Supreme Court Upholds CIRP Admission Based on Debt Acknowledgment: Vidyasagar Prasad vs. UCO Bank (22 October 2024)

Date of the Judgment: 22 October 2024
Citation: 2024 INSC 810
Judges: Pamidighantam Sri Narasimha, J., Sandeep Mehta, J.
Can a company’s balance sheet entries and One Time Settlement (OTS) proposal be considered as valid acknowledgment of debt, thereby extending the limitation period for initiating Corporate Insolvency Resolution Process (CIRP)? The Supreme Court of India recently addressed this critical question in a case concerning UCO Bank and a corporate debtor. The court examined whether entries in the balance sheet and an OTS proposal constitute sufficient acknowledgment of debt to extend the limitation period under Section 18 of the Limitation Act, 1963. This judgment clarifies the scope and applicability of Section 18 of the Limitation Act within the context of the Insolvency and Bankruptcy Code, 2016. The judgment was delivered by a two-judge bench comprising Justice Pamidighantam Sri Narasimha and Justice Sandeep Mehta.

Case Background

The case involves a corporate debtor (respondent No. 2), represented by its Insolvency Resolution Professional (IRP), that had availed loan and credit facilities from UCO Bank (respondent No. 1) and other banks. These loans, obtained under agreements dated 21 June 2010, 30 August 2012, 19 July 2012, and 31 December 2012, were intended to fund the corporate debtor’s thermal power plant. The corporate debtor defaulted on repayments, leading to its account being declared as a Non-Performing Asset (NPA) on 5 November 2014. Subsequently, UCO Bank initiated proceedings under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act and the Debts Recovery Tribunal (DRT) for recovery of dues.

On 13 February 2019, UCO Bank filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) to initiate the Corporate Insolvency Resolution Process (CIRP) against the corporate debtor. The corporate debtor contested these proceedings, primarily on the grounds of limitation, arguing that the application was filed beyond the prescribed period. Additionally, the corporate debtor challenged the application’s validity, claiming it was not signed by a competent person and that there was no existing debt.

Timeline

Course of Proceedings

The Adjudicating Authority (National Company Law Tribunal, Kolkata Bench) ruled in favor of UCO Bank, holding that the General Manager of the bank was authorized to sign the application. It also concluded that a debt existed based on the contract, sanction letter, and credit agreements. The Adjudicating Authority rejected the limitation argument, citing an acknowledgment of debt in the corporate debtor’s financial statements and auditor’s report for the year ending 31 March 2017. The authority relied on Section 238A of the IBC, which incorporates the Limitation Act, and Section 18 of the Limitation Act, which allows for the extension of the limitation period based on acknowledgment of debt. The Adjudicating Authority also noted that even if the financial creditor’s name was not specifically mentioned in the balance sheet, proceedings could still be initiated under Section 7(1) of the IBC.

The corporate debtor appealed to the National Company Law Appellate Tribunal (NCLAT), Principal Bench, which upheld the Adjudicating Authority’s decision. The NCLAT considered the balance sheet for the financial year ending 31 March 2017, which was part of the record and admitted by the appellant. The NCLAT also noted that the balance sheet format does not require specific names of creditors. Further, the NCLAT observed that the corporate debtor had not denied outstanding dues to UCO Bank and that a charge of ₹175 crores remained outstanding. The NCLAT also relied on the Supreme Court’s judgment in Asset Reconstruction Company (India) Limited v. Bishal Jaiswal to conclude that entries in the balance sheets amount to acknowledgment under Section 18 of the Limitation Act. Additionally, the NCLAT considered the corporate debtor’s One Time Settlement (OTS) proposal dated 7 June 2016, as an acknowledgment of a subsisting liability, referencing the Supreme Court’s judgments in Lakshmirattan Cotton Mills Co Ltd and Dena Bank’s case.

Legal Framework

The judgment primarily revolves around the interpretation and application 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 238A of the IBC: This section extends the applicability of the Limitation Act, 1963, to proceedings under the IBC.
• 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 by the party against whom such right is claimed, a fresh period of limitation shall be computed from the time when the acknowledgment was signed.
• Section 3(12) of the IBC: 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.
• Section 129 of the Companies Act, 2013: Mandates the preparation of financial statements in compliance with the Act, read with Schedule III of the Companies Act 2013.

The Supreme Court emphasized that Section 238A of the IBC makes the Limitation Act applicable to IBC proceedings, thus allowing for the benefit of Section 18 of the Limitation Act. The court also highlighted that the date of default for initiating CIRP is not necessarily the date of declaring the loan account as NPA, but rather when the debt becomes due and is not paid, as defined in Section 3(12) of the IBC. The court noted that an acknowledgment of debt can extend the limitation period, provided it is made in writing before the expiration of the prescribed period.

