Supreme Court clarifies the application of Section 18 of the Limitation Act in IBC cases: SVG Fashions vs. Ritu Goyal (29 March 2022)

Date of the Judgment: 29 March 2022
Citation: (2022) INSC 234
Judges: Hemant Gupta, J., V. Ramasubramanian, J. (authored the judgment)
Can a letter acknowledging a debt, along with dishonored cheques, revive a time-barred claim under the Insolvency and Bankruptcy Code (IBC)? The Supreme Court of India addressed this crucial question in a recent case concerning the interplay between the IBC and the Limitation Act. The court examined whether the National Company Law Appellate Tribunal (NCLAT) erred in dismissing an insolvency application based on limitation, without considering crucial evidence of debt acknowledgement. The bench comprised Justices Hemant Gupta and V. Ramasubramanian, with Justice Ramasubramanian authoring the judgment.

Case Background

SVG Fashions Pvt. Ltd. (the operational creditor) initiated insolvency proceedings against Arpita Filaments Private Limited (the corporate debtor) under Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC) on 20 April 2018. The operational creditor claimed that the corporate debtor had outstanding dues for fabrics supplied since 2013. The corporate debtor had been irregular in making payments. A demand notice issued under Section 8 of the IBC did not elicit any response.

Timeline

Course of Proceedings

The National Company Law Tribunal (NCLT) initially admitted the application filed by the operational creditor, SVG Fashions, on 26 September 2019. The NCLT found that a letter dated 28 September 2015, along with six dishonored cheques, constituted an acknowledgment of debt, thereby extending the limitation period. The corporate debtor, Arpita Filaments, argued that the cheques were lost in March 2017 and that they had issued stop payment instructions. However, the NCLT rejected these arguments.

On appeal, the National Company Law Appellate Tribunal (NCLAT) reversed the NCLT’s decision, holding that the debt arose between 11 August 2013 and 2 September 2013. The NCLAT concluded that the six cheques issued on 5 December 2017, could not save the limitation period. The NCLAT also noted that even if the date of default was considered to be 7 October 2013, the acknowledgment of liability under Section 18 of the Limitation Act should have occurred before 7 October 2016. The NCLAT failed to consider the letter dated 28 September 2015.

Legal Framework

The case primarily revolves around Section 9 of the Insolvency and Bankruptcy Code, 2016, which allows an operational creditor to initiate corporate insolvency resolution process, and Section 18 of the Limitation Act, 1963, which deals with the effect of acknowledgment in writing.

Section 9 of the Insolvency and Bankruptcy Code, 2016 states:
“Application for initiation of corporate insolvency resolution process by operational creditor.—(1) After the expiry of the period of ten days from the date of delivery of the notice or invoice demanding payment under sub-section (1) of section 8, if the operational creditor does not receive payment from the corporate debtor or notice of the dispute under sub-section (2) of section 8, the operational creditor may file an application before the Adjudicating Authority for initiation of a corporate insolvency resolution process.”

Section 18 of the Limitation Act, 1963 states:
“Effect of acknowledgment in writing.—(1) Where, before the expiration of the prescribed period for a suit or application in respect of any property or right, an acknowledgment of liability in respect of such property or right has been made in writing signed by the party against whom such property or right is claimed, or by any person through whom he derives his title or liability, a fresh period of limitation shall be computed from the time when the acknowledgment was so signed.”

Arguments

Arguments of the Appellant (Operational Creditor):

• The operational creditor contended that the letter dated 28 September 2015, along with the six dishonored cheques, constituted a valid acknowledgment of debt. This acknowledgment extended the limitation period, making their application under Section 9 of the IBC within the prescribed time.
• The operational creditor argued that the NCLAT failed to consider the letter dated 28 September 2015, which was crucial evidence of acknowledgment of liability.
• The operational creditor submitted that the cheque numbers and bank details in the letter dated 28 September 2015, matched the particulars of the six cheques that the corporate debtor claimed were lost.

Arguments of the Respondent (Corporate Debtor):

• The corporate debtor claimed that the six cheques were lost in March 2017, and they had issued stop payment instructions to the bank on 4 March 2017.
• The corporate debtor argued that the letter dated 28 September 2015, was issued by Shree Adeshwar Textiles and not by them, and therefore, the operational creditor could not rely on it to save limitation.
• The corporate debtor contended that the acknowledgment, if any, should have been made before 7 October 2016, as the date of default was 7 October 2013. The cheques were dated December 2017, which was beyond the limitation period.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues. However, the core issue was whether the NCLAT was correct in holding that the application under Section 9 of the IBC was barred by limitation, without considering the letter dated 28 September 2015, and the six dishonored cheques.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Cases:

• Jignesh Shah and Another vs. Union of India and Another [(2019) 10 SCC 750] – The Supreme Court referred to this case to emphasize that the time period under the Limitation Act can only be extended as provided in the Act. The court highlighted the importance of Section 18 of the Limitation Act in this context.
• Babu Lal Vardharji Gurjar vs. Veer Gurjar Aluminium Industries Private Limited and Another [(2020) 15 SCC 1] – This case was cited to show that a two-member bench had held that the reference to Section 18 of the Limitation Act in Jignesh Shah was illustrative and did not alter the ratio in B.K. Educational Services.
• B.K. Educational Services Private Limited vs. Parag Gupta and Associates [(2019) 11 SCC 633] – This case was mentioned in relation to the discussion in Babu Lal Vardharji Gurjar, but its ratio was not directly applied in this case.
• Laxmi Pat Surana vs. Union Bank of India And Another [(2021) 8 SCC 481] – The Supreme Court cited this case to clarify the doubt created by Babu Lal, reaffirming the importance of Section 18 of the Limitation Act.
• Asset Reconstruction Company (India) Limited vs. Bishal Jaiswal and Another [(2021) 6 SCC 366] – The Court referred to this case to highlight that an entry in the balance sheet of a company could be treated as an acknowledgment in writing under Section 18 of the Limitation Act.

