NCLAT : Balance Sheet entry cannot be treated to be an acknowledgement under Section 18 of the Limitation Act, 1963

The National Company Law Appellate Tribunal (“NCLAT”) has, in the case of V. Padmakumar v. Stressed Assets Stabilisation Fund and Others (dated March 12, 2020) held that an entry in balance sheet/ annual return , cannot be treated to be an acknowledgement under Section 18 of the Limitation Act, 1963 (“Limitation Act”).

Facts
This question arose for the purpose of filing an application for initiation of the Corporate Insolvency Resolution Process (“CIRP”) under the Insolvency and Bankruptcy Code, 2016 (“Code”). The case in question was before a three-member bench of the NCLAT. However, the Stressed Asset Stabilisation Fund (“Respondent”) relied upon the judgement of the NCLAT in the case of Ugro Capital Limited v. Bangalore Dehydration and Drying Equipment Company Private Limited (decided on January 22, 2020) where it was held that the decreeing of a suit would amount to “committing default” in terms of Section 3(12) of the Code for calculating the limitation period in terms of the Limitation Act, 1963. Since the three-member bench doubted the view expressed in Ugro Capital, this matter was referred to a larger five-member bench.

In the instant case, the Industrial Development Bank of India (“IDBI”) granted financial assistance of INR 600 lacs by way of at erm loan agreement dated March 02, 2000 to Uthara Fashion Knitwear Limited (“Corporate Debtor”) and the loan disbursed was primarily secured by hypothecation of plant and machinery together with certain movable assets and equitable mortgage of properties.

The loan was classified as a non performing asset on May 29, 2002. In 2003, IDBI filed an application for recovery under Section 19 of the Recovery of Debts and Bankruptcy Act, 1993 (“RDB Act”), pursuant to which a recovery certificate was issued on August 31, 2009. The debt was reflected in the Corporate Debtor’s balance sheet for the year ending March 31, 2012. Subsequently, the debt was assigned to the Respondent who filed an application under Section 7 of the Code.

Issue
Whether the application filed under Section 7 of the Code was barred by limitation.

Observations of the NCLAT
First, we shall discuss the majority opinion, which was penned by Justice Mukhopadhaya and signed by Justice Bansi Lal, Bhat, Justice Venugopal and Kanthi Narahari, where previously decided cases such as the case of Gaurav Hargovindbhai Dave v. Asset Reconstruction Company (India) Limited [(2010) 10 SCC 72)] were cited, where it was held that since the default had taken place and as the account was declared NPA on July 21, 2011, the application under Section 7 was barred by limitation and that the Report of the Insolvency Law Committee itself stated that the intent of the Code could not have been to give a new lease of life to debts which are already timebarred.

The judgement in the case of V. Hotels Limited v. Asset Reconstruction Company (India) Limited (decided on December 11, 2019) was further discussed where it was observed that the language of Section 18 of the Limitation Act, 1963, makes it clear that for the purpose of filing a suit or application in respect of any property or right, an acknowledgment of liability in respect of such property or right has to be made in writing duly signed by the party against whom such property or right is claimed.

Further, the case of Jignesh Shah and Another v. Union of India and Another (decided on September 25, 2019) was also cited wherein the Supreme Court held that the date of default is to be taken into consideration for computing the period of limitation of application under Section 7 of the Code.

It was further observed that a suit for recovery of money based upon a cause of action that is within the limitation period can be filed only when there is a default of payment of dues. Even if the decree is passed, the date of default cannot be shifted forward to the date of decree. If the decree is executable within the period of limitation, it cannot be said that there is a default of decree or payment of dues. Therefore, the NCLAT held that mere filing of a suit for recovery or a decree passed by a Court cannot shift forward the date of default for the purpose of computing the period for filing an application under the Code.

The counsel for the Respondent had previously submitted that the application under Section 7 of the Code was not barred by limitation as the company had acknowledged the claim in its audited balance sheet for the financial year 2011-2012 and 2012-2013 onwards. It was counted with the proposition that if balance sheet/ annual return of the corporate debtor amounts to acknowledgement under Section 18 of the Limitation Act, 1963, then in such case, it is to be held that no limitation would be applicable because every year, it is mandatory for all companies to file balance sheet/ annual return.

In the dissent penned by Justice Cheema, it was stated that the dissent was due to the fact that Justice Cheema had reservations regarding part of the judgement where it relates to annual returns/audited balance sheets. It was stated that there are various judgements passed by various High Courts including High Court of Delhi which have dealt with the balance sheet/annual returns of companies and where entries in the same have been treated as “acknowledgement of debt” and even accepted for the purpose of Section 18 of the Limitation Act, 1963.

Precedents such as the Supreme Court’s judgement in the case of Mahabir Cold Storage v. C.I.T. (dated December 07, 1990) which held that entries in the books of accounts would amount to an acknowledgement of the liability within the meaning of Section 18 of the Limitation Act were cited. Further, the judgement of A.V. Murthy v. B.S. Nagabasavanna (decided on February 02, 2002) which was relied on by the Supreme Court in the case of S. Natarajan v. Sama Dharman (decided on July 15, 2014) was discussed. In that case, it was held that if the amount borrowed by a party is shown in the balance sheet, it may amount to acknowledgement and the creditor might have a fresh period of limitation from the date on which the acknowledgement was made.

Justice Cheema concluded his dissent by stating he is of the opinion that annual returns/audited balance sheets, one time settlement proposals, proposals to restructure loans, by whatever name called, cannot be simply ignored as debarred from consideration and in every given matter, it would be a question of applying the facts to the law and vice versa, to see whether or not the specific contents, spell out an acknowledgement under the Limitation Act, 1963.

Decision of the NCLAT
The NCLAT held that entry in the balance sheet/ annual return cannot be treated as an acknowledgement under Section 18 of the Limitation Act, 1963 therefore, the application under Section 7 of the Code was barred by limitation and not maintainable.

Vaish Associates Advocates View
The dissent by Justice Cheema and the cases cited by him clearly indicate that there may be diverging viewpoints with regards to this question of law. Therefore, the Supreme Court’s final ruling in this important issue is awaited so that there can be some clarity regarding the application, extent and scope of Section 18 of the Limitation Act, 1963.

This is especially critical since the judgement may have far-reaching ramifications regarding the extent of the Limitation Act, 1963 and the criteria for debt to be time-barred, which would have many implications including but not limited to implications regarding filing applications relating to Sections 7 and 9 of the Code.

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