The Hon’ble Supreme Court (“SC”) has in its judgment dated April 15, 2021 (“Judgement”), in the matter of Asset Reconstruction Company (India) Limited v. Bishal Jaiswal & Another [Civil Appeal No.323/2021], held that entries in balance sheets amount to acknowledgement of debt for the purpose of extending limitation under Section 18 of the Limitation Act, 1963 (“1963 Act”).

Facts

Corporate Power Limited (“Corporate Debtor”) had set up a thermal power project in Jharkhand in 2009, for which it availed of loan facilities from various lenders, including the State Bank of India (“SBI”). The account of the Corporate Debtor was declared as a non-performing asset by SBI on July 31, 2013. On March 27, 2015, SBI issued a loan-recall notice to the Corporate Debtor in its capacity as the lenders’ agent. On March 31, 2015, some of the original lenders of the Corporate Debtor, namely, India Infrastructure Finance Company Limited, SBI, State Bank of Hyderabad, State Bank of Bikaner and Jaipur, State Bank of Patiala, and State Bank of Travancore, assigned the debts owed to them by the Corporate Debtor, to the Asset Reconstruction Company (India) Limited (“Appellant”). On June 20, 2015, the Appellant issued a notice under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”) to the Corporate Debtor. On June 01, 2016, the Appellant took actual physical possession of the project assets of the Corporate Debtor under the SARFAESI Act.

On December 26, 2018, the Appellant filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) before the National Company Law Tribunal, Calcutta (“NCLT”) for a default amounting to INR 5997,80,02,973/- from the Corporate Debtor. As the relevant form indicating the date of default did not indicate date of default, this was rectified by the Appellant on November 08, 2019, by filing a supplementary affidavit before the NCLT, specifically mentioning the date of default and annexing copies of balance sheets of the Corporate Debtor, which, according to the Appellant, acknowledged periodically the debt that was due. On February 19, 2020, the Section 7 application was admitted by the NCLT. The NCLT observed that the balance sheets of the Corporate Debtor, wherein it acknowledged its liability, were signed before the expiry of three years from the date of default, and entries in such balance sheets being acknowledgements of the debt due for the purposes of Section 18 of the 1963 Act, the Section 7 application is not barred by limitation.

In an appeal filed to the National Company Law Appellate Tribunal (“NCLAT”), the Corporate Debtor relied upon a precedent of a full bench judgment of the NCLAT in V. Padmakumar v. Stressed Assets Stabilisation Fund [Company Appeal (AT) (Insolvency) No. 57/2020], wherein a majority of four members held that entries in balance sheets would not amount to acknowledgement of debt for the purpose of extending limitation under Section 18 of the 1963 Act. After a preliminary hearing, a three-member bench passed an order on September 25, 2020, doubting the correctness of the majority judgment of V. Padmakumar (supra) and referred the matter to the ‘Acting Chairman’ of the NCLAT to constitute a bench of coordinate strength to reconsider V. Padmakumar (supra).

A five-member bench of the NCLAT, by the impugned judgment dated December 22, 2020, (“Impugned Judgment”), refused to adjudicate the question referred, stating that the reference to the bench was incompetent. The NCLAT, in the Impugned Judgment had, without reconsidering the majority decision in V. Padmakumar (supra), rubber-stamped the same.

Issue

Whether entries made in a balance sheet of the Corporate Debtor amount to an acknowledgement of liability under Section 18 of the 1963 Act.

Arguments

Contentions raised by the Appellant:

The majority judgment of the NCLAT in V. Padmakumar (supra) was per incuriam as it had not considered various binding judgments of the SC and that the said judgment was wholly incorrect in rejecting the reference out of hand at a preliminary stage. A number of judgments of the SC were referred in which it had been made clear that by Section 238A of the IBC, Section 18 of the 1963 Act is applicable to a proceeding under Section 7 of the IBC. Catena of judgments of the high courts and of the SC have expressly held that entries made in signed balance sheets of a corporate debtor would amount to acknowledgements of liability and have, therefore, correctly been relied upon by the NCLT on the facts of this case.

It was further argued that the reference made to the five-member bench by the three-member bench was perfectly in order and ought to have been answered on merits. The constitution of the five-member bench which passed the Impugned Judgment was not in order and contrary to the principles of natural justice, since three out of the five members of the bench were members who had assented with the majority opinion in V. Padmakumar (supra), and the dissentient member was not made part of the bench so formed. Further, the fact that a balance sheet has to be filed under compulsion of law does not mean that an acknowledgement of debt has also to be made under compulsion of law.

