Entry in balance sheet may amount to acknowledgement of liability u/s 18 of Limitation Act if entry not with any caveat

Entry in balance sheet of a corporate debtor may amount to an acknowledgement of liability u/s 18 of the Limitation Act if such entry is not with any caveat

ABCAUS Case Law Citation
ABCAUS 3485 (2021) (04) SC

Important case law relied referred:
V. Padmakumar vs. Stressed Assets Stabilisation Fund
Sesh Nath Singh v. Baidyabati Sheoraphuli Co-operative Bank Ltd
Mahabir Cold Storage v. CIT, 1991 Supp (1) SCC 402
Laxmi Pat Surana v. Union Bank of India
Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries (P) Ltd.,(2020) 15 SCC 1
Khan Bahadur Shapoor Fredoom Mazda v. Durga Prasad,(1962) 1 SCR 140
Bengal Silk Mills Co. v. Ismail Golam Hossain Ariff, 1961 SCC OnLine Cal 128 : AIR1962 Cal 115
Jignesh Shah v. Union of India, (2019) 10 SCC 750
Hegde & Golay Limited v. State Bank of India, 1985   SCCOnLine Kar 428 : ILR 1987 Kar 2673

In this case, the Corporate Debtor had availed loan facilities from various lenders, including Bank. The loan account was declared as a non-performing asset (NPA).

Later, some of the original lenders of the corporate debtor assigned the debts owed to them by the corporate debtor to the appellant Asset Reconstruction Company.

The appellant 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 behalf of itself and other consortium.

The appellant took actual physical possession of the project assets of the corporate debtor under the SARFAESI Act. Subsequently, the appellant filed an   application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) before the National Company Law Tribunal, Calcutta (NCLT).  

However, as the relevant form indicating the date of default did not indicate any such date, this was made up by the appellant almost after 12 months by filing a supplementary affidavit before the NCLT, specifically mentioning the date of default and in support thereof annexing copies of the balance sheets of the corporate   debtor, which, according to the appellant, acknowledged periodically the debt that was due.

The NCLT in view of that balance sheets of the corporate debtor acknowledging loan liability were signed before   the expiry of three years from the date of default, held that it was acknowledgment of the debt due for the purposes   of Section 18 of the Limitation Act, 1963 (Limitation Act), the Section 7 application was not barred by limitation.

However, the issue travelled to the Hon’ble Supreme Court.

The question of law before the Hon’ble Supreme Court were:

(i) whether Section 18 of the Limitation Act, which extends the period of limitation depending upon an acknowledgement of debt made in writing and signed   by the corporate debtor?

(ii) whether an entry made in a balance sheet of a corporate debtor would amount to an acknowledgement of liability under Section 18 of the Limitation Act.

The Hon’ble Supreme Court observed that referring to the report of the Insolvency Law Committee, it had held that an application to the IBC should not amount to resurrection of time-barred debts which, in any other forum, would have been dismissed on the ground of limitation. Thus, the principle of Section 9 of the Limitation Act is to be strictly adhered to, namely, that when time begins to run, it cannot be halted, except by a process known to law.

The Hon’ble Supreme Court observed that several judgments of it had indicated that an entry made in the   books of account, including the balance sheet, could amount to an acknowledgement of liability within the   meaning of Section 18 of the Limitation Act

The Hon’ble Supreme Court also observed that an   exhaustive judgment of the Calcutta High Court held that an acknowledgement of liability made in a balance sheet can amount to an acknowledgement of debt.

It was noted that in the above judgment, the High Court had held that it is not uncommon to have an entry in a balance sheet with notes annexed to or forming part of such balance sheet, or in the auditor’s report, which must be read along with the balance sheet, indicating that such entry would not amount to an acknowledgement of debt for reasons given in the said note.

The Hon’ble Supreme Court noted the various provisions of the Companies Act, 2013 qua any compulsion of law for filing of balance sheets and acknowledgements made therein.

It was observed that notes annexed to or forming part of financial statements are expressly recognised by Section 134(7). Equally, the auditor’s report may also enter caveats with regard to acknowledgements made in the books of accounts including the balance sheet.

The Hon’ble Supreme Court opined that in view of the above, the statement of law made by Calcutta High Court 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 depend 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 acknowledgement of liability has, in fact, been made, thereby extending limitation under Section 18 of the Limitation Act.

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