Acknowledgement in Balance Sheet – A Fresh Limitation: The Final Word of Law

-Prachi Bhatia 

Legal Intern at Vinod Kothari & Company 

(resolution@vinodkothari.com)

The three-judge bench of the Hon’ble Supreme Court vide its order dated 14th April, 2021, in Asset Reconstruction Limited v. Bishal Jaiswal & Anr^[1] (‘ARCIL v. Bishal’) has settled the dust around acknowledgment of liability in books of corporate debtor for the purpose of section 18 of the Limitation Act; corollary to the applicability of the section to the Insolvency and Bankruptcy Code, 2016 (‘Code’). This comes in tandem with another recent order of the Hon’ble SC in LaxmiPat Surana v. Union Bank of India & Anr^[2], wherein too the Apex Court upheld that acknowledgement of debt in the balance sheet would render initiation of the limitation period afresh for the purpose of filing an application under the Code.

In what seems to be the final word of law, the, vide the instant order, the Hon’ble SC further set aside the judgment set aside the Full Bench judgment of the Hon’ble NCLAT in V.Padmakumar v. Stressed Assets Stabilisation Fund^[3], (‘V. Padmakumar’), wherein the Appellate Tribunal dismissed the benefit of extension of limitation to the creditors by virtue of the debt’s presentation in the books of the corporate debtor.

In this article, author humbly analyses the order of the Apex Court in ARCIL v. Bishal in light of the catena of preceding judgements both in favour and against the ratio-decidendi in ARCIL v. Bishal.

Facts and Rulings

In the instant matter, the account of the Corporate Debtor (‘CD’) was declared NPA on in 2013 by the original lenders, and was later assigned to the Appellant herein (‘Financial Creditor’) in 2015. Thereafter in 2018, the Financial Creditor filed an application under section 7 of the Code, which was admitted by the Adjudicating Authority on the basis of annexed copies of the balance sheet of the CD wherein such debt was signed and acknowledged. However, in view of its order in V. Padmakumar, the Hon’ble NCLAT set aside the admission of CD in CIRP – hence, the instant appeal.

In the given state of affairs, two moot issues that arose for consideration before the Apex Court were –

• Whether Sec. 18 of the Limitation Act is applicable to the Code?; and
• Whether entry made in a balance sheet of the corporate debtor would amount to an acknowledgment of liability under Sec 18 of the Limitation Act?

With respect to the first issue, the Hon’ble SC reinstated the application of Limitation Act on the Code by relying on Report of the Insolvency law Committee, 2018^[4] and its judgment in Jignesh Shah v. Union of India^[5] to strengthen the position that application to the IBC should not amount to resurrection of time-barred debts which, in any forum, would have been dismissed on the ground of limitation. Further, the Apex Court ventured into the application of sec 18 and held that this question is no longer res integra. The court took aid from its two recent judgments; Sesh Nath Singh v. Baidyabati Sheoraphuli Co-operative  Bank Ltd^[6]. and Laxmi Pat v. Union Bank (supra).

 In the second issue, the Hon’ble SC after giving cumulative reading to various provisions of the Companies Act, 2013^[7] came to the conclusion that though there is a compulsion in law to prepare a balance sheet, there exists no compulsion to make any particular admission. The Apex Court held that 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 to case basis to  establish whether such acknowledgement of liability has, in  fact,  been  made,  thereby extending  limitation  under  Section  18  of  the  Limitation  Act.

Analysis

The instant judgment restores the position of law which was settled previously by numerous precedents^[8]. Sec 18 read with Article 137 of the Limitation Act extends the period of limitation if the acknowledgment duly signed by the debtor to its creditor is made before the expiration of the 3 years from date of default.

Interpretation of sec 18^[9]

The explanation (a) to sec 18 widens the horizon of valid acknowledgment to state that even after the omission of various details pertaining to the liability, an acknowledgment may be considered sufficient- reflecting the intention of the legislature to give the liberal interpretation to the term. It must be noted that the nature of acknowledgement is not mentioned in the section; the only requisite is that acknowledgement need to be signed personally or agent duly authorized. Thus, one cannot completely rule out an acknowledgement made under statutory compulsion inter-alia acknowledgement in balance sheet.

The literal rule of interpretation persists that an interpretation to a word should be given its ordinary or natural meaning. ‘Acknowledgment’ as per Oxford dictionary^[10] ‘is an act of accepting something that exists or true, or that something is there.’

