Supreme Court clarifies the role of balance sheets in acknowledging debt under the Insolvency and Bankruptcy Code (IBC): Asset Reconstruction Company vs. Bishal Jaiswal (2021)

Date of the Judgment: April 15, 2021
Citation: (2021) INSC 218
Judges: R.F. Nariman, J., B.R. Gavai, J., Hrishikesh Roy, J.
Can a company’s balance sheet serve as valid proof of debt acknowledgment, thereby extending the limitation period for initiating insolvency proceedings? The Supreme Court of India recently addressed this crucial question, clarifying the interplay between the Limitation Act, 1963, and the Insolvency and Bankruptcy Code, 2016 (IBC). This judgment is significant for understanding how financial creditors can use balance sheets to establish a continuing liability of a corporate debtor. The judgment was authored by Justice R.F. Nariman, on behalf of a three-judge bench.

Case Background

In 2009, Corporate Power Ltd. (the corporate debtor) secured loans from various lenders, including the State Bank of India (SBI), to establish a thermal power project in Jharkhand. By July 31, 2013, SBI had declared the corporate debtor’s account as a non-performing asset (NPA). On March 27, 2015, SBI, acting as the lenders’ agent, issued a loan-recall notice. Subsequently, on March 31, 2015, several original lenders assigned their debts to the Asset Reconstruction Company (India) Limited (the appellant). The appellant then issued a notice under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act) on June 20, 2015, and took physical possession of the project assets on June 1, 2016. The appellant filed an application under Section 7 of the IBC before the National Company Law Tribunal (NCLT), Calcutta, on December 26, 2018, claiming a default of Rs. 5997,80,02,973/-. The NCLT admitted the application on February 19, 2020, relying on the corporate debtor’s balance sheets as acknowledgment of debt, which extended the limitation period under Section 18 of the Limitation Act, 1963.

Timeline

Course of Proceedings

The NCLT admitted the Section 7 application, observing that the balance sheets of the corporate debtor acknowledged its liability, which was signed before the expiry of three years from the date of default. The NCLT held that these entries were acknowledgments of debt under Section 18 of the Limitation Act, 1963, thereby making the application not barred by limitation. In an appeal, the National Company Law Appellate Tribunal (NCLAT) relied on the Full Bench judgment in V. Padmakumar v. Stressed Assets Stabilisation Fund, which held that entries in balance sheets do not amount to acknowledgment of debt for the purpose of extending limitation under Section 18 of the Limitation Act. A three-member bench of the NCLAT doubted the correctness of the majority judgment of the Full Bench and referred the matter to the Acting Chairman of the NCLAT to constitute a Bench of coordinate strength to reconsider the judgment in V. Padmakumar. However, a five-member bench of the NCLAT refused to adjudicate the question, stating that the reference was incompetent.

Legal Framework

The Supreme Court examined the following key legal provisions:

• Section 238A of the Insolvency and Bankruptcy Code, 2016 (IBC): This section makes the provisions of the Limitation Act, 1963, applicable to proceedings before the Adjudicating Authority, the NCLAT, the Debt Recovery Tribunal, or the Debt Recovery Appellate Tribunal. It states:
  
  “The provisions of the Limitation Act, 1963 (36 of 1963) shall, as far as may be, apply to the proceedings or appeals before the Adjudicating Authority, the National Company Law Appellate Tribunal, the Debt Recovery Tribunal or the Debt Recovery Appellate Tribunal, as the case may be.”
  
  This section ensures that time-barred debts cannot be resurrected through the IBC.
• Section 18 of the Limitation Act, 1963: This provision allows for the extension of the limitation period when there is an acknowledgment of debt made in writing and signed by the party against whom the right is claimed. It states:
  
  “18. Effect of acknowledgement in writing.—(1) Where, before the expiration of the prescribed period for a suit or application in respect of any property or right, an acknowledgement 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 acknowledgement was so signed.”
• Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC): This section deals with the initiation of corporate insolvency resolution process by a financial creditor.
• 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 of the debt has become due and payable and is not paid by the debtor.
• Section 2(40) of the Companies Act, 2013: This section defines “financial statement” which includes a balance sheet.
• Section 129 of the Companies Act, 2013: This section states that financial statements shall give a true and fair view of the state of affairs of the company.
• Section 134 of the Companies Act, 2013: This section provides that financial statements are to be approved by the Board of Directors before they are signed.

