The National Company Law Appellate Tribunal (“NCLAT”) in the case of Mr. R.R. Gopaljee v. Indian Overseas Bank and Others (decided on June 24, 2020) upheld the order dated July 05, 2019 passed by the NCLT, special bench, Chennai (“Adjudicating Authority”) under Section 7 (initiation of corporate insolvency resolution process by financial creditor) of the Insolvency and Bankruptcy Code (“IBC”) and held that a writing to be an acknowledgement of liability must involve an admission of subsisting jural relationship between the parties and a conscious affirmation of an intention of continuing such relationship in regard to an existing liability and that the said admission need not be in regard to any precise amount nor by expressed words.

Facts
Indian Overseas Bank (“Financial Creditor”) granted financial assistance to Malar Energy and Infrastructure Private Limited (“Corporate Debtor”) on various dates between June 13, 2011 and May 29, 2015. Post disbursement of the loan, the Corporate Debtor defaulted in repayment and thus, its account was declared as a Non-Performing Asset (“NPA”) by the Financial Creditor.

The Financial Creditor thereafter, sent a legal notice dated March 15, 2017 demanding the repayment of INR 21,86,26,661 along with interest and the Corporate Debtor in its reply dated March 27, 2017 acknowledged the debt and stated that it is in process of settling the dues of the Financial Creditor. The Corporate Debtor, on April 13, 2017 sent a One-time Settlement (“OTS”) proposal to the Financial Creditor and the said OTS proposal was accepted by the Financial Creditor on certain terms and conditions by its letter dated July 3, 2017. However, the letter dated April 13, 2017 is not on record.

The said OTS period was also extended by the Financial Creditor by its letter dated August 28, 2017 at the request of the Corporate Debtor. However, the Corporate Debtor failed in repayment of the amount as per the OTS proposal and hence, the Financial Creditor by its letter dated November 22, 2017 cancelled the said OTS proposal and initiated recovery proceedings under Section 19 of the Recovery of Debts and Bankruptcy Act, 1993 and also under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”) but the proceedings did not reach to a logical end. Therefore, the Financial Creditor filed an application under Section 7 of the IBC on March 15, 2019.

The Adjudicating Authority by order dated July 5, 2019 admitted the application to initiate the corporate insolvency resolution process (“CIRP”) against the Corporate Debtor, issued moratorium and appointed Mr. Radha Krishnan Dharamrajan as the interim resolution professional. Being aggrieved by the said order, Mr. R.R. Gopaljee, promoter and shareholder of the Corporate Debtor filed an appeal before the NCLAT under Section 61(1) (appeals and appellate authority) of the IBC.

Issue
Whether the letter dated March 27, 2017 be treated as an acknowledgment of debt in terms of Section 18 of the Limitation Act, 1963 (“Limitation Act”) in absence of any specific acknowledgment of liability by the Corporate Debtor.

Arguments
The submission of the counsel for the appellant were:

1. The Adjudicating Authority did not observe the principal of natural justice and passed the order without providing an opportunity to file objections on the application under Section 7 of IBC.
2. The correct date of NPA is not clear as the Financial Creditor in the notice sent under Section 13(2) of the SARFAESI Act, 2002 mentioned the NPA date as June 30, 2015 whereas, in the additional affidavit filed before the Adjudicating Authority, the NPA date is disclosed as April 1, 2015.
3. The debt is time barred as the application under Section 7 is filed on March 15, 2019.
4. The Adjudicating Authority wrongly relied upon the letter dated March 27, 2017 as an acknowledgment of debt, as the said letter only states that the Corporate Debtor will settle issue with the Financial Creditor and that there is no specific acknowledgment of debt. Also, for the purpose of acknowledgment of debt, the exact amount of debt due and the timeline for payment has to be specifically admitted and clearly stated.
5. High Court of Delhi in the Case of Dorham Carelline India Limited. v. Studio Line [2009 DLT 123] held that Section 18 of Limitation Act requires: (i) An admission or acknowledgement; (ii) that such acknowledgement must be in respect of a property or right; (iii) that it must be made before the expiry of limitation; (iv) that it should be in writing and signed by the party against whom such property or right is claimed. None of these conditions were fulfilled by the letter dated March 27, 2017.
6. The Supreme Court of India (“SC”) in the case of State of Kerala v. T.M. Chackoo, [(2000) 9 SCC 722] held that “The person acknowledging must be conscious of his liability and commitment should be made towards that liability. It need not be specific, but if necessary facts which constituted the liability are admitted, an acknowledgement may be inferred from such an admission.”As the letter dated March 27, 2017 does not specify any commitment towards the liability and is merely a reply stating certain meetings with the officials of the Financial Creditor, it cannot be treated as an acknowledgment.

The submission of the counsel for Financial Creditor was that as the Corporate Debtor defaulted in repayment of the loan, a legal notice dated March 15, 2017 was sent to it and the Corporate Debtor replied to the said notice on March 27, 2017 wherein it acknowledged the claim. Thereafter, the Corporate Debtor sent an OTS proposal which was accepted by the Financial Creditor. However, the Corporate Debtor failed to repay the loan and therefore, an application under Section 7 of the IBC was filed.

