1. Introduction

A balance sheet is a financial statement that records and reports inter-alia a company's assets, liabilities and shareholders equity for a specific period of time. It also provides a basis for calculation of the rates of return and evaluating its capital structure. Financial statement provides a picture of what a company owns and owes in the form of debtors and creditors. An important question which arises is whether the liabilities of a company in its balance sheets amount to an acknowledgment of debt i.e. acceptance, and therefore, makes the entity liable for payment of dues.

The present article discusses the effect of acknowledgment of debt in a balance sheet on recovery proceedings under the Limitation Act, 1963 ("Act"), the Code of Civil Procedure, 1908 ("CPC") as well as under the Insolvency and Bankruptcy Code, 2016 ("IBC").

2. Applicability of Section 18 of the Act

Section 18 of the Act stipulates that a fresh period of limitation shall be computed from the timewhen the acknowledgment of debt was signed by the debtor. It is a settled law that entries made in a balance sheet of a company amounts to an acknowledgment of debt under Section 18 of the Act and allows the parties to compute a fresh date of limitation from the date of such acknowledgment. The judgments passed by the various courts in India are discussed herein below:

  1. Judgments passed by the Hon'ble Supreme Court of India ("SCI")
  1. The SCI in Mahabir Cold Storage vs Commissioner of Income Tax1 held that entries in the books of accounts would amount to an acknowledgment of liability under the meaning of Section 18 of the Act and extend the period of limitation for the discharge of liability as debt.
  2. The SCI in V Murthy vs B.S. Nagabasavanna2 while evaluating a balance sheet observed that if an amount borrowed by the Respondent is shown in the balance sheet, it may amount to an acknowledgment of debt and the creditor may have a fresh period of limitation accruing from the date of such acknowledgment made.
  3. In the case of Usha Rectifier Corporation (I) Ltd. vs Commissioner of Central Excise,New Delhi3,the SCI while dealing with the directors reports of a company, held that once the appellants have themselves made an admission in their balance sheet, which was not rebutted and was further substantiated in the directors reports, the appellant cannot take a volte face and give submissions, contrary to the admissions.
  1. Judgments passed by various High Courts in India
  1. The High Court of Delhi in Zest Systems Pvt. Ltd. vs Center for Vocational and Entrepreneurship Studies &Anr.4 while adjudicating a suit filed by the plaintiff relied upon Shahi Exports Pvt. Ltd. vs CMD Buildtech Pvt. Ltd.5 to hold that the acknowledgment of the debt in the balance sheet extends the period of limitation. Recently the High Court of Delhi while referring to Shahi Exports (supra)held that there is no dispute on the proposition of law that acknowledgment of debt in a balance sheet amounts to an admission.6
  2. The High Court of Calcutta in the case of Bengal Silk Mills Co. vs Ismail Golam Hossain Arif7 held that in an appeal arising from a money decree against a company, even a statement of a liability in the balance sheet of the company amounted to an acknowledgment/admission of a debt giving rise to a fresh period of limitation, notwithstanding the fact that the balance sheet was prepared under statutory compulsions and articles of association of the company.

In Hedge and Golay Limited vs State Bank of India, 8 the High Court of Kerala held that an acknowledgment of liability contained in the balance sheet of a company furnishes a fresh starting point of limitation. It further held that it is not necessary that such an acknowledgment should be addressed and communicated to the creditor.

3. Ruling rendered by a majority bench of the National Company Law Appellate Tribunal ("NCLAT")

Despite the law laid down by the judiciary in the above stated judgments, the issue of acknowledgment of debt came up before the NCLAT in V. Padmakumar vs Stressed Assets Stabilisation Fund (SASF) & Anr9. In the said judgment, the question arose on whether an application filed under Section 7 of the IBC would be barred by limitation even if the claim has been acknowledged by the debtor subsequently in its balance sheets. The majority bench headed by Justice S.J. Mukhopadhyay firstly held that a judgment or decree passed by a court for recovery of money by civil court/ debt recovery tribunal cannot extend/shift forward the date of default for the purpose of computing the period of filing an application under section 7 of the IBC. Secondly, the NCLAT relied on Sh. G Eswara Rao vs SASF10 ("SASF") to hold that filing of a balance sheet/annual return is mandatory under Section 92(4) of the Companies Act, 2013 and non-compliance of the above would amount to a penal action under Section 92(5) and 92(6). Hence, the balance sheet/annual return of the corporate debtor cannot be treated as an acknowledgment under Section 18 of the Act due to the mandatory statutory compliance. The NCLAT also observed that accepting an argument in favor of acknowledgment of debt in the balance sheet/annual return of the corporate debtor would be erroneous as in such a case, there would be no limitation which would be applicable as the balance sheet/annual returns have to be filed by the corporate debtor every year to comply with the provisions of Companies Act, 2013. Accordingly, the limitation cannot be extended for each subsequent year.

