Asset Reconstruction Company (India) Limited V Bishal Jaiswal & Anr: The Case Deals With Is Whether Or Not Balance Sheets Can Amount To Acknowledgment Of Debt For The Purpose Of Extending It

DATE OF JUDGMENT:
15th April, 2021.

JUDGES:
R.F. Nariman, B.R. Gavai, Hrishikesh Roy.

PARTIES:
Asset Reconstruction Company (India) Limited (Appellant)
Bishal Jaiswal & Anr. (Respondent)

SUMMARY

The following case deals with the issue of whether or not balance sheets can amount to acknowledgment of debt for the purpose of extending it.

OVERVIEW

1. Some of the original lenders to the corporate debtor in the present case assigned the debts owed to them by the corporate debtor to the appellant. The appellant issued a notice under the provisions of Sec. 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act) on behalf of itself and other consortium lenders to the corporate debtor.
2. Later on, the appellant took actual physical possession of the project assets of the corporate debtor under the SARFAESI Act and filed an application under the provisions of Sec. 7 of the Insolvency and Bankruptcy Code (IBC) before the National Company Law Tribunal (NCLT).
3. On 19.02.2020, the Sec. 7 application was admitted by the NCLT, observing 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 Sec. 18 of the Limitation Act, 1963, the Sec. 7 application is not barred by limitation.
4. An appeal was filed by the corporate debtor before the NCLAT. The corporate debtor relied upon the Full Bench judgment of the NCLAT in V. Padmakumar v. Stressed Assets Stabilisation Fund, (Company Appeal (AT) (Insolvency) No. 57 of 2020), in which a majority of four membersheld that entries in balance sheets would not amount to acknowledgement of debt for the purpose of extending limitation under Section 18 of the Limitation Act.
5. The tribunal refused to adjudicate the question referred, stating that the reference to the Bench was itself incompetent.

ISSUES

The following issues were analyzed by the court:

• Whether entries in balance sheet can amount to acknowledgment of debt for the purpose of extending limitations under the provisions of Sec. 18 of the Limitation Act.
• Whether the provisions of Sec. 18 of the Limitation Act also apply to issues under the provisions of Sec. 238A of the Insolvency and Bankruptcy Code.

IMPORTANT PROVISIONS

• Sec. 7 of the Insolvency and Bankruptcy Code: Initiation of corporate insolvency resolution process by financial creditor.
• Sec. 238A of the Insolvency and Bankruptcy Code: Applicability of limitations under the provisions of the Limitation Act.
• Sec. 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002: Enforcement of security interest.
• Sec. 18 of the Limitation Act: Effect of acknowledgment in writing.
• Art. 137 of the Limitation Act: Limitation period of three years when the right to apply accrues.

ANALYSIS OF THE JUDGMENT

1. The counsel for the appellant contended that the judgment given in the V. Padmakumar case clearly per incuriam as it had not considered various binding judgments of the court and that the said judgment was wholly incorrect in rejecting the reference out of hand at a preliminary stage.
2. To support his argument, the counsel relied on a number of judgments in which it had been made clear that vide Section 238A of the IBC, Section 18 of the Limitation Act is applicable to a proceeding under Section 7 of the IBC.
3. The counsel contended that the judgments of the High Courts and the judgments of this Court have expressly held that entries made in signed balance sheets of the corporate debtor would amount to acknowledgements of liability and have, therefore, correctly relied upon by the NCLT on the facts of this case.
4. The counsel for the appellant, therefore, contended that in the majority judgment passed in the V. Padmakumar case, dissentient member not being made part of the Bench so formed. This, according to the counsel, was contrary to the principles of natural justice.
5. The counsel, therefore, concluded by contending that 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, and for this purpose, he referred to two High Court judgments.
6. The counsel for the respondent, however, contended that the Explanation to Section 7, read with the definition of “default” contained in Section 3(12) of the IBC, would preclude the application of Section 18 of the Limitation Act inasmuch as a default in respect of a financial debt would include a financial debt owed not only to the applicant-financial creditor, butto all other financial creditors of the corporate debtor.
7. The counsel contended that the rationale for enacting Sec. 238A by referring to the Insolvency Committee Report which introduced the aforesaid section and strongly relied upon the fact that in all these cases, 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 Limitation Act to the IBC, recoveries will not be thwarted.
8. The counsel, therefore, contended that 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.
9. The court, on hearing the contentions made by the appellant and the respondent, held that entries in the balance sheet can amount to acknowledgment of debt for the purpose of extending limitations under the provisions of Sec. 18 of the Limitation Act.
10. With regards to the second issue, the court held that the provisions of Sec. 18 were applicable to issues under the provisions of Sec. 238A of the Insolvency and Bankruptcy Code.

CONCLUSION

The issue that the present case deals with is whether or not entries in balance sheet can amount to acknowledgment of debt for the purpose of extending limitations under the provisions of Sec. 18 of the Limitation Act. The court, in the present case, held in the positive and was of the view that entries made in the books of account can amount to acknowledgment of liability within the purview of the provisions of Sec. 18 of the Limitation Act.
The court, to support its view, referred to the decision given in the case of Mahabir Cold Storage v. CIT ((1991) 188 ITR 91), which held that the entries in the books of accounts of the appellant would amount to an acknowledgement of the liability to Messrs. Prayagchand Hanumanmal within the meaning of Section 18 of the Limitation Act, 1963, and extend the period of limitation for the discharge of the liability as debt.
The court also referred to the decision given in the case of Bengal Silk Mills Co. v. Ismail Golam Hossain Ariff, (1961 SCC On Line Cal 128), which held that an acknowledgement of liability that is made in a balance sheet can amount to an acknowledgement of debt.

Click here to download the original copy of the judgement