Contentions raised by the Respondents:

Bishal Jaiswal and another (the “Respondents”) argued that, by Section 18 of the 1963 Act, entries made in balance sheets do not amount to acknowledgement of debt. Further, the explanation to Section 7, read with the definition of “default” under Section 3(12) of the IBC, would preclude the application of Section 18 of the 1963 Act inasmuch as a default in respect of a financial debt would include a financial debt owed not only to the applicant-financial creditor, but to all other financial creditors of a corporate debtor. Further, reference was made to Insolvency Committee Report which introduced Section 238A of the IBC to gauge the rationale for enacting the said section. The Respondents strongly relied upon the fact that in all matters where recovery proceedings were ongoing before the Debt Recovery Tribunal and/or the appellate authority under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 and that, by not applying Section 18 of the 1963 Act to the IBC, recoveries will not be thwarted.

The Respondents referred the main submission of the Appellant that, INR 12,000 crores would go down the drain if acknowledgements in balance sheets were not looked at, to contend that, this would be relevant only in recovery proceedings and not in proceedings before the IBC, which are not meant to be recovery proceedings at all.

Further that, no date of default had been mentioned in the original form that was submitted with the application under Section 7 of the IBC, and that this would be a non-curable defect, on account of which the application under Section 7 of the IBC should have been dismissed at the threshold itself.

If a period of three years had elapsed from the date of declaration of the account of a corporate debtor as a non-performing asset, the claim filed by a creditor is a dead claim which cannot be resurrected having recourse to Section 18 of the 1963 Act. Lastly, the balance sheets in the present case did not amount to acknowledgement of liability inasmuch as the auditor’s report, which must be read along with the balance sheets, would make it clear that there was no unequivocal acknowledgement of debt, but that caveats had been entered by way of notes in the auditor’s report.

Observations of the Supreme Court

The SC in the instant appeal, deemed it important to first advert to the rationale for the enactment of Section 238A (Limitation) of the IBC, which was inserted by way of the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018. The SC noted that in the case of Jignesh Shah v. Union of India [(2019) 10 SCC 750], the SC had referred to the Report of the Insolvency Law Committee of March, 2018, (“Committee”) which led to the introduction of Section 238A of the IBC and noted that, considering that the 1963 Act applies only to courts, unless made statutorily applicable to tribunals, the Committee was of the view that the 1963 Act should be made to applicable to the IBC as well. The Committee observed that, though the IBC is not a debt recovery law, the trigger being “default in payment of debt” would render the exclusion of the law of limitation “counter-intuitive”. Thus, it was made clear that an application to the IBC should not amount to resurrection of time-barred debts which, in any other forum, would have been dismissed on the ground of limitation.

The SC noted that in the case of Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries Private Limited [(2020) 15 SCC 1] (“Babulal”) it was observed that, Section 18 of the 1963 Act would be triggered every time when the principal borrower and/or the corporate guarantor, as the case may be, acknowledge their liability to pay the debt. Such acknowledgement, however, must be before the expiration of the prescribed period of limitation including the fresh period of limitation due to acknowledgement of the debt, from time to time, for institution of the proceedings under Section 7 of the IBC. Further, the acknowledgement must be of a liability in respect of which the financial creditor can initiate action under Section 7 of the IBC.

The SC noted that several judgments including Mahabir Cold Storage v. CIT [1991 Supp (1) SCC 402], S. Natarajan v. Sama Dharman [Crl. A. No. 1524 of 2014] and Bengal Silk Mills Co. v. Ismail Golam Hossain Ariff, [AIR 1962 Cal 115] (“Bengal Silk Mills”) have indicated that an entry made in the books of accounts, including the balance sheet, can amount to an acknowledgement of liability within the meaning of Section 18 of the 1963 Act. It was further noted that if the amount borrowed by the accused 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.

The SC observed that the natural inference to be drawn from the balance-sheet is that the closing balance due to the creditor at the end of the previous year will be carried forward as the opening balance due to him at the beginning of the next year. In each balance-sheet, there is thus an admission of a subsisting liability to continue the relation of debtor and creditor and a definite representation of a present intention to keep the liability alive until it is lawfully determined by payment or otherwise. The SC observed that the judgment of Bengal Silk Mills (supra) had held that though the filing of a balance sheet is by compulsion of law, the acknowledgement of a debt is not necessarily so. In fact, it is not uncommon to have an entry in a balance sheet with notes annexed to or forming part of such balance sheet, or in the auditor’s report, which must be read along with the balance sheet. The SC observed that in the judgment of Khan Bahadur Shapoor Fredoom Mazda v. Durga Prasad, [(1962) 1 SCR 140] it had been clarified that all that was necessary, was that, the acknowledgement establishes a jural relationship of debtor and creditor.

