CIRP can be initiated even if name of financial creditor not specifically mentioned – SC

CIRP can be initiated even if name of financial creditor not specifically mentioned in balance sheet, an entry in the balance sheet coupled with the note of the accounts to acknowledgement of the liability – SC 

In a recent judgment, Hon’ble Supreme Court has held that for initiation of Corporate Insolvency Resolution Process (CIRP), even if the name of financial creditor was not specifically mentioned in the balance sheet, an entry made in the balance sheet coupled with the note of the accounts of the appellant clearly amounts to acknowledgement of the liability.

ABCAUS Case Law Citation:
4293 (2024) (10) abcaus.in SC

In the instant case, suspended director of the Corporate Debtor had challenged the order of the NCLAT affirming the order of the NCLT/Adjudicating Authority admitting the application under Section 7 of IBC3 for initiating Corporate Insolvency Resolution Process (CIRP) proceedings against the Corporate Debtor company.

The said corporate debtor had availed loan and credit facilities from respondent bank and other consortium of banks. On committing default on repayment of principal as well as interest, Corporate Debtor’s account was declared as Non-Performing Asset (NPA). Further, proceedings under SARFAESI5 Act and DRT for recovery of dues were also initiated.

The main objection of the corporate debtor to the initiation of CIRP proceedings was on the ground of limitation but it was rejected by the NCLT on the ground that there was an acknowledgement of debt in the financial statements as well as auditor’s report of the Corporate Debtor. On the basis of Section 238A of the Code, incorporating the Limitation Act, the NCLT relied on Section 18 of the Limitation Act to reckon the period of limitation from the date of acknowledgement of the debt and concluded that the institution of CIRP was within the period of limitation.

Another ground taken by the Corporate Debtor that name of UCO Bank, the financial creditor, was not specifically mentioned in the relied upon entry in the balance sheet was rejected by NCLT by referring to the Explanation to Section 7(1) of the Code providing that the proceedings thereunder get triggered even in the case of a default by debtor in respect of any financial creditor other than the applicant.

With the NCLAT dismissing the appeal of the corporate debtor, the matter travelled to the Hon’ble Apex Court.

Before the Hon’ble Supreme Court, it was contended that there was no unequivocal, unambiguous and specific acknowledgement of debt owed to Bank in the balance sheet entries of Corporate Debtor. In the absence of clear demarcation as to what the Corporate Debtor owes to the Bank, the said entries cannot be relied on for the purpose of extending the period of limitation in terms of Section 18 of the Limitation Act. It was further argued that even if said entry is taken to be an acknowledgment of debt, the same cannot aid respondent bank case since it did not mention the name of financial creditor.

The Hon’ble Supreme Court concurred with the concurrent finding of the NCLT well as the NCLAT based on Supreme Court judgment of three Judge Bench that the entries in the balance sheets amount to clear acknowledgment of debt. Further note to the balancesheet mentioned that “company has made certain defaults in the repayment of term loans and interest.” It further mentioned of a continuing default. The entry also mentioned long-term borrowings. As such, the conclusions of NCLT and NCLAT that there is acknowledgment of debt were unimpeachable.

The Hon’ble Supreme Court opined that the NCLT as well as the NCLAT have examined the case in detail and had come to the correct 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.

Accordingly, the Hon’ble Supreme Court dismissed the ground of appeal.

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