Sec 134 of the Companies Act, 2013 mandates that financial statements of a company should be duly signed by the Chairperson of the Board, CEO, CFO and CS of the company – all being authorized agents of the company. Hence, a presentation of debt in balance sheet can be said to be satisfying both the requisites of sec 18 – an acknowledgement in writing; signed by the authorised agent^[11]. Thus, where the balance sheet of a debtor acknowledges the debt before the expiry of the original period of limitation, a fresh period of limitation shall be computed from the time when the acknowledgment was so signed.

The aforesaid view also finds support in several rulings –

In Bengal Silk Mills Co. & Ismail Golam Hossain Ariff^[12], the Hon’ble Calcutta High Court dispelled the notion that entry of debt under compulsion of law is not admission of debt under section 18, and held that

 “The Balance sheet contains admission of liability; the agent of the company who makes it and signs it intends to make those admissions. The admission does not cease to be acknowledgements of liability merely on the ground that they were made in discharge of statutory duty.”

 Again, in Bhajan Singh Samra v. M/S. Wimpy International Ltd^[13]  the Hon’ble Delhi High Court held that

“Admission of debt either in a balance sheet or in the form of a letter duly signed by the respondent would amount to an acknowledgment, extending the period of limitation.”.

 While there have been contradictory ruling too – for instance, order of the Hon’ble NCLT in V. Padmakumar, the same now stands settled in view of the instant judgement.  In the same vein, we have in our previous articles^[14] have put forth our humble views on the SC ruling in Babulal Vardharji Gurjar vs Veer Gurjar Aluminium Industries^[15] and emphasised on the well-settled law. However, one interesting observation which SC makes in this ruling is that even a balance sheet entry has to be judged on a case-to-case basis to determine if that constitutes an ‘acknowledgement of liability’, per se. Therefore, in cases where an entry is qualified by certain caveats (e.g. in disputed cases), the same may not be treated as an acknowledgement of liability.

 In light of the above, it must be appreciated that given that the limitation period starts from the ‘date of default’ non-applicability of extension provided in sec 18, may defeat many bonafide claims of the creditors as a major chunk of applications being initiated even today pertain to defaults occurred prior to IBC. Hence, the section protects the claim of scrupulous creditors by giving them extension and starting the new period of limitation from the date of acknowledgment.

Conclusion

The author, humbly supports the judgment of the Hon’ble Supreme Court which has rightfully observed that while entry in the balance sheet is a valid acknowledgment of debt, this principle cannot have a straightjacket application – it would depend on the facts of the case and other determinants such as whether  an  entry  made  in  a  balance  sheet  qua  any particular  creditor  is  unequivocal  or  has  been  entered  into  with  caveats. The instant ruling very cautiously reinstates the established principle by drawing conclusions with the aid of judgments.

[1] https://www.ibbi.gov.in/uploads/order/6f46d35423eabba10c230c216c6c78d9.pdf

[2] https://www.ibbi.gov.in/uploads/order/4ed4a21540b05893704433eca2efade9.pdf (dated 26th March, 2021)

[3] https://nclat.nic.in/Useradmin/upload/7982247415e6a2b56e8bef.pdf – Company Appeal (AT) (Insolvency) No. 57 of 2020 (decided on 12.03.2020)

[4] See: http://www.mca.gov.in/Ministry/pdf/ReportInsolvencyLawCommittee_12042019.pdf

[5]Jignesh Shah v. Union of India, (2019 10 SCC 750

[6] https://indiankanoon.org/doc/123420950/

[7] sec 2(40); 92; 128; 129; 134 and 137)

[8] 1967 SCC OnLine Raj 20, 1985 SCC OnLine Kar 428, 2013 SCC OnLine Del 2535

[9] https://indiankanoon.org/doc/85586/

[10] Oxford Advanced American Dictionary, 2011

[11] Due care must be taken that the financials are signed, failing which section 18 shall not be applicable – held in Babulal Rukmanand vs. Official Liquidator, Bharatpur Oil Mills Pvt. Ltd. AIR 1968 Raj 214)

[12] https://indiankanoon.org/doc/572449/ 1961 SCC OnLine Cal 128

[13] https://indiankanoon.org/doc/176039237/

[14] Liability Acknowledgment & Limitation Period For IBC Applications– Deciphering The Enigma http://vinodkothari.com/2020/09/acknowledgment-of-liability-limitation-period-for-ibc/ ; Limits of the Limitation Law and IBC http://vinodkothari.com/2020/02/limits-of-the-limitation-law-and-ibc/

[15] (2020) 15 SCC 1