The Dilemma Of Acknowledgment Of Debt Through Balance Sheet: An Unending Saga

[By Vishesh Jain and Sahiba Vyas]

The authors are students at National Law University, Odisha.

Introduction

The 89th Law Commission Report subserves that no one should live under the menace of a plausible action for an indefinite period. When the Insolvency and Bankruptcy Code, 2016 (IBC) was instituted, there was no explicit provision regarding the application of Limitation Act, 1963 until the Hon’ble Supreme Court (SC) ascertained the applicability of limitation period for filing of an application under IBC. The Apex Court, in the matter of Innoventive Industries Ltd. vs. ICICI Bank Limited (2018), adjudged that, “a debt may not be due if it is not payable in law or in fact”. Thus, Section 238A was inserted into IBC which states that,

“The provisions of the Limitation Act, 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 Appellate Tribunal, as the case may be.”

The interpretation of the same has become misty after the National Company Law Appellate Tribunal (NCLAT) and the National Company Law Tribunal (NCLT) have given contradictory judgements on the same question of law. The authors through this post comment on the differing views of the adjudicating authorities and try to establish a conclusion to encounter the disparate views with the help of foreign jurisprudence.

NCLAT & NCLT at Odds

The whole conundrum started when recently in the case of Syndicate Bank v. Bothra Metals and Alloys Limited, NCLT held that an application under Section 7 of IBC  is not barred by limitation. The case dealt with a Company Petition filed under Section 7 of IBC by Syndicate Bank (Financial Creditor), seeking to initiate Corporate Insolvency Resolution Process (CIRP) against Bothra Metals and Alloys Limited (Corporate Debtor). The Corporate Debtor (CD) failed to pay the principal and interest of the loan availed by the Financial Creditor (FC). The CD raised the contention that the present application of the FC is barred by limitation but the Tribunal, held that “an acknowledgement in the Balance Sheet of the company satisfies the requirements of Section 18 of the Limitation Act, 1963, leading to a fresh period of limitation commencing from each such acknowledgement.” The contradictory views on the impugned issue can be observed from various rulings of NCLAT. In 2019 in case of Gautam Sinha vs. UV Asset Reconstruction Company Limited, the Tribunal ruled that though a default in the form of NPA is reflected in the Balance Sheet, it was not an acknowledgement of the debt by the Corporate Debtor and the default was time-barred for filing of an application under Section 7 of the IBC. Further, in February 2020 in the case of Sh. G Eswara Rao vs. Stressed Assets Stabilisation Fund, the Appellate Tribunal reaffirmed the same rationale and stated that under Section 92(4) of the Companies Act, 2013, the filing of Balance Sheet/annual return is mandatory notwithstanding which penal action might be initiated under Section 92(5) and 92(6) of the same Act. Thus, the filling of Balance Sheet/ Annual Return cannot be considered as a ground for acknowledgement of debt under Section 18 of the Limitation Act, 1963.

In March 2020 again in case of V. Padmakumar v. Stressed Assets Stabilisation Fund, the AA relied on the same contradictory premise as stated in above-mentioned cases. In this case an application was filed under Section 7 of IBC by M/s. Stressed Assets Stabilization Fund (SASF) for initiation of CIRP against M/s. Uthara Fashion Knitwear Limited. A five-judge bench of NCLAT, with a ratio of 4:1, favoured barring limitation to file an application under Section 7 of IBC. The impugned case discussed the legal perspectives with regards to the acknowledgement of the debt using Recovery Certificate reflected in the Balance Sheet. The one dissenting opinion of Justice Cheema, in this case, favoured the acknowledgement of debt through the Balance Sheet. While deciding the case, the Adjudicating Authority (AA) relied on the judgement delivered by the Apex Court in the case of Jignesh Shah and another v. Union of India and another, where the Hon’ble court cited the prima facie objectives of IBC i.e. an insolvency proceeding is a proceeding ‘in rem’ and not a recovery proceeding; thus, a winding-up petition must trigger the date of default and not on the day of acknowledgement of debt. Thus, the contradictory views adopted by various Adjudicating Authorities have left the interpretation of the provision in a lurch.

Acknowledgement of Debt and Foreign Jurisprudence

Under the English Law, Atlantic and Pacific Fibre Importing and Manufacturing Co. Ltd is considered as one of the first cases on the acknowledgement of debt and Balance Sheet conundrum wherein the court opined that recording debenture debt in the Balance Sheet of the company is sufficient acknowledgement of debenture debt. The next most notable and celebrated decision on the Balance Sheet conundrum was rendered in Jones v. Bellgrone Properties, wherein the Court of Appeals held that once the chartered accountant and directors of a company sign the Balance Sheet, it constitutes as an acknowledgement of debt within the meaning of applicable limitation statue. The current legal position in English Law can be derived from the decision of Gee & Co.(Woolwich) Ltd., where the Court observed that there is no requirement in English law that debt must be due at the time when it is acknowledged. The Court further held that when the director duly signs the Balance Sheet, then it can be efficiently considered as acknowledgement of debt and the cause of action for the same is deemed to have accrued on the date of signing of the Balance Sheet by the director. This has also been upheld by the Court in the case of Overmark Smith Warden Ltd.

