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Liability Acknowledgment & Limitation Period for IBC Applications – Deciphering the Enigma
The applicability of the Limitation Act, 1963 (Limitation Act) to the applications under the Insolvency and Bankruptcy Code, 2016 (Code) has been settled long back, after a series of contradictory rulings, by the Report of the Insolvency Law Committee of March 2018 followed by insertion of section 238A in the Code, which was then upheld to be retrospectively applicable by the Hon’ble Supreme Court in B.K. Educational Services Private Limited v. Parag Gupta & Associates. However, the intrigue surrounding the application of various principles of limitation law to the applications under the Code does not seem to rest.
Very recently, on 14.08.2020, one of the questions before the Hon’ble Supreme Court (SC) in Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries Pvt. Ltd. & Anr. (Ruling), was whether the limitation period gets extended with acknowledgement of liability in the books of the corporate debtor. While the SC denied the benefit of section 18 to the creditor; however, in humble views of the author, the ruling does not exactly give a clear judgment on whether the limitation period gets extended on acknowledgment of liability in the books of the corporate debtor.
The author, in this article, tries to elucidate the point of view.
Facts and ruling
In the instant matter, the account of the CD was declared NPA on 08.07.2011. On commencement of the Code, the creditor (FC) filed an application under section 7 with the NCLT and sought initiation of CIRP in March 2018. Notably, the date of default, as stated in the application was 08.07.2011 (being the date of NPA). The application was admitted by NCLT. On appeal and in due course of the proceedings, the NCLAT held that the application was not barred by limitation essentially on two major considerations: one, that the right to apply under section 7 of the Code accrued to the FC only on 01.12.2016 when the Code came into force; and second, that the period of limitation as under Article 62 of the Limitation Act for recovery of possession of the mortgaged property is 12 years.
The SC reversed the orders of NCLT and NCLAT, thereby annulling the CIRP. Reading the provisions of section 238A with several of its preceding rulings, SC laid down the following “basics” pertaining to the application of principles of limitation to IBC [reference, para 30 of the Ruling] –
“(a) that the Code is a beneficial legislation intended to put the corporate debtor back on its feet and is not a mere money recovery legislation;
(b) that CIRP is not intended to be adversarial to the corporate debtor but is aimed at protecting the interests of the corporate debtor;
(c) that intention of the Code is not to give a new lease of life to debts which are time-barred;
(d) that the period of limitation for an application seeking initiation of CIRP under Section 7 of the Code is governed by Article 137 of the Limitation Act and is, therefore, three years from the date when right to apply accrues;
(e) that the trigger for initiation of CIRP by a financial creditor is default on the part of the corporate debtor, that is to say, that the right to apply under the Code accrues on the date when default occurs;
(f) that default referred to in the Code is that of actual non-payment by the corporate debtor when a debt has become due and payable; and
(g) that if default had occurred over three years prior to the date of filing of the application, the application would be time-barred save and except in those cases where, on facts, the delay in filing may be condoned; and
(h) an application under Section 7 of the Code is not for enforcement of mortgage liability and Article 62 of the Limitation Act does not apply to this application.” [emphasis ours]
However, on the question as to whether section 18 of the Limitation Act would save the creditor, where the CD has been acknowledging the debts in its balance sheet, SC observed that limitation period is extendable only by application of section 5 of the Limitation Act. Further, the FC never came out with any pleading other than stating the date of default as ‘08.07.2011’ in the application. Thus, no case for extension of period of limitation is available to be examined. In other words, even if section 18 of the Limitation Act and principles thereof were applicable, the same would not apply to the application under consideration in the present case, looking to the very allegation regarding default therein as well as for want of any other allegation in regard to acknowledgement.
The SC relied on the fact that the question of limitation is essentially a mixed question of law and facts and when a party seeks application of any particular provision for extension or enlargement of the period of limitation, the relevant facts are required to be pleaded and requisite evidence is required to be adduced. As the same was lacking in the current case, the benefit of section 18 of the Limitation Act ought not be given.
Insofar as the applicability of Article 137 of the Limitation Act is concerned, the Ruling reiterates the SC’s findings in B.K. Educational Services (supra), wherein it was held:
“It is thus clear that since the Limitation Act s applicable to applications filed under Sections 7 and 9 of the Code from the inception of the Code, Article 137 of the Limitation Act gets attracted. “The right to sue”, therefore, accrues when a default occurs. If the default has occurred over three years prior to the date of filing of the application, the application would be barred under Article 137 of the Limitation Act, save and except in those cases where, in the facts of the case, Section 5 of the Limitation Act may be applied to condone the delay in filing such application.” [emphasis supplied]
The Ruling also reiterates that the date of coming into force of the Code (that is, 01.12.2016) is wholly irrelevant to the triggering of any limitation period for the purposes of the Code.
