Supreme Court clarifies the applicability of Section 18 of the Limitation Act to IBC proceedings: State Bank of India vs. Krishidhan Seeds Private Limited (2022) INSC 189

Date of the Judgment: April 18, 2022
Citation: (2022) INSC 189
Judges: Dr Dhananjaya Y Chandrachud, J. and Surya Kant, J.
Can a one-time settlement (OTS) offer or acknowledgment of debt in a balance sheet extend the limitation period for initiating insolvency proceedings? The Supreme Court of India addressed this crucial question in a recent case, clarifying the interplay between the Insolvency and Bankruptcy Code (IBC) and the Limitation Act. The court held that acknowledgments of debt, including those in balance sheets and OTS offers, can indeed extend the limitation period for initiating Corporate Insolvency Resolution Process (CIRP) under the IBC. This judgment has significant implications for financial creditors seeking to recover debts from corporate debtors. The judgment was delivered by a two-judge bench comprising of Justice Dr Dhananjaya Y Chandrachud and Justice Surya Kant.

Case Background

The State Bank of India (appellant) had extended credit facilities to Krishidhan Seeds Private Limited (respondent) starting from November 30, 2006. By June 24, 2013, the outstanding amount had reached Rs 102.4 crores. The respondent provided securities for these facilities but allegedly failed to meet the repayment terms. Consequently, the respondent’s account was classified as a Non-Performing Asset (NPA) on June 10, 2014.

The appellant pursued various recovery options, including actions under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, and the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, while also engaging in settlement negotiations with the respondent. On January 19, 2016, the respondent proposed a one-time settlement (OTS) of Rs 61 crores, which the appellant conditionally accepted. However, on September 18, 2017, the respondent unilaterally revised the OTS offer to Rs 40.6 crores, which the appellant rejected.

Subsequently, the appellant filed an application on September 19, 2018, under Section 7 of the Insolvency and Bankruptcy Code, 2016, to initiate CIRP against the respondent, citing a default of approximately Rs 189 crores (including interest as of June 30, 2018). The date of default was stated as June 10, 2014, the date the account was declared an NPA.

Timeline

Course of Proceedings

The National Company Law Tribunal (NCLT) rejected the appellant’s application under Section 7 of the IBC, citing limitation. The NCLT noted that the application was filed more than three years after the date of default (June 10, 2014). The NCLT also relied on the National Company Law Appellate Tribunal (NCLAT) decision in V Padmakumar v Stressed Assets Stabilisation Fund and Another, which held that statements in a balance sheet cannot be considered an acknowledgment of liability under Section 18 of the Limitation Act, 1963. Additionally, the NCLT noted that the OTS proposal was also beyond the three-year limitation period.

The NCLAT upheld the NCLT’s decision, stating that the limitation period is calculated as per Article 137 of the Limitation Act, and the date of default (June 10, 2014) could not be shifted or extended. The NCLAT also noted that the appellant had moved the Debt Recovery Tribunal (DRT) based on the same default, and there could not be two defaults for the same debt. The NCLAT further held that Section 18 of the Limitation Act was not applicable in this case.

Legal Framework

The case primarily revolves around the interpretation and interplay of the following legal provisions:

• Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC): This section deals with the initiation of the Corporate Insolvency Resolution Process (CIRP) by a financial creditor when a corporate debtor defaults on its debt.
• Section 18 of the Limitation Act, 1963: This section states that if, before the expiration of the prescribed period for a suit or application, an acknowledgment of liability is made in writing and signed by the party against whom the right to initiate proceedings is claimed, a fresh period of limitation shall be computed from the time when the acknowledgment was signed.
• Article 137 of the Limitation Act, 1963: This article prescribes a limitation period of three years for applications for which no other period of limitation is provided.
• Section 3(12) of the Insolvency and Bankruptcy Code, 2016 (IBC): This section defines “default” as non-payment of debt when the whole or any part or installment of the amount of debt has become due and payable and is not paid by the debtor or the corporate debtor.

The Supreme Court also considered the interplay between the IBC and the Limitation Act, specifically whether the provisions of Section 18 of the Limitation Act can be applied to extend the limitation period for initiating CIRP under the IBC.