Observations of the NCLAT

In the additional affidavit filed on behalf of the Financial Creditor, date of default is shown as April 1, 2015. However, in the notice under Section 13(2) of the SARFAESI Act, 2002, the NPA date is shown as June 30, 2015. The Adjudicating Authority considered the objection and held that according to the Corporate Debtor, the Financial Creditor declared its account as NPA on June 30, 2015 and the NCLAT agreed with the said finding of the Adjudicating Authority.

Further, the Application under Section 7 of IBC was filed on March 15, 2019, that is, after three years from the date of default. Therefore, the question for consideration is whether the Corporate Debtor has acknowledged the debt as per the requirement under Section 18 of the Limitation Act, only then, the date of default can be forwarded to a future date as held by the NCLAT in Sh. G Eswara Rao v. Stressed Assets Stabilisation Fund [Company Appeal (At) (Ins) No. 1097 of 2019].

The SC in the case of J.C. Budhraja v. Chairman Orissa Mining Corporation Limited [(2008) 2 SCC 444] held that Section 18 of the Limitation Act, deals with the effect of acknowledgment in writing and provides that a fresh period of limitation shall be computed from the time when the acknowledgment was signed before the expiration of the prescribed period for a suit or application in respect of a right. The explanation to the section provides that an acknowledgment may be sufficient though it omits to specify the exact nature of the right or avers that the time for payment has not yet come or is accompanied by a refusal to pay, or is coupled with a claim to set off, or is addressed to a person other than a person entitled to the right.

Further in the case mentioned above, a reference is also made of the SC’s ruling in the case of Shapoor Freedom Mazda v. Durga Prosad Chamaria [AIR 1961 SC 1236] wherein the SC stated that words used in the acknowledgment must indicate existence of jural relationship between the parties such as that of debtor and creditor, and it must appear that the statement is made with the intention to admit such jural relationship.

Making a reference from the SC’s ruling in the above said case, the NCLAT further stated that it is now well settled that a writing to be an acknowledgement of liability must involve an admission of subsisting jural relationship between the parties and a conscious affirmation of an intention of continuing such relationship in regard to an existing liability. The admission need not be in regard to any precise amount nor by expressed words. The SC in the aforesaid judgment also held that in construing words used in the statement made in writing on which a plea of acknowledgement rest, oral evidence has been expressly excluded but surrounding circumstances can always be considered. It is also held that the statement on which a plea of acknowledgement is based must relate to a person’s subsisting liability though the exact nature or the specific character of said liability may not be indicated in words.

Thereafter, in reference to the principal laid down in the above case, the NCLAT examined the case in hand and stated that the Corporate Debtor in its reply dated March 27, 2017 to the demand notice, admitted the jural relationship between the parties and a conscious affirmation of an intention of continuing such relationship in regard to an existing liability.

The Corporate Debtor in its reply to the demand notice did not dispute the amount and admitted the liability and stated that it is in process of settling the dues of Financial Creditor. Subsequent to the same, on April 13, 2017, the Corporate Debtor also sent an OTS proposal to the Financial Creditor and on July 3, 2017 the same was accepted by the Financial Creditor on certain terms and conditions. An extension for time of payment was also granted by the Financial Creditor. However, the Corporate Debtor failed to make the payment and the said OTS proposal was revoked by the Financial Creditor on November 22, 2017. The NCLAT observed that it is true that the letter dated April 13, 2017 is not on record, however, the Corporate Debtor does not deny that it had not sent an OTS on April 13, 2017 to the Financial Creditor.

On the basis of the above discussion, the NCLAT held that it is proved that Corporate Debtor had acknowledged the debt within three years, that is, before the expiration of the prescribed period for a suit or application.

Decision of the NCLAT
The NCLAT upheld the admission order passed by the Adjudicating Authority under Section 7 of IBC as the same was well within limitation and hence, the appeal was dismissed.

Vaish Associates Advocates View
In the present case, the Corporate Debtor contended that the letter by which it offered to settle the dues of the Financial Creditor cannot be treated as an acknowledgment of debt as there was no specific acknowledgment of debt in the letter and neither the exact amount of debt due was admitted in the said letter.

However, the NCLAT rejected this contention of the Corporate Debtor and stated that the said letter admitted the jural relations between both the parties and a conscious affirmation of an intention of continuing such relationship in regard to an existing liability. Even though the said letter made no express acknowledgment of debt but the NCLAT emphasised that it is the intent of the parties which will determine the nature of the acknowledgment and that the admission need not be with regard to any precise amount nor by expressed words, if the intent is clearly established and thus by virtue of Section 18 of the Limitation Act, the limitation period would be extended.

Also, it can be inferred from the subsequent letters exchanged between both the parties, wherein an OTS was arrived, that the Corporate Debtor was aware of the debt and had also shown its intent to settle the same. The said intent can very well be treated as an admission of debt as the execution of an OTS makes it clear that the Corporate Debtor was conscious of its liability towards the Financial Creditor and made a commitment to clear the same.

For more information please write to Mr. Bomi Daruwala at [email protected]

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