However, with respect to applicability of section 18 of the Limitation Act, the author would crave to put a different perspective. Most humbly, as stated earlier, the SC in the instant Ruling, has not taken an unequivocal stance.
Notably, in Jighesh Shah, which was also relied upon by the creditor in this case, the SC remarked,
“In law, when time begins to run, it can only be extended in the manner provided in the Limitation Act. For example, an acknowledgement of liability under Section 18 of the Limitation Act would certainly extend the limitation period, but a suit for recovery, which is a separate and independent proceeding distinct from the remedy of winding up would, in no manner, impact the limitation within which the winding up proceeding is to be filed, by somehow keeping the debt alive for the purpose of the winding up proceeding.” [emphasis ours]
However, in the instant case, SC refused to consider the same as it appeared that illustrative reference to section 18 of the Limitation Act in the aforesaid decision had only been in relation to the suit or other proceedings, wherever it could apply and where the period of limitation could get extended because of acknowledgment of liability. Instead, SC has put reliance on B.K. Educational Services (supra) to hold that limitation period can only be extended by section 5 of the Limitation Act. Further, SC went on to observe, that even if section 18 and principles thereof were applicable, “the same would not apply to the application under consideration in the present case, looking to the very averment regarding default therein and for want of any other averment in regard to acknowledgement”.
In this respect, the author would like to humbly submit the following –
First, the case law relied herein was B.K. Educational Services (supra). The author opines that in the said case, the SC had no occasion to deal with applicability (or non-applicability) of section 18 of the Limitation on the applications under the Code. The reference to section 5 of the Limitation Act was in the context of condonation of delay in filing application which, in view of the author, would come into picture only when the limitation period has otherwise expired. The question of condonation under section 5 would not come where the limitation period is otherwise stretched by application of section 18. Hence, in humble view of the author, reliance on B.K. Educational Services (supra) may not have led to a justifiable conclusion in the instant case.
Secondly, the observation of SC in Jignesh Shah, in the author’s view, was not a mere illustrative reference; but a comparative instance where the SC sought to clarify the circumstances which can and which cannot impact the limitation. Notably, the aforesaid para of the judgment in Jignesh Shah begins with “when time begins to run, it can only be extended in the manner provided in the Limitation Act”, and then SC goes on to cite the example of section 18. This is amply evident of the fact the SC, in the said case, was bringing out the contradistinction between two things – one, acknowledgment of liability, which can extend the limitation period, and the other, a suit for recovery which cannot impact the limitation.
There have been other judgements in the past on whether recording of the debt in the balance sheet would be treated as an acknowledgement under section 18 of the Act thereby extending the period of limitation. An array of rulings, even before the Code came into existence, go on to validate the existence of entries in balance sheet as valid acknowledgment of debt for the purpose of limitation law.
As has been laid down in Shapoor Freedom Mazda v. Durga Prosad Chamaria, what section 19 [of the then Limitation Act, 1908] requires is that the words used in the acknowledgment must indicate the existence of “jural relation-ship between the parties such as that of debtor and creditor” and the courts lean in favour of a liberal construction of such a statement unless it is shown that it was made clearly without intending to admit the existence of such relationship. See Babulal Rukmanand v. Official Liquidator, Bharatpur Oil Mills Pvt. Ltd., which relied on the SC ruling in Shapoor Freedom Mazda (supra) to hold that if an entry in a balance sheet fulfills the requirement of section 19 of the Limitation Act, 1908, there is no reason why it should not amount to an acknowledgment of liability and give a fresh start to the period of limitation.
In Bengal Silk Mills Co. v. Ismail Golam Hossain Arif, the Calcutta High Court held, “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.” In order to be regarded as acknowledgment of debt, it need not he made to the creditor nor need it amount to a promise to pay the debt. The Calcutta HC had relied on several earlier rulings like The Rajah of Vizianagram v. Vizianagram Mining Co. Ltd., Lahore Enamelling and Stamping Co. Ltd. v. A.K. Bahalla, First National Bank Ltd. v. Mandi (Slate) Industries Ltd.
In Bhajan Singh Samra v. M/S.Wimpy International Ltd, the Delhi High Court held that admission of a debt either in a balance sheet or in the form of a letter duly signed by the respondent, would amount to an acknowledgement under section 18(1) of the Limitation Act, extending the period of limitation. Thus, acknowledgement of the petitioner’s loan by way of letters and also in the respondent-company’s balance sheets not only extends the period of limitation but also constitutes fresh cause of action for filing a winding up petition. See also, Shahi Exports Pvt Ltd & Another v. CMD Buildtech Pvt. Ltd., Zest Systems Pvt. Ltd. v. Center For Vocational and Entrepreneurship Studies & Anr.
In A.V. Murthy v. B.S. Nagabasavanna, though the SC observed that if the amount borrowed by the respondent 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; however, did not express any final opinion on the same.
In the context of the Code, besides the observations of SC in Jignesh Shah, there have been certain NCLT and NCLAT rulings in favour and against allowing balance sheet entries/books of accounts for extending the limitation period.
In Vivek Jha v. Daimler Financial Services India Private Ltd. & Anr., NCLAT held that acknowledgment of debt by the corporate debtor would refresh the limitation period. See also, the NCLAT ruling in Manesh Agarwal v. Bank of India & Ors., wherein the NCLAT relied on Jignesh Shah ruling, to hold that a one-time settlement offer amounts to acknowledgment of liability and would lead to fresh limitation period. In Punjab National Bank v. J-Marks Exim (India) Private Limited, the NCLT held that the acknowledgment of liability in financial statements filed with MCA and the offer of one Time Settlement (OTS) made by the corporate debtor to the financial creditor constitutes an acknowledgement of liability within the meaning of section 18 of the Limitation Act. In TJSB Sahakari Bank Ltd. v. M/s. Unimetal Castings Ltd, the NCLT stated that when the liability is shown in the balance sheet, that is a clear acknowledgement of debt by the corporate debtor and should not be treat the debt to be barred by limitation.
However, there had been certain contradictory rulings as well – see, V Hotels Ltd v. Asset Reconstruction Company (India) Limited, where NCLAT observed that financial creditor had failed to bring on record any acknowledgment in writing by the corporate debtor or its authorised person acknowledging the liability in respect of debt. The books of account cannot be treated as an acknowledgment of liability in respect of debt payable to the financial Cceditor signed by the corporate debtor or its authorised signatory. See also V Padmakumar v. Stressed Assets Stabilisation Fund (SASF) & Anr..
The author, thus observes that the judicial perception has been – (i) acknowledgment of liability would result in fresh limitation period, that is, effectually, it would enable extension of the limitation period, and (ii) balance sheet entry has been regarded as an acknowledgment of liability for the purpose of limitation law.
However, the instant Ruling tends to differ from the established principle, at the same time, reserving that, even if section 18 of the Limitation Act is applicable, the same cannot be availed by the creditor because of the “very averment (sic) regarding default therein and for want of any other averment in regard to acknowledgement” Hence, it can also be said that the SC has not completely obviated the possibility of applicability of section 18 to IBC applications.
Therefore, in humble view of the author, the Ruling must be read in the light of specifics of the case, and should not be seen as the last word on the issue.
 See: Neelkanth Township and Construction Pvt. Ltd. v. Urban Infrastructure Trustees Ltd (Company Appeal (AT) (Insolvency) No. 44 of 2017); Black Pearls Hotel Pvt. Ltd. v Planet M Retail Ltd (Company Appeal (AT) (Insolvency) No. 91 of 2017); Innoventive Industries Ltd. vs. ICICI Bank Limited (2018) 1 SCC 407
 See: http://www.mca.gov.in/Ministry/pdf/ReportInsolvencyLawCommittee_12042019.pdf. The Committee deliberated on the issue and unanimously agreed that the intent of the Code could not have been to give a new lease of life to debts which are time-barred. The decision was based on the principle that when a debt is barred by time, the right to a remedy is time-barred.
 Civil Appeal No.23988 of 2017
 Civil Appeal No. 6347 of 2019, decided on 14th August, 2020
 As held in B.K. Educational Services (supra).
 Innoventive Industries Ltd. v. ICICI Bank, B.K. Educational Services (supra), Swiss Ribbons Private Limited and Anr. v. Union of India and Ors., K. Sashidhar v. Indian Overseas Bank, Jignesh Shah and Anr. v. Union of India and Anr., Vashdeo R. Bhojwani v. Abhyudaya Co-operative Bank Ltd. & Anr., Gaurav Hargovindbhai Dave v. Asset Reconstruction Company (India) Ltd. & Anr. and Sagar Sharma & Anr. v. Phoenix Arc Pvt. Ltd. & Anr.
 AIR 1961 SC 1236
 AIR 1968 Raj 214
 AIR 1962 Cal 115
 AIR 1952 Mad 136
 AIR 1958 P H 341
 59 Pun LR 588
 Co. Pet. 246/2006 & CA 1206/2006
 AIR 2002 SC 985
 Company Appeal (AT) Insolvency No. 756 of 2018, decided on 13.01.2020.
 Company Appeal (AT) (Insolvency) No. 1182 of 2019, decided on 28.02.2020
 CP(IB) No. 2176/MB/C-IV/2019, decided on 26.05.2020.
 CP (IB) -3622/I&BP/MB/2018
 Company Appeal (AT) (Insolvency) No. 525 of 2019
 Company Appeal (AT) (Insolvency) No. 57 of 2020