Arguments

The appellant, State Bank of India, argued that the NCLT and NCLAT erred in rejecting their application under Section 7 of the IBC on the grounds of limitation. They contended that:

• The acknowledgment of debt by the respondent in its balance sheets and the one-time settlement (OTS) offer constituted a valid acknowledgment of liability under Section 18 of the Limitation Act, thereby extending the limitation period.
• The NCLT and NCLAT incorrectly relied on the decision in V Padmakumar, which had been overruled by the Supreme Court in Asset Reconstruction Company (India) Limited v Bishal Jaiswal and Another.
• The provisions of Section 18 of the Limitation Act are applicable to proceedings under the IBC, as held by the Supreme Court in Sesh Nath Singh v Baidyabati Sheoraphuli Coop. Bank Ltd. and Laxmi Pat Surana v Union Bank of India and Another.
• The date of default should not be restricted to the date of declaration of NPA, and acknowledgments of debt should be considered to determine the limitation period.

The respondent, Krishidhan Seeds Private Limited, argued that:

• The application under Section 7 of the IBC was barred by limitation as it was filed more than three years after the date of default (June 10, 2014).
• The statements in the balance sheet cannot be treated as acknowledgment of liability under Section 18 of the Limitation Act.
• The OTS proposal was also beyond the three-year limitation period.

The innovativeness of the argument by the appellant lies in its reliance on the recent Supreme Court judgments that clarified the applicability of Section 18 of the Limitation Act to IBC proceedings, effectively challenging the earlier view taken by the NCLT and NCLAT.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the core issues that the court addressed were:

1. Whether the provisions of Section 18 of the Limitation Act, 1963, are applicable to proceedings under the Insolvency and Bankruptcy Code, 2016.
2. Whether an acknowledgment of debt in a balance sheet, without any qualification, can extend the limitation period for initiating proceedings under Section 7 of the IBC.
3. Whether an offer for one time settlement can extend the limitation period for initiating proceedings under Section 7 of the IBC.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court relied on the following authorities:

The court also referred to the following legal provisions:

• Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC): The court discussed the application for initiation of Corporate Insolvency Resolution Process (CIRP) by a financial creditor.
• Section 18 of the Limitation Act, 1963: The court discussed the provision for extension of limitation period through acknowledgment of liability.
• Article 137 of the Limitation Act, 1963: The court discussed the prescribed limitation period for applications where no other period is provided.
• Section 3(12) of the Insolvency and Bankruptcy Code, 2016 (IBC): The court discussed the definition of “default” under the IBC.

Judgment

The Supreme Court allowed the appeal, setting aside the judgments of the NCLAT and NCLT. The court held that the provisions of Section 18 of the Limitation Act are applicable to proceedings under the IBC. The court also clarified that an acknowledgment of debt in a balance sheet, without any qualification, can extend the limitation period, provided it is within three years from the original date of default.

The court restored the proceedings to the file of the NCLT for fresh adjudication, keeping all rights and contentions of the parties open on the factual aspects of the controversy. The NCLT was directed to dispose of the application expeditiously, within three months from the date of the order.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to harmonize the provisions of the IBC with the Limitation Act, ensuring that genuine claims are not barred by technicalities. The court emphasized the following points:

• Applicability of Section 18 of the Limitation Act to IBC proceedings: The court reiterated that Section 18 of the Limitation Act is applicable to IBC proceedings, as established in previous judgments.
• Acknowledgment of debt: The court emphasized that an unqualified acknowledgment of debt in a balance sheet or an OTS offer can extend the limitation period for initiating CIRP.
• Overruling of V Padmakumar: The court highlighted that the decision in V Padmakumar, which held that balance sheet entries cannot extend limitation, was specifically overruled.
• Ensuring fair opportunity: The court aimed to provide financial creditors a fair opportunity to recover their dues, provided they act within the extended limitation period.

The court’s reasoning was primarily based on legal principles and precedents, with a focus on ensuring that the law is applied fairly and consistently. The court considered both the factual aspects of the case and the relevant legal provisions to arrive at its decision.

Logical Reasoning

The court considered alternative interpretations, such as the strict application of Article 137 of the Limitation Act, which would have barred the application. However, the court rejected this interpretation, emphasizing the need to give effect to Section 18 of the Limitation Act and the legislative intent behind the IBC.

The final decision was reached by considering the interplay between the IBC and the Limitation Act, ensuring that the provisions of both statutes are harmoniously construed. The court’s decision ensures that genuine claims are not barred by limitation due to technicalities, while also maintaining the balance between the rights of financial creditors and corporate debtors.