Legal Provisions:

• Section 9 of the Insolvency and Bankruptcy Code, 2016 – This section allows an operational creditor to initiate corporate insolvency resolution process.
• Section 8 of the Insolvency and Bankruptcy Code, 2016 – This section deals with the demand notice to be issued by the operational creditor to the corporate debtor.
• Section 18 of the Limitation Act, 1963 – This section deals with the effect of acknowledgment in writing on the limitation period.

Judgment

How each authority was viewed by the Court?

• The court relied on Jignesh Shah [(2019) 10 SCC 750]* to emphasize that the time period under the Limitation Act can only be extended as provided in the Act.
• The court considered Babu Lal Vardharji Gurjar [(2020) 15 SCC 1]* to show a previous view that the reference to Section 18 was illustrative.
• The court cited Laxmi Pat Surana [(2021) 8 SCC 481]* to clarify the doubt created by Babu Lal Vardharji Gurjar [(2020) 15 SCC 1]* and reaffirm the importance of Section 18 of the Limitation Act.
• The court referred to Asset Reconstruction Company [(2021) 6 SCC 366]* to highlight that an entry in the balance sheet could be an acknowledgment under Section 18 of the Limitation Act.

What weighed in the mind of the Court?

The Supreme Court was primarily concerned with the NCLAT’s failure to consider the letter dated 28 September 2015 and the six dishonored cheques. The court emphasized that the NCLAT, as the first appellate authority, should have examined all the evidence, especially when the NCLT had recorded a specific finding of fact on this issue. The Court also noted the discrepancy in the date of the stop payment instruction acknowledgement and the corporate debtor’s claim. The Court highlighted the importance of Section 18 of the Limitation Act, emphasizing that an acknowledgment of debt can extend the limitation period. The court’s reasoning was driven by the need to ensure that all relevant evidence is considered by the appellate authorities, particularly in cases involving limitation issues under the IBC.

Logical Reasoning:

The Supreme Court observed that the NCLAT had overlooked the pleadings related to the letter dated 28 September 2015, and the six cheques. This was a critical error, especially since the NCLT had made a specific finding of fact on this issue. The Court emphasized that the NCLAT, as the first appellate authority, should have examined this vital aspect. The Court noted that the law regarding the applicability of Section 18 of the Limitation Act is well-settled. In Jignesh Shah [(2019) 10 SCC 750]*, the Court had pointed out that once the limitation period begins, it can only be extended as provided in the Limitation Act. The Court also referred to Asset Reconstruction Company [(2021) 6 SCC 366]*, where it was held that an entry in the balance sheet of a company could be treated as an acknowledgment in writing, subject to any caveats in the accompanying reports.

The Court stated, “Unfortunately NCLAT completely overlooked the pleadings revolving around the letter dated 28.09.2015 and the six cheques. The failure of the NCLAT as the first appellate authority to look into a very vital aspect such as this, vitiates its order, especially when NCLT has recorded a specific finding of fact on this.”

The Court further stated, “It is needless to point out that the law relating to the applicability of Section 18 of the Limitation Act, 1963 is fairly well settled.”

The Court concluded, “Therefore, the order of NCLAT is liable to be set aside and the matter liable to be remanded back for a fresh consideration.”

The Supreme Court did not provide any alternative interpretations, but it emphasized that the NCLAT failed to consider the crucial evidence of the letter dated 28 September 2015, and the six cheques. The court’s decision was unanimous.

Key Takeaways

• The NCLAT must consider all relevant evidence, including acknowledgment of debt, when deciding on limitation issues under the IBC.
• A letter acknowledging a debt, along with dishonored cheques, can extend the limitation period under Section 18 of the Limitation Act.
• Appellate authorities must thoroughly examine the findings of fact recorded by the lower tribunals.
• Discrepancies in dates and documents must be carefully scrutinized.

Directions

The Supreme Court set aside the order of the NCLAT and remanded the matter back to the NCLAT for fresh consideration in light of the observations and principles of law indicated in the judgment.

Development of Law

The ratio decidendi of the case is that the NCLAT must consider all relevant evidence, including acknowledgment of debt, when deciding on limitation issues under the IBC. This case reinforces the importance of Section 18 of the Limitation Act in the context of IBC proceedings and clarifies that an acknowledgment of debt, such as a letter along with dishonored cheques, can extend the limitation period. The Supreme Court also reiterated that appellate authorities must thoroughly examine the findings of fact recorded by the lower tribunals, ensuring that no crucial evidence is overlooked. This case does not introduce any new legal principles but clarifies the application of existing laws in the context of IBC.

Conclusion

The Supreme Court’s decision in SVG Fashions vs. Ritu Goyal highlights the importance of considering all relevant evidence, particularly acknowledgments of debt, when determining limitation issues in IBC cases. The Court’s emphasis on the NCLAT’s failure to consider the letter dated 28 September 2015 and the six dishonored cheques underscores the need for thorough examination of facts by appellate authorities. The judgment reinforces the application of Section 18 of the Limitation Act in IBC proceedings, ensuring that genuine claims are not dismissed on technical grounds of limitation when there is evidence of acknowledgment of liability. The matter has been remanded back to the NCLAT for fresh consideration.