The Court emphasized that Section 238A of the IBC makes the Limitation Act applicable to IBC proceedings, ensuring that time-barred debts are not revived. The interplay between Section 18 of the Limitation Act and the IBC was also examined to determine if acknowledgments of debt in balance sheets could extend the limitation period. The court also considered the provisions of the Companies Act, 2013, regarding the preparation and filing of balance sheets.

Arguments

Appellant’s Arguments:

• The majority judgment of the Full Bench of the NCLAT in V. Padmakumar was incorrect as it did not consider binding judgments of the Supreme Court.
• Section 238A of the IBC makes Section 18 of the Limitation Act applicable to proceedings under Section 7 of the IBC.
• Entries in signed balance sheets of the corporate debtor amount to acknowledgments of liability, as per judgments of the High Courts and the Supreme Court.
• The reference made to the five-member bench by the three-member bench was in order and should have been answered on merits.
• The constitution of the five-member bench was not in order, as it included members who had assented with the majority opinion in V. Padmakumar.
• The fact that a balance sheet has to be filed under compulsion of law does not mean that an acknowledgment of debt has also to be made under compulsion of law.

Respondent’s Arguments:

• The Explanation to Section 7, read with the definition of “default” in Section 3(12) of the IBC, precludes the application of Section 18 of the Limitation Act.
• Section 238A was enacted to prevent the revival of time-barred debts.
• Recovery proceedings were ongoing before the Debt Recovery Tribunal, and applying Section 18 of the Limitation Act to the IBC would thwart recoveries.
• The IBC is not meant to be a recovery proceeding, and acknowledgments in balance sheets are relevant only in recovery proceedings.
• Entries made in balance sheets do not amount to acknowledgment of debt under Section 18 of the Limitation Act.
• No date of default was mentioned in the original Section 7 application, which is a non-curable defect.
• If a period of three years had elapsed from the date of declaration of the account as an NPA, the claim is a dead claim and cannot be resurrected using Section 18 of the Limitation Act.
• The balance sheets in the present case did not amount to acknowledgment of liability, as the auditor’s report contained caveats.

The appellant argued that the balance sheets filed by the corporate debtor contained clear acknowledgments of debt, which extended the limitation period. The respondent contended that the IBC should not be used to revive time-barred debts and that balance sheets prepared under compulsion of law cannot be considered valid acknowledgments.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court addressed the following key issues:

1. Whether Section 18 of the Limitation Act, which extends the period of limitation based on acknowledgment of debt, applies to proceedings under the IBC given the expression “as far as may be” in Section 238A of the IBC?
2. Whether an entry made in a balance sheet of a corporate debtor would amount to an acknowledgment of liability under Section 18 of the Limitation Act?

Treatment of the Issue by the Court

Authorities

The Supreme Court relied on the following authorities:

Judgment

The Supreme Court allowed the appeal, setting aside the majority judgment of the Full Bench of the NCLAT in V. Padmakumar and the impugned judgment of the NCLAT. The Court held that entries in balance sheets can amount to an acknowledgment of debt under Section 18 of the Limitation Act, provided that the acknowledgment is clear and not qualified by caveats. The Court emphasized that while the filing of a balance sheet is mandatory under the Companies Act, the acknowledgment of a debt is not necessarily so.

Treatment of Submissions by the Court

How each authority was viewed by the Court?