The court’s reasoning is summarized in the following points:

• The provisions of Section 18 of the Limitation Act are applicable to proceedings under the IBC.
• An acknowledgement in a balance sheet without a qualification can furnish a legitimate basis for determining whether the period of limitation would stand extended.
• An offer of OTS can also extend the limitation period.
• The acknowledgment must be within a period of three years from the original date of default.

The Supreme Court quoted from its decision in Laxmi Pat Surana v Union Bank of India and Another:

“Notably, the provisions of the Limitation Act have been made applicable to the proceedings under the Code, as far as may be applicable. For, Section 238 -A predicates that the provisions of the Limitation Act shall, as far as may be, apply to the proceedings or appeals before the adjudicating authority, N CLAT , the DR T or the Debt Recovery Appellate Tribunal, as the case may be. After enactment of Section 238 -A IBC on 6 -6-2018, validity whereof has been upheld by this Court, it is not open to contend that the limitation for filing application under Section 7 IBC would be limited to Article 137 of the Limitation Act and extension of prescribed period in certain cases could be only under Section 5 of the Limitation Act. There is no reason to exclude the effect of Section 18 of the Limitation Act to the proceedings initiat ed under the Code.”

The Supreme Court quoted from its decision in Asset Reconstruction Company (India) Limited v Bishal Jaiswal and Another:

“A perusal of the aforesaid sections would show that there is no doubt that the filing of a balance sheet in accordance with the provisions of the Companies Act is mandatory, any transgression of the same being punishable by law. However, what is of importa nce is that notes that are annexed to or forming part of such financial statements are expressly recognised by Section 134(7). Equally, the auditor’s report may also enter caveats with regard to acknowledgments made in the books of accounts including the b alance sheet. A perusal of the aforesaid would show that the statement of law contained in Bengal Silk Mills , 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 dep end 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 acknowledgment of l iability has, in fact, been made, thereby extending limitation under Section 18 of the Limitation Act.”

The Supreme Court also quoted from its decision in Rajendra Narottamdas Sheth and Another v Chandra Prakash Jain and Another:

“We have already held that the burden of prima facie proving occurrence of the default and that the application filed under Section 7 of the Code is within the period of limitation, is entirely on the financial creditor. While the decision to admit an application under Section 7 is typically made on the basis of material furnished by the financial creditor, the Adjudicating Authority is not barred from examining the material that is placed on record by the corporate debtor to determine that such application is not beyond the period of limitation. Undoubtedly, there is sufficient material in the present case to justify enlargement of the extension period in accordance with Section 18 o f the Limitation Act and such material has also been considered by the Adjudicating Authority before admitting the application under Section 7 of the Code. The plea of Section 18 of the Limitation Act not having been raised by the Financial Creditor in the application filed under Section 7 cannot come to the rescue of the Appellants in the facts of this case. It is clarified that the onus on the financial creditor, atthe stage of admission of an application under Section 7 of the Code, is only to prima facie establish the occurrence of a default and that the application is within the period of limitation. The Adjudicating Authority is not barred from examining the material that is placed on record by the corporate debtor to determine that such application is not beyond the period of limitation.”

Conclusion

The Supreme Court’s judgment in State Bank of India vs. Krishidhan Seeds Private Limited provides significant clarity on the applicability of Section 18 of the Limitation Act to IBC proceedings. The court’s ruling ensures that acknowledgments of debt, whether in balance sheets or through OTS offers, can extend the limitation period for initiating CIRP, thus providing financial creditors with a fair opportunity to recover their dues. This judgment reinforces the harmonized approach between the IBC and the Limitation Act, ensuring that genuine claims are not barred by technicalities.

The key takeaways from the judgment are:

• Section 18 of the Limitation Act is applicable to proceedings under the IBC.
• An unqualified acknowledgment of debt in a balance sheet can extend the limitation period for initiating CIRP.
• A one-time settlement (OTS) offer can also extend the limitation period for initiating CIRP.
• The acknowledgment of debt or OTS offer must be within three years from the original date of default.
• The onus on the financial creditor, at the stage of admission of an application under Section 7 of the Code, is only to prima facie establish the occurrence of a default and that the application is within the period of limitation.