May 2002. In 2003, IDBI filed an application for recovery under Section 19 of the Recovery of Debts and Bankruptcy, Insolvency Resolution and Bankruptcy of Individuals and Partnership Firms Act, 1993 (RDB Act), which was decreed on 19 June 2009, and a recovery certificate was issued on 31 August 2009. The debt was reflected in the Corporate Debtor’s balance sheet for the year ending 31 March 2012. The question before the bench was whether the application filed under Section 7 of the IBC (by the Respondent to whom the debt was assigned by IDBI) filed in 2019 was barred by limitation.

FINDINGS AND OBSERVATIONS (JUDGMENT)

 

Date of default for an application under Section 7 of the IBC

Placing reliance on the decision of the Supreme Court in Gaurav Hargovindbhai Dave v Asset Reconstruction Company (India) Limited and another (2019) 10 SCC 572 and V. Hotels Limited v Asset Reconstruction Company (India) Limited (11 December 2019, Company Appeal (AT) (Insolvency) No. 525 of 2019), the NCLAT observed that for the purposes of computing the period of limitation for an application under Section 7 of the IBC, the right to sue occurs from the date of default. Accordingly, in this regard, the date of classification as an NPA is crucial.

 

Recovery proceedings and limitation

Relying on the decision of the Supreme Court in Jignesh Shah and Another v Union of India and another (2019) 10 SCC 750, the NCLAT held that the mere filing of a suit for recovery could not shift forward the date of default for the purposes of initiating the CIRP under Sections 7, 9 or 10 of the IBC.

While relying on the aforesaid judgment of the Supreme Court, the NCLAT further observed that when a decree is passed it remains executable throughout the period of limitation i.e., 12 years. During this period, while the decree remains executable, it cannot be alleged that there is a default of decree or default in payment of dues. Thus, the passing of the decree cannot shift forward the date of default, for computation of the limitation period.

 

Balance sheet entries and acknowledgement under Limitation Act

The Respondent argued that the application under Section 7 of the IBC is within limitation since the Corporate Debtor had acknowledged the claim in its audited balance sheet from the financial year 2011-12 onwards.

Relying on the decision of the NCLAT in Sh. G Eswara Rao v Stressed Assets Stabilisation Fund (7 February 2020, Company Appeal (AT) (Insolvency) No. 1097 of 2019), the NCLAT held that:

 

 

the filing of balance sheet/ annual returns is a mandatory action to be complied with under Section 92(4) of the Companies Act, 2013, failing which penalties would be attracted. Thus, this mandatory compliance cannot be construed as an acknowledgement under Section 18 of the Limitation Act; and

 

 

if one were to accept that entries in a balance sheet amount to an acknowledgement of liability for the purposes of Section 18 of the Limitation Act, there would effectively be no limitation applicable, since every company must file a balance sheet/ annual return every year which would lead to an acknowledgement of liability/ debt and this cannot be the intention of the law.

Accordingly, the NCLAT held that entries in the balance sheet of the Corporate Debtor admitting the liability do not constitute an acknowledgement of liability under relevant provisions of the Limitation Act.

FINDINGS AND OBSERVATIONS (DISSENTING OPINION)

Hon’ble Justice Cheema, while dissenting from the majority view, made the following findings/ observations:

 

Balance sheet entry is an acknowledgement under Section 18 of Limitation Act

Relying on the decision of the NCLAT in Gautam Sinha v UV Asset Reconstruction Company Limited and Ors. (25 February 2020, Company appeal (AT) (Ins) No. 1382 of 2019) (Gautam Sinha), the dissenting opinion of Hon’ble Justice AIS Cheema holds that an entry admitting the debt in the balance sheet of the Corporate Debtor will be construed as an acknowledgement of liability under Section 18 of the Limitation Act, contrary to the majority view.

In the matter of Gautam Sinha, the NCLAT, while relying on the decision of the Calcutta High Court in In re. Padam Tea Company Ltd. AIR 1974 Calcutta 170, had laid down the following objective criteria for a balance sheet entry to be treated as an acknowledgement of liability:

 

 

the balance sheet must be approved by the shareholders of the corporate debtor at an appropriate meeting; and

 

 

the directors’ report in the balance sheet must also acknowledge the debt since the balance sheet, the explanatory statements thereto, and the directors’ report must be taken together to ascertain the true meaning and purport of the statements.

The dissenting opinion further relied on the decision of the Supreme Court in L.C. Mills v Aluminium Corpn. Of India Ltd. (1971) 1 SCC 67 with respect to the nature/ character of the entry in the balance sheet for it meet the requirement of acknowledgement. It was observed that the relevant statement in the balance sheet need not be express or indicate the exact nature or specific character of the liability, but it must relate to a subsisting liability and indicate the existence of a jural relationship between the parties.

The dissenting opinion further took note of the judgment of the Supreme Court in S. Natarajan v Sama Dharman 2014 (9) SCALE 3. In this judgement, the apex court had observed that amounts admitted in a balance sheet by a party may give rise to a fresh period of limitation from the date on which the acknowledgement was made.

Based on the findings of these judgments, Hon’ble Justice Cheema arrived at the view that entries in the balance sheet may be considered as acknowledgement of liability subject to the satisfaction of certain conditions.

 

OTS proposal is an acknowledgement of liability under Section 18 of Limitation Act

Relying on the decision of the NCLAT in Mr Gouri Prasad Goenka v Punjab National Bank and another (8 November 2019, Company Appeal (AT) (Insolvency) No. 28 of 2019), the dissenting opinion as an obiter noted that even a One-time Settlement (OTS) proposal made by a borrower may constitute an acknowledgement of liability under Section 18 of the Limitation Act.

The dissenting opinion also deals with the proposition that although OTS proposals are typically made “without prejudice”, the same would still constitute an acknowledgement of debt. In this regard, it relies on the decision of the Supreme Court in ITC Limited v Blue Coast Hotels Ltd and Ors AIR 2018 SC 3063. The Supreme Court had noted that in the context of Section 13(3A) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, the mere introduction of the words “without prejudice” has no significance when a debtor has clearly acknowledged the debt.

CONCLUSION

The majority opinion, in our view, in holding that balance sheet entries will not amount to an acknowledgement of liability for the purpose of limitation, has unsettled a position of law that various courts and tribunals have always accepted. The dissenting opinion of Hon’ble Justice AIS Cheema is in line with established precedent on acknowledgement of debt for limitation, in relation to entries in balance sheets/ annual returns as well as in an OTS proposal.

In any event, the judgment is likely to have far reaching consequences and may even be appealed before the Supreme Court at the earliest opportunity.

-       Rajeev Vidhani (Partner) and Vishnu Shriram (Senior Associate)

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Rajeev Vidhani (partners)

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