The following authorities were viewed by the Court as follows:

• Jignesh Shah v. Union of India, (2019) 10 SCC 750: The Court relied on this case to understand the rationale behind the introduction of Section 238A of the IBC, which makes the Limitation Act applicable to IBC proceedings.
• Sesh Nath Singh v. Baidyabati Sheoraphuli Co-operative Bank Ltd., Civil Appeal No. 9198 of 2019: The Court followed this judgment, which had applied Section 18 of the Limitation Act to IBC proceedings, reinforcing the applicability of the provision.
• Laxmi Pat Surana v. Union Bank of India, Civil Appeal No. 2734 of 2020: The Court cited this case to support the view that the provisions of the Limitation Act are applicable to IBC proceedings, and that Section 18 of the Limitation Act is not excluded.
• Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries (P) Ltd., (2020) 15 SCC 1: The Court referred to this case to clarify that it had not ruled out the application of Section 18 of the Limitation Act to IBC proceedings, if the facts of the case so warrant.
• Ambika Prasad Mishra v. State of U.P., (1980) 3 SCC 719: The Court used this case to emphasize that a settled position of law should not be easily undone by novel arguments.
• Khan Bahadur Shapoor Fredoom Mazda v. Durga Prasad, (1962) 1 SCR 140: The Court relied on this case to explain the scope of Section 18 of the Limitation Act, stating that an acknowledgment of debt renews the debt and need not be accompanied by a promise to pay.
• Mahabir Cold Storage v. CIT, 1991 Supp (1) SCC 402: The Court followed this case, which held that entries in the books of accounts amount to an acknowledgment of liability under Section 18 of the Limitation Act. This was a key precedent for the Court’s decision.
• A.V. Murthy v. B.S. Nagabasavanna, (2002) 2 SCC 642: The Court relied on this case, which stated that if the amount borrowed is shown in the balance sheet, it may amount to acknowledgment, and the creditor might have a fresh period of limitation.
• S. Natarajan vs. Sama Dharman, Crl. A. No. 1524 of 2014: The Court followed the judgment in A.V. Murthy, further solidifying the position that balance sheet entries can amount to an acknowledgment of debt.
• Bengal Silk Mills Co. v. Ismail Golam Hossain Ariff, 1961 SCC OnLine Cal 128 : AIR 1962 Cal 115: The Court cited this case to support the view that an acknowledgment of liability made in a balance sheet can amount to an acknowledgment of debt.
• Kashinath Sankarappa v. New Akot Cotton Ginning & Pressing Co. Ltd., 1949 SCC OnLine MP 123 : AIR 1951 Nag 255: The Court distinguished this case on the ground that the balance sheet was not made or signed by a duly authorized agent of the company. This case was not followed.
• Kashinath Sankarappa Wani v. New Akot Cotton Ginning and Pressing Co. Ltd., 1958 SCR 1331: The Court referred to this case to highlight that balance sheets should be admissible in evidence, but it did not raise a presumption of debt acknowledgment in the specific facts of that case.
• Vijayalakshmi v. Hari Hara Ginning and Pressing, Nandigaon, OS A No. 40 of 1998: The Court noted that this Andhra Pradesh High Court case differed from the view that merely showing a debt in a balance sheet would amount to an acknowledgment. This case was not followed.
• Ajit Chandra Bagchi v. Harishpur Tea Company (P.) Ltd., 1990 SCC OnLine Gau 24 : AIR 1991 Gau 92: The Court noted that this Gauhati High Court case held that entries in the books of accounts were not proved on the facts of that case. This case was not followed.
• South Asia Industries (P) Ltd. v. General Krishna Shamsher Jung Bahadur Rana, 1972 SCC OnLine Del 185 : ILR (1972) 2 Del 712: The Court cited this Delhi High Court case, which referred to the judgment in Bengal Silk Mills, and held that statements in balance sheets of a company could amount to acknowledgments of liability. This case was followed.
• Pandam Tea Co. Ltd., In re, 1973 SCC OnLine Cal 93 : AIR 1974 Cal 170: The Court referred to this case to support the view that balance sheets and directors’ reports should be read together to find the true meaning and purport of the statements. This case was followed.
• Hegde & Golay Limited v. State Bank of India, 1985 SCC OnLine Kar 428 : ILR 1987 Kar 2673: The Court relied on this Karnataka High Court case, which held that an acknowledgment of debts in the balance sheets of a company furnishes a fresh starting point of limitation. This case was followed.
• Bhajan Singh Samra v. M/s. Wimpy International Ltd., 2011 SCC OnLine Del 4888 : (2011) 185 DLT 428: The Court cited this Delhi High Court case, which held that admission of a debt in a balance sheet amounts to an acknowledgment, extending the period of limitation. This case was followed.
• CIT-III v. Shri Vardhman Overseas Ltd., 2011 SCC OnLine Del 5599 : (2012) 343 ITR 408: The Court followed this Delhi High Court case, which held that disclosure by the assessee company in its balance sheet amounts to an acknowledgment of the debts for the purposes of Section 18 of the Limitation Act. This case was followed.
• Shahi Exports Pvt. Ltd. v. CMD Buildtech Pvt. Ltd., 2013 SCC OnLine Del 2535 : (2013) 202 DLT 735: The Court relied on this Delhi High Court case, which held that an entry made in the company’s balance sheet amounts to an acknowledgment of the debt and has the effect of extending the period of limitation. This case was followed.
• N.S. Atwal v. Jindal Steel and Power Ltd., 2013 SCC OnLine Del 3902: The Court referred to this Delhi High Court case, which noted that admission in balance sheet is per-se an admission of liability. This case was followed.
• M/s. Al-Ameen Limited v. K.P. Sethumadhavan, 2017 SCC OnLine Ker 11337 : (2017) 4 KLJ 80: The Court followed this Kerala High Court case, which held that the inclusion of a debt in a balance sheet duly prepared and authenticated would amount to admission of a liability. This case was followed.
• Zest Systems Pvt. Ltd. v. Center for Vocational and Entrepreneurship Studies, 2018 SCC OnLine Del 12116: The Court cited this Delhi High Court case, which held that the acknowledgment of the debt in the balance sheet extends the period of limitation. This case was followed.
• Agni Aviation Consultants v. State of Telangana, 2020 SCC OnLine TS 1462 : (2020) 5 ALD 561: The Court relied on this Telangana High Court case, which held that an acknowledgment of liability in the balance sheet by a company extends the period of limitation. This case was followed.

