Introduction
The Limitation Act, 1963 and the Insolvency and Bankruptcy Code, 2016 (IBC) have been at odds ever since the inception of the latter. One such instance of conflict has been brought about by Section 18 of the Limitation Act. This section lays down that an admission of liability in writing shall create a fresh period of limitation which will be calculated from the time such admission was made.
This provision becomes very relevant in case of IBC matters where timely claims are of the utmost concern. A contentious question which has subsequently emerged is whether acknowledgement of debt in a balance sheet would extend the time for initiating corporate insolvency resolution processes (CIRP) under section 7 of the IBC.
This controversial position of law before the NCLT began with the case of Syndicate Bank v. Bothra Metals and Alloys Limited. This case held that an admission of debt in the balance sheet came within the particulars envisaged under Section 18 of the Limitation Act and would lead to a fresh period of limitation from the date of such acceptance. This extension of limitation allowed the court to accept the petition under section 7 of the IBC seeking CIRP.
Early jurisprudence evolved by the High Courts and the Supreme Court
In the case of Ambika Mills Ltd. v. Commissioner of Income Tax, the question before the court was whether the liability of the assessee to pay the wages was barred by limitation or not. The court ruled that there was an acknowledgement in the balance sheet at the end of the year and thus, the claim was not barred by limitation. Also, the company could not be unduly benefited with profit as the amounts were clear and conclusive liabilities. They said that even though publishing of accounts is a regular statutory obligation, the acknowledgment will still serve as a valid piece of evidence.
In the Hedge and Golay Limited v. State Bank of India case, the court clarified that it is not mandatory that the acknowledgments of debt be addressed to the creditor for creation of a fresh period of limitation. This allows the entries in the balance sheet which are not addressed to any person to be treated as an admission of debt as well.
The Supreme Court also added to this discourse in the case of A.V. Murthy v. B.S. Nagabasavanna. They propounded that acknowledgement of debt would lead to a fresh period of limitation from the date of such admission. The admission need not be an elaborate depiction of the status of liability. It just needs to be an existing obligation which reflects the legal relationship between the parties to the dispute.
In the case of Usha Rectifier Corporation (I) Ltd. v. Commissioner of Central Excise, New Delhi the Supreme Court was of the opinion that not giving due consideration to the acknowledgments made by a party would be equivalent to allowing them to make contradictory submissions and escape liability. Therefore, such admissions which are supported by adequate proof must be taken into account.
Principles propounded by courts of foreign jurisdictions
Decisions of several international jurisdictions are in line with the principles laid down by the Indian courts. For instance, in the case of Gee & Co. (Woolwich) Ltd., the court laid down that acknowledgement of debt can extend the period of limitation by initiating a fresh cause of action. There is no mandate that the debt must have been wholly due. When the director signs the balance sheet it serves as a proof of admission. However, the court said that even if the accounts have not been signed or fully finalized, they can still be treated as sufficient and valid proof.
In the case of Bowring-Hanbury’s Trustee v. Bowring-Hanbury, the court held that the acknowledgment must be specific and should not just be a vague and general statement. They also said that statements cannot be morphed into an acknowledgement by giving oral evidence that certain debts are included in the final sum of money owed. The acknowledgement should be a clear, cogent and written statement.
The Jones v. Bellgrone Properties case held that the acknowledgment must be written and signed by the person or company making it. The acknowledgment must be made to the person whose claim is being admitted. The people making the acknowledgment must also have the authority and right to make such admission. An acknowledgment by a party having no stake in the dispute will have no effect.
The foreign decisions were more detailed with respect to the mode and manner of the acknowledgement. However, in essence they were similar to decisions by the courts of India and laid down that entries in the balance sheet can amount to acknowledgement of debt and can create a fresh period of limitation.
Position of law as put forth by the NCLT and NCLAT
NCLAT in the case of G Eswara Rao v. Stressed Assets Stabilization Fund departed from the ratios enshrined in the Syndicate case and the past decisions of the judiciary. This court pointed out that filing annual returns is a constant and mandatory process under Section 92(4) of the Companies Act, 2013. This implied that if balance sheets were treated as an appropriate evidence of acceptance of liability, then situations of limitation would keep getting extended and lead to delays in the process of resolution.
This position was again reinforced by the case ofV. Padmakumar v. Stressed Assets Stabilization Fund (SASF). The court categorically held that entries in balance sheets are not equivalent to admission of debt under Section 18. The judges passed this ruling without hesitation in light of the principles laid down by the case of Babulal Vardharji Gurjar v. Veer Gurjar Aluminum Industries Ltd. The Babulal case held that Section 18 of the Limitation Act will not be used in bankruptcy cases. Using this ratio as a stepping stool, subsequent courts ruled that the matter of acknowledgment of debt in the balance sheet impacting limitation period shall not arise in IBC matters.
A three judge bench in the case of Bishal Jaiswal v. Asset Reconstruction Company (India) Ltd. referred the Padmakumar case for reconsideration to a 5 judge bench. The judges believed that the recent catena of cases have disturbed settled waters and might lead to grave injustice. They said that just because filing an annual return was a mandatory duty under Companies Act, 2013 was not a good enough reason that the balance sheet cannot be used as evidence of debt.
They quoted Section 397 of the Companies Act, 2013 which stated that documents part of the annual return would be admissible in any proceeding and have a strong evidentiary value. The case then went to the five judge bench. This higher bench did not go into the merits and dismissed the case citing judicial indiscipline and misadventure by the lower bench. Thus, the ratio of the Padmakumar case prevailed.
Final position of law as laid down by the Supreme Court of India
The Supreme Court in the recent case of Asset Reconstruction Company v. Bishal Jaiswal has reconsidered the earlier decisions by the company law tribunals and has brought an end to this conflict of rationales. It has held that entries in balance sheets can be treated as admission of debt and this can extend the period of limitation under Section 18 of the Limitation Act. The court has set aside the Padmakumar decision and has concurred with the earlier decisions of various high courts. The only requirement of Section 18 is that the admission should be in writing. There is no restriction on the type of document and thus, a balance sheet is a sufficient proof of debt.
Conclusion
The Padmakumar decision provided that entries in the balance sheet will not be treated as acknowledgement of debt under Section 18 of the Limitation Act, 1963 and the IBC, 2016. These decisions created a lot of controversy and debate as there was a complete departure from the original rulings of various High Courts and the Supreme Court. The NCLAT was a bit too focused on providing speedy redressals. However, this cannot outweigh the need to ensure that all parties can suitably use the IBC mechanism to recover the money due to them. The Supreme Court has rightly stepped in and restored the position that was originally propounded by the high courts that the balance sheet must be treated as a valid piece of evidence which can create a fresh period of limitation.
[Aryan Vij is a 4th year student at NLIU, Bhopal. The author can be reached at aryanzlaw@gmail.com]
NