Asset Reconstruction Company (India) Limited Vs. Bishal Jaiswal and Ors. - (Supreme Court) (15 Apr 2021)

Balance Sheets entries can amount to acknowledgement of debt for purpose of extending limitation

MANU/SC/0279/2021

Insolvency

In present matter, Corporate Power Ltd. ["the corporate debtor"] set up a thermal power project in Jharkhand, and for so doing, availed of loan facilities from various lenders, including the State Bank of India ["SBI"]. The account of the corporate debtor was declared as a non-performing asset by SBI. SBI issued a loan-recall notice to the corporate debtor in its capacity as the lenders' agent.

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 lenders to the corporate debtor. The Appellant took actual physical possession of the project assets of the corporate debtor under the SARFAESI Act. The Appellant filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 ["IBC"] before the National Company Law Tribunal, Calcutta ["NCLT"] for a default amounting to Rs. 5997,80,02,973 from the corporate debtor.

The Section 7 application was admitted by the NCLT, observing that the balance sheets of the corporate debtor, wherein it acknowledged its liability, were signed before the expiry of three years from the date of default, and entries in such balance sheets being acknowledgements of the debt due for the purposes of Section 18 of the Limitation Act, 1963 ["Limitation Act"], the Section 7 application is not barred by limitation.

In an appeal filed to the National Company Law Appellate Tribunal ["NCLAT"], the corporate debtor relied upon the Full Bench judgment of the NCLAT in V. Padmakumar v. Stressed Assets Stabilisation Fund Co. Appeal (AT) (Insolvency) ["V. Padmakumar"], in which a majority of four members held that, entries in balance sheets would not amount to acknowledgement of debt for the purpose of extending limitation under Section 18 of the Limitation Act. After a preliminary hearing, a three-Member Bench passed an order doubting 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. A five-Member Bench of the NCLAT, vide the impugned judgment refused to adjudicate the question referred, stating that the reference to the Bench was itself incompetent.

The Appellant, has assailed the impugned judgment, arguing that the majority judgment of the Full Bench of the NCLAT in V. Padmakumar was clearly per incuriam as it has not considered various binding judgments of this Court and that the said judgment was wholly incorrect in rejecting the reference out of hand at a preliminary stage. Issue arise before present Court is 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.

Several judgments of present Court have indicated that, an entry made in the books of accounts, including the balance sheet, can amount to an acknowledgement of liability within the meaning of Section 18 of the Limitation Act.

A perusal of various Sections in Company Act, 2013, would show that, there is no doubt that the filing of a balance sheet in accordance with the provisions of the Companies Act is mandatory, any transgression of the same being punishable by law. However, what is of importance is that notes that are annexed to or forming part of such financial statements are expressly recognised by Section 134(7) of Act. Equally, the auditor's report may also enter caveats with regard to acknowledgements made in the books of accounts including the balance sheet.

A perusal of the aforesaid would show that the statement of law contained in Bengal Silk Mills Vs. Ismail Golam Hossain Ariff, 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.

The NCLAT, in the impugned judgment has, without reconsidering the majority decision of the Full Bench in V. Padmakumar, rubber-stamped the same. Present Court therefore, set aside the impugned judgment also.

On the facts of this case, the NCLT, by its judgment dated 19th February, 2020, recorded that, the default in this case had been admitted by the corporate debtor, and that the signed balance sheet of the corporate debtor for the year 2016-2017 was not disputed by the corporate debtor. As a result, the NCLT held that the Section 7 application was not barred by limitation, and therefore, admitted the same. This appeal is, therefore, allowed, and the matter is remanded to the NCLAT to be decided in accordance with the law.

Tags : BALANCE SHEETS ENTRIES PROVISION APPLICABILITY