The Supreme Court primarily relied on its own previous judgments and various High Court judgments that supported the view that entries in balance sheets can amount to an acknowledgment of debt under Section 18 of the Limitation Act. The Court distinguished or did not follow judgments that held a contrary view.

Ratio Decidendi

The ratio decidendi of the judgment is that:

1. Section 18 of the Limitation Act, 1963, applies to proceedings under the Insolvency and Bankruptcy Code, 2016, by virtue of Section 238A of the IBC.
2. Entries in the balance sheet of a corporate debtor can amount to an acknowledgment of debt under Section 18 of the Limitation Act, provided that the acknowledgment is clear and not qualified by caveats.

Obiter Dicta

The obiter dicta in the judgment include the following observations:

1. While the filing of a balance sheet is mandatory under the Companies Act, 2013, the acknowledgment of a debt is not necessarily so, and it depends on the facts of each case.
2. The IBC is not a recovery proceeding, but the provisions of the Limitation Act are still applicable to ensure that time-barred debts are not revived.

Implications of the Judgment

The judgment has significant implications for corporate insolvency cases:

• Extension of Limitation Period: Financial creditors can now rely on entries in the balance sheets of corporate debtors to extend the limitation period for initiating insolvency proceedings under the IBC.
• Clarity on Acknowledgment: The judgment provides clarity on what constitutes a valid acknowledgment of debt, emphasizing that the acknowledgment must be clear and not qualified.
• Impact on Corporate Debtors: Corporate debtors need to be cautious about the entries made in their balance sheets, as these can be used as evidence of acknowledgment of debt.
• Relevance of Section 18: The judgment reinforces the relevance of Section 18 of the Limitation Act in the context of IBC proceedings.

Flowchart of Decision-Making Process

Ratio Analysis