Acknowledgment Of Debts in Balance Sheet

Supreme Court of India clears the air on Balance Sheet Entries As Acknowledgment Of Debts And Its Effect On Extending Limitation.
Acknowledgment Of Debts in Balance Sheet
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Facts

The Corporate Debtor availed loan facilities from various financial creditors and defaulted in re-payments leading to his account being declared as a non- performing asset. Some of the original lenders assigned their debts to the Asset Reconstruction Company (India) Limited (ARCIL/Applicant/Appellant) and on 26 December 2018, ARCIL filed an application u/s 7 of the Insolvency and Bankruptcy Code, 2016 (IBC). ARCIL in its application annexed the balance sheets of the Corporate Debtor, who had periodically acknowledged the debt that was due. The Applicant initially failed to mention the date of default in the appropriate place in the form but rectified this by filing a supplementary affidavit wherein the Applicant mentioned the date of default and in addition to the same, annexed the balance sheets of the Corporate Debtor as acknowledgment of liabilities. Given that these balance sheets had been signed within 3 years from the date of default, the Applicant argued that Section 18 of the Limitation Act was applicable in that it extended the time period of limitation. The NCLT accepted these submissions and held the application for initiation of CIRP to not be barred by limitation.

An appeal was preferred by the respondents to NCLAT. In the appellate tribunal, the Corporate Debtor relied on the decision of V. Padmakumar v Stressed Asset Stabilisation Fund [Company Appeal (AT) (Insolvency) No. 57 of 2020], a 5-member decision, wherein a 4:1 member majority laid down that the entries in the balance sheets would not amount to acknowledgment of debt for the purpose of extending limitation under Section 18 of the Limitation Act.

The three-member bench of the NCLAT doubting the correctness of the above decision referred the appeal to the Chairman of NCLAT in order to constitute a five-member bench of the NCLAT for re-considering the law on the point and to consider the appeal in question. The five-member bench in turn refused to adjudicate the question referred and held that the judgement in V. Padmakumar was itself a reference to a larger bench of NCLAT and further held that the Appellate Tribunal being a creature of statute must only apply the laws as per the statutes and as already settled by the coordinate bench of NCLAT.

The decision of NCLAT came to appealed to the Supreme Court of India, wherein the following issues came up for consideration.

Issues

1) Whether the provisions of the Limitation Act can be referred to by NCLT for IBC proceedings?

2) Whether Section 18 of the Limitation Act be made applicable under Section 238A of the IBC?

3) Whether entries made in the balance sheet of the corporate debtor amounts to an acknowledgement of liability under Section 18 of the Limitation Act?

Reasoning

Issue No. 1

In dealing with the first issue, the Supreme Court of India delved into the rationale behind the enactment of Section 238A of the IBC. Section 238A of IBC reads as follows,

238A. Limitation. —The provisions of the Limitation Act, 1963 (36 of 1963) shall, as far as may be, apply to the proceedings or appeals before the Adjudicating Authority, the National Company Law Appellate Tribunal, the Debt Recovery Tribunal or the Debt Recovery Appellate Tribunal, as the case may be.

The court relied on the findings of the judgment in Jignesh Shah v Union of India [(2019) 10 SCC 750] wherein the court referred to the Report of the Insolvency Law Committee of March, 2018. The committee report stated that the intention of the code was not to give a new lease of life to time-barred debts and that when a debt is barred by time, so is the remedy. Hence a non- applicability of the limitation law to IBC would result in financial and operational creditors holding such time-barred debts under the Limitation Act to file for CIRP under the IBC and considering the fact that the IBC is not a debt recovery law and the trigger for its applicability is a “default in payment of debt”, the exclusion of Limitation Act is counter-intuitive step. The Hon’ble Supreme Court of India observed that since the Limitation Act applies exclusively to courts, it was necessary to make it statutorily applicable to Tribunals. Hence the inclusion of Section 238A under the IBC.

Issue No.2

The second issue arose with regards to the wording of Section 238A of the Code, more specifically the wordings “as far as may be” in relation to the Limitation Act. The court relied on a catena of judgements and held that an acknowledgement in writing of a subsisting liability under Section 18 of the Limitation Act and signed by the party against whom the right is claimed gives rise to a fresh period of limitation from the date of signing such acknowledgment provided that such an acknowledgment is signed before the expiry of the limitation period. Section 238A of the Code being a procedural law provides a clarification as to the application of the relevant provisions of the Limitation Act on a case-to-case basis. Section 18 of the Limitation Act will apply the moment there is an acknowledgment of liability to pay debt by the corporate debtor and as long as such acknowledgement is made within the limitation period which may also include the renewed limitation period due to the acknowledgment of debt from time to time. Hence, Section 18 of the Limitation Act will apply to the proceedings initiated under the Code.

Issue No.3

The Hon’ble Supreme Court while relying on a myriad of judgments as well as on perusing the relevant provisions of the Companies Act, 2013 held that since the filing of the Balance Sheet is mandatory under the provisions of the Companies Act, any deviation from it is punishable by law. A Balance Sheet reflects the closing balance due to the creditor and such is carried forward at the beginning of the following year. There is thus an acknowledgment of liability in each of the Balance Sheets which further reflects the relationship as a debtor and creditor until such liability is determined by payment or otherwise. The court also placed emphasis on the relevant provisions of the Companies Act, 2013 such as Sections 2(40), 92, 128, 129, 134, 137. Hence, there is a compulsion in law to prepare a Balance Sheet but no compulsion to make any particular admission and it would be on the facts of each individual case to determine whether an acknowledgement of liability has been made so as to extend the limitation under Section 18 of the Limitation Act. It was further observed that the notes annexed to or forming a part of such Balance Sheet are expressly recognised under Section 134(7) of the Companies Act which deals with Financial Statements, Board’s Report etc.

All that is required from such acknowledgment is the establishment of the debtor and creditor relationship. Hence, though the filing of the Balance Sheet is mandatory, but there is no compulsion to make an admission and it is not uncommon for Balance Sheets to have notes annexed to or forming a part of it including on the auditor's reports and such notes are to be read along with the Balance Sheet.

Ratio

The Supreme Court Bench consisting of Justice B. R. Gavai, Justice Hrishikesh Roy and Justice R. F. Nariman, while setting aside the decision in V. Padmakumar held that Balance Sheet entries can amount to acknowledgment under Section 18 of the Limitation Act, 1963 and thus will have the effect of extending the limitation even in IBC cases depending on the facts of each case.

The judgment rendered by the Supreme Court can be downloaded here.

Attachment
PDF
BMC - Balance Sheet Entries as acknowledgment of Debts pages 5 - 68.pdf
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