The IBC limitation edition balance sheet and acknowledgement of liability

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)

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:

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.

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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