Arguments

Appellant’s Arguments (Vidyasagar Prasad):

• The appellant argued that there was no clear and unequivocal acknowledgment of debt owed to UCO Bank in the entries of the balance sheets.
• The appellant contended that the entries in the balance sheets did not specifically demarcate the debt owed to UCO Bank, and therefore, could not be relied upon to extend the period of limitation under Section 18 of the Limitation Act.
• The appellant submitted that even if the entry is considered an acknowledgment of debt, it cannot aid the respondent’s case as it fails to mention the name of the financial creditor (UCO Bank) specifically.

Respondent’s Arguments (UCO Bank):

• The respondent argued that the balance sheets of a company are prepared in a statutory format which does not require specific names of every secured and unsecured creditor.
• The respondent submitted that the entries in the balance sheet, along with the auditor’s note, clearly acknowledge the debt.
• The respondent contended that the One Time Settlement (OTS) proposal made by the Corporate Debtor also constituted an acknowledgment of debt, as it related to a present and subsisting liability and indicated a jural relationship between the parties.
• The respondent relied on the judgment in Asset Reconstruction Company (India) Ltd. v. Bishal Jaiswal, where it was observed that there was no compulsion for companies to make any particular admissions in the balance sheet, except for what is prescribed.

Issues Framed by the Supreme Court

The Supreme Court addressed the following issue:

1. Whether the entries in the balance sheets of the Corporate Debtor amount to a clear and unequivocal acknowledgment of debt owed to UCO Bank, thereby extending the period of limitation under Section 18 of the Limitation Act, 1963.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

The following legal provisions were also considered:

• 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 238A of the IBC: This section extends the applicability of the Limitation Act, 1963, to proceedings under the IBC.
• 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 by the party against whom such right is claimed, a fresh period of limitation shall be computed from the time when the acknowledgment was signed.
• Section 3(12) of the IBC: 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.
• Section 129 of the Companies Act, 2013: Mandates the preparation of financial statements in compliance with the Act, read with Schedule III of the Companies Act 2013.

Judgment

How each authority was viewed by the Court?

• Laxmi Pat Surana v. Union Bank of India [CITATION]: The Court followed this authority to reiterate that the Limitation Act applies to IBC proceedings, and the date of default is when the debt becomes due, not necessarily the NPA declaration date.
• Dena Bank v. C. Shivakumar Reddy [CITATION]: The Court relied on this case to support the view that an acknowledgment of debt before the expiry of the limitation period extends the limitation, and an OTS proposal can be considered as an acknowledgment of debt.
• Rajendra Narottamdas Sheth v. Chandra Prakash Jain [CITATION]: The Court followed this authority to reiterate that Section 18 of the Limitation Act is applicable to applications filed under Section 7 of the IBC, and a fresh period of limitation commences if there is an acknowledgment of debt in writing by the corporate debtor within the initial period of three years from the date of default.
• Asset Reconstruction Company (India) Ltd. v. Bishal Jaiswal [CITATION]: The Court used this case to clarify that while filing a balance sheet is mandatory, there is no compulsion to make any particular admission, and it depends on the facts of each case whether an entry is an unequivocal acknowledgment.
• Lakshmirattan Cotton Mills Co. Ltd. and Messrs Behari Lal Ram Charan v. Aluminium Corporation of India Limited [CITATION]: The Court used this case to explain that an acknowledgment of debt must relate to a subsisting liability and indicate a jural relationship between the parties.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the legal principle that an acknowledgment of debt, if made in writing before the expiry of the limitation period, extends the period of limitation. The Court emphasized that the balance sheet entries, when read with the auditor’s note, constituted a clear acknowledgment of debt. The Court also considered the One Time Settlement (OTS) proposal as a valid acknowledgment of a subsisting liability. The Court’s reasoning was also influenced by the fact that the balance sheets are prepared in a statutory format, and it is not mandatory to include specific names of creditors in those statements. The Court also noted that the Corporate Debtor did not deny the debt to the UCO Bank. The Court’s conclusion was also influenced by the fact that the OTS proposal was not made “without prejudice”.

Fact:Law Ratio

Logical Reasoning:

The Court considered the appellant’s argument that the balance sheet entries did not specifically mention the debt owed to UCO Bank. However, it rejected this argument by noting that the balance sheets are prepared in a statutory format which does not require specific names of every secured and unsecured creditor. The court also considered the fact that the Corporate Debtor had not denied the debt to the UCO Bank. The Court also considered the fact that the OTS proposal was not made “without prejudice”.