The SC also examined the position under the Companies Act, 2013 (“Companies Act”) qua any compulsion of law for filing of balance sheets and acknowledgements made. The provisions mentioned below were specifically noted by the SC:

• Section 2(40) of the Companies Act defines financial statement and Section 129, refers directly to financial statements and the required compliance with the accounting standards mentioned under Section 133 of the Companies Act.
• Section 92 of the Companies Act, mandates every company to prepare an annual return containing certain particulars as prescribed.
• Section 128 of the Companies Act, mandates every company to prepare and keep at its registered office, books of accounts and financial statements for every financial year as prescribed.
• Section 134 of the Companies Act, provides that financial statements are to be approved by the board of directors before they are signed, and the auditor’s report, as well as a report by the board of directors, is to be attached to each financial statement.
• Section 137 of the Companies Act, provides that copies of financial statements are to be filed with the Registrar of Companies.

The SC observed that on a perusal of the aforesaid provisions, there is no doubt that, the filing of a balance sheet in accordance with the provisions of the Companies Act is mandatory, and any transgression of the same is punishable by law. The SC importantly noted that the notes that are annexed to or form part of such financial statements are expressly recognised under Section 134(7) of the Companies Act. Equally, the auditor’s report may also enter caveats with regard to acknowledgements made in the books of accounts including the balance sheet. Therefore, the SC observed that, the statement of law contained in Bengal Silk Mills (supra), that there is a compulsion in law to prepare a balance sheet but no compulsion to make any particular admission, is correct in law as it would depend on the facts of each case as to whether an entry made in a balance sheet qua any particular creditor is unequivocal or has been entered into with caveats, which then has to be examined on a case by case basis to establish whether an acknowledgement of liability has, in fact, been made, thereby extending limitation under Section 18 of the 1963 Act. The SC observed the precedent cited in Bengal Silk Mills (supra) of, Good v. Jane Job, 120 E.R. 810 at 812, wherein the court held that, “The balance-sheet contains admissions of liability; the agent of the company who makes and signs it intends to make those admissions. The admissions do not cease to be acknowledgements of liability merely on the ground that they were made in discharge of a statutory duty.” The SC noted that this judgment of Bengal Silk Mills (supra) has been referred to with approval in various subsequent judgments.

The SC further observed that, in Shahi Exports Private Limited. v. CMD Buildtech Private Limited [(2013) 202 DLT 735], the Delhi High Court held that it is hardly necessary to cite authorities in support of the well-established position that an entry made in the company’s balance sheet amounts to an acknowledgement of the debt and has the effect of extending the period of limitation under Section 18 of the 1963 Act.

Decision of the Supreme Court

The SC held that the entries in balance sheets amount to acknowledgement of debt for the purpose of extending limitation under Section 18 of the 1963 Act. Therefore, the SC concluded that the majority decision in V. Padmakumar (supra) was contrary to a catena of judgments referred and hence set it aside. The SC further observed that, the NCLAT, in the Impugned Judgment had, without reconsidering the majority decision of V. Padmakumar (supra), rubber-stamped the same, therefore, the SC set aside the Impugned Judgment.

The SC allowed the appeal, and the matter was remanded to the NCLAT to be decided in accordance with the law laid down in this Judgment.

VA View:
The SC has importantly noted that, it is an undisputed fact that, a balance sheet is the statement of assets and liabilities of a company, which at the end of a financial year is approved by the ‘Board of Directors’ and is authenticated in the manner provided by law. The SC also noted the observation made by Justice Krishna Iyer in Ambika Prasad Mishra v. State of Uttar Pradesh [(1980) 3 SCC 719], that, every new discovery or argumentative novelty cannot undo or compel reconsideration of a binding precedent.

The SC in this Judgement reiterated the well-established position of law that, an entry made in the company’s balance sheet amounts to an acknowledgement of the debt and that it has the effect of extending the period of limitation under Section 18 of the 1963 Act. It was rightly observed that, the inclusion of a debt in a balance sheet duly prepared and authenticated by a company would amount to admission of a liability and therefore would satisfy the requirements of law for a valid acknowledgement under Section 18 of the 1963 Act for extension of the limitation period.

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

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