However, Justice AIS Cheema did not concur with the decision passed by the majority bench of the NCLAT. In his dissenting judgment, he opined that the findings given by the NCLAT in Sh. G Eswara Rao (supra) cannot be relied upon in view of the various judgments passed by the SCI and the various high courts in India which have laid down the law regarding acknowledgment of debt in balance sheets. He further opined that it is a settled law that balance sheets and books of accounts can be looked into to see if there is acknowledgment of debt and the judgments passed by the SCI are binding and cannot be ignored.

4. Observations of the NCLAT in Bishal Jaiswal vs Asset Reconstruction Company (India) Ltd. & Ors.11

An application filed by the financial creditor under Section 7 of the IBC was admitted by the adjudicating authority on the ground that the debt and default were not under challenge and the application was filed within limitation. Subsequently, the admission was challenged by the appellant before the NCLAT. The appellant argued that the corporate debtor's balance sheet cannot be considered as an acknowledgment under Section 18 of the Act and cited the judgment passed in V.Padmakumar (supra) in support of its contention before the three member bench of the NCLAT headed by Justice Jarat Kumar Jain. After a perusal of the judgment, the three-member bench was of the following view:

"Hon'ble Supreme Court and various Hon'ble High Courts have consistently held that an entry made in the Company's Balance Sheet amounts to an acknowledgment of debt under Section 18 of the Limitation Act, 1963, in view of the settled law, V. Padmakumar's case requires reconsideration."

Accordingly, the three-member bench held that the majority view taken in V. Padmakumar's case is contrary to the settled law. The consistent view taken by the SCI and various High Courts with respect to acknowledgment of debt in balance sheets amounting to extension of limitation under Section 18 of the Act has not been considered. The bench also observed that a balance sheet is not an annual return, whereas, it is financial statement under Section 2(40) of the Companies Act, 2013. Consequently, the bench placed reliance onPradeep Chandra & Ors. vs Promod Chandra & Ors12 and referred V. Padmakumar's case to a bench of five members of the NCLAT for reconsideration.

The matter came up for reconsideration before the bench of five members of the NCLAT on 22.12.2020. The NCLAT rejected the reference and observed that for computing the limitation period under Section 7 of IBC, the date of default would be the date on which the debtor has been classified as a non performing asset ("NPA"). It further opined that the referral bench had construed the decision of the larger bench by acting as an appellate court which was impermissible. The NCLAT differentiated the proceedings under civil suits from the proceedings under the IBC and relied on Babulal Vardharji Gurjar vs Veer Gurjar Aluminium Industries13 wherein it was held that Section 18 of the Act would have no applicability to the IBC. Accordingly, the issue of acknowledgment of debt under Section 18 of the Act will not survive. The NCLAT expressed its anguish over the ruling rendered by the referral bench as an error of judicial discipline. The approach adopted by the referral bench was also reprimanded by the NCLAT as the same may instill ambiguity and weaken the faith and authority in law.

5. Recent developments before the SCI

The judgment passed by the NCLAT in V. Padmakumar has been challenged by SASF before the SCI. On 10.02.2021, the SCI issued a stay on proceedings before the NCLAT. Aggrieved by certain observation made by the NCLAT in V. Padmakumar, the 3-members NCLT tribunal approached the SCI. The SCI while dismissing the appeal, obliterated the adverse observations made against the 3-member NCLT.

6. Conclusion

The decision of the NCLAT in V. Padmakumar and the subsequent reconsideration clears the position of law that an acknowledgment of debt in a balance sheet under Section 18 of the Act would not be applicable to recovery proceedings under the IBC. The said ruling raises a concern for future stakeholders who have to be vigilant in approaching the NCLT on the basis of such admissions. Further, it may discourage the stakeholders from instituting recovery proceedings under the IBC and ultimately defeat the purpose of the statutory enactment. Considering that the SCI has put a halt to the proceedings before the NCLAT, the conundrum seems to continue, and it is only a matter of time before a final verdict is issued in this regard. Irrespective of the issue of extension of limitation, in the author's opinion an acknowledgment still remains reliable whether or not a party is bound by certain statutory compliances.  

-10 March 2021

Footnotes

1 AIR 1991 SC 1357.

2 (2002) SCC 642.

3 (2011) 11 SCC 571.

4 2018 SCC Online Del 12116.

5 2013 (202) DLT 735.

6 Brace Iron and & Steel Pvt. Ltd. vs Tata Steel BSL Limited MANU/DE/2243/2020.

7 MANU/WB/0033/1962.

8 MANU/KA/0225/1985.

9 MANU/NL/0192/2020.

10 Company Appeal (AT)(Insolvency) No. 1097/2019.

11 MANU/NL/0372/2020.

12 (2002) 1 SCC 1.

13 2019 SCC Online NCLAT 295.

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