The Supreme Court, in its judgment, stated, “The conclusions of NCLT and NCLAT that there is acknowledgment of debt are unimpeachable.” The court further noted, “Following the principles as expounded in the case of Bishal Jaiswal (Supra), the Adjudicating Authority as well as the NCLAT have examined the case in detail and have come to the conclusion that the entry made in the balance sheet coupled with the note of the auditor of the appellant clearly amounts to acknowledgement of the liability.” Additionally, the court observed, “Both these factors, acknowledgment of debt in the balance sheet as well as in the OTS proposal, have been considered by NCLAT while dismissing the appeal.”

The court did not find any alternative interpretations that would negate the acknowledgment of debt. The Court upheld the concurrent findings of the Adjudicating Authority and NCLAT, stating that they were correct in law and fact. The Court concluded that the entries in the balance sheets and the OTS proposal constituted a valid acknowledgment of debt, thereby extending the limitation period for initiating CIRP.

The judgment was delivered by a two-judge bench comprising Justice Pamidighantam Sri Narasimha and Justice Sandeep Mehta. There were no dissenting opinions.

Key Takeaways

• Acknowledgment of debt in balance sheets, along with auditor’s notes, can extend the limitation period for initiating CIRP under the IBC.
• One Time Settlement (OTS) proposals can also be considered as valid acknowledgment of debt, provided they are not made “without prejudice”.
• The statutory format of balance sheets does not require specific names of creditors, and a general acknowledgment of debt can suffice.
• The date of default is not necessarily the date of NPA declaration but when the debt becomes due and payable.

Directions

No specific directions were given by the Supreme Court in this judgment.

Development of Law

The ratio decidendi of this case is that the entries in the balance sheet of a Corporate Debtor, along with the auditor’s note, can be considered as a valid acknowledgment of debt, thereby extending the period of limitation for initiating CIRP under the IBC. Further, the court held that an OTS proposal can also be considered as a valid acknowledgment of debt. This judgment reinforces the applicability of Section 18 of the Limitation Act to proceedings under the IBC and clarifies that the date of default is when the debt becomes due and payable, not necessarily the date of NPA declaration. This ruling does not change the previous position of law but rather reinforces it.

Conclusion

The Supreme Court dismissed the appeal, upholding the NCLAT’s decision that the entries in the balance sheets of the corporate debtor and the One Time Settlement (OTS) proposal constituted a valid acknowledgment of debt. This acknowledgment extended the limitation period for initiating the Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016. The court’s decision clarifies the scope of Section 18 of the Limitation Act within the context of the IBC, emphasizing that acknowledgment of debt can be inferred from balance sheet entries and OTS proposals, even if they do not explicitly mention the creditor’s name. This judgment ensures that financial creditors can initiate CIRP proceedings against defaulting corporate debtors even after the initial limitation period, provided there is a valid acknowledgment of debt.

Category

Parent Category: Insolvency and Bankruptcy Code, 2016

• Child Category: Section 7, Insolvency and Bankruptcy Code, 2016
• Child Category: Section 238A, Insolvency and Bankruptcy Code, 2016
• Child Category: Corporate Insolvency Resolution Process (CIRP)
• Child Category: Acknowledgment of Debt
• Child Category: Limitation Act, 1963
• Child Category: Section 18, Limitation Act, 1963

Parent Category: Limitation Act, 1963

• Child Category: Section 18, Limitation Act, 1963

FAQ

Q: What does this judgment mean for companies that have defaulted on loans?
A: This judgment means that if a company has acknowledged its debt in its balance sheet or through a One Time Settlement (OTS) proposal, the limitation period for initiating Corporate Insolvency Resolution Process (CIRP) can be extended. This gives more time to financial creditors to recover their dues.

Q: Can a balance sheet entry alone be considered an acknowledgment of debt?
A: Yes, a balance sheet entry, when read with the auditor’s note, can be considered a valid acknowledgment of debt, even if it does not specifically mention the creditor’s name. This is because the statutory format of balance sheets does not require specific names of creditors.

Q: What is the significance of an OTS proposal in this context?
A: A One Time Settlement (OTS) proposal can also be considered as a valid acknowledgment of debt, provided it is not made “without prejudice.” This means that if a company offers an OTS, it is essentially admitting that it owes the debt, which can extend the limitation period for CIRP.

Q: What is the ‘date of default’ in the context of CIRP?
A: The ‘date of default’ is not necessarily the date when a loan account is declared as a Non-Performing Asset (NPA). Instead, it is the date when the debt becomes due and payable and is not paid by the debtor. This is crucial for determining the limitation period for initiating CIRP.

Q: How does Section 18 of the Limitation Act apply to IBC proceedings?
A: Section 18 of the Limitation Act states that if, before the expiration of the prescribed period for a suit or application, an acknowledgment of liability is made in writing by the party against whom such right is claimed, a fresh period of limitation shall be computed from the time when the acknowledgment was signed. This section is applicable to IBC proceedings as per Section 238A of the IBC, allowing for an extension of the limitation period based on acknowledgment of debt.