If we look upon Australian Jurisprudence, the Courts have settled the position in the case of Stage Club v. Miller Hotels wherein it was held that the signed Balance Sheet is enough to constitute an acknowledgement for the debt for Statute of Limitation.

After the perusal of English and Australian Jurisprudence, it can be conclusively argued that acknowledgement of debt through balance sheet is a valid acknowledgement. This calls for attention towards the divergent opinion of Justice Cheema in V. Padmakumar Judgement, where he observed that acknowledgement in the Balance sheet can amount to an acknowledgement of debt under Section 18 of the Limitation Act, 1963. Since the books of accounts show the true and fair value of companies’ affairs, it also holds sanctity in law as evidence. The rationale behind such sanctity is that it is a general practice enumerated under Indian Accounting Standard to record the true and fair value of assets and liabilities of the company in the Balance Sheet. Furthermore, there is a minimal chance of falsification as such Balance Sheet is audited by the auditor which provides a sufficient degree of trustworthiness to the same.

Analysing the Contrasting Views

Firstly, the decision of the NCLAT in the V. Padmakumar, negating the Balance Sheet to be a valid form of acknowledgement of debt is per incuriam. As the Apex Court unequivocally held in the case of Mahabir Cold Storage v. Commissioner of Income Tax, Patna that if the amount borrowed by the respondent is shown in the Balance Sheet, it may amount to acknowledgement and the creditor will have a fresh period of limitation from such date of acknowledgement. The Supreme Court in the most recent judgement of Babulal Vardharji Gurjar vs. Veer Gurjar Aluminium Industries Private Limited & Anr held that if the acknowledgement of debt is within the limitation period, then such acknowledgement extends or enlarges the limitation period under Section 18 for filing of an application. Furthermore, the Calcutta High Court in Bengal Silk Mills Co. vs. Ismail Golam Hossain Ariff held that the statement of liability amounted to a valid acknowledgement of debt giving rise to a fresh period of limitation, even though Balance Sheet was prepared under the “compulsion of the statute”. Moreover, the Delhi High Court in the case of Sahi Export Pvt. Ltd. vs. CMD Buildtech Pvt. observed that entry in the Balance Sheet can be considered as a valid acknowledgement and has the effect of extending limitation period for the purpose of Section 18 of the Limitation Act, 1963. Thus, NCLAT erred in following these settled laws and based its judgement on erroneous reasoning rendering it per incuriam.

Secondly, the NCLAT has observed that there will be no limitation if the Balance Sheet is considered as a valid acknowledgement under Section 18 of Limitation Act, 1963 as the Balance Sheet is filed every year under a statutory provision. This reasoning of the NCLAT does not hold good as the Kerala High Court in the case of P. Sreedevi v. P Appu, held that acknowledgement of debt through Balance Sheet would not create a new right of action but would merely extend the period of limitation. Therefore, it can be concluded that filing of annual returns by the company would not amount to arising of a fresh cause of action every year.

Lastly, the Balance Sheet is considered to be the document showing the existing jural relation between debtor and creditors. As is clear from the dicta of the Punjab High Court in the case of Dainik Finance and Chit Fund Co. P. Ltd. v. Agricultural Industries that if the statement of the Balance Sheet is fairly clear in subsisting liability, then it can be implied that there exists a jural relation between the creditor and debtor. Moreover, the liabilities mentioned in the statement of the Balance Sheet will amount to a valid acknowledgement of debt for the purposes of Section 18 of the Limitation Act, 1963. Thus, negating the Balance Sheet as a valid acknowledgement of debt will jeopardize the jural relationship of the parties and the creditor would not be able to recover its debt.

Concluding Remarks

After the careful perusal of the Indian and foreign jurisprudence related to the acknowledgement of debt through Balance Sheet, the authors establish the fact that the central argument for inconsistency in the views of Adjudicating Authorities traces back its genesis to Section 92 of the Companies Act, 2013 which mandates for filing of annual returns. The authors advocate the fact that the Balance Sheet holds high evidentiary value and is considered to put forth the true and fair financial statement of the company but the  Appellate Tribunal erred in not considering the same. Such a flawed precedent will also affect the jural relation between the creditor and the debtor and would put them in a position where the debtor can take an undue advantage of the creditor. However, this issue has already been challenged before the SC and hopefully, the Apex Court will settle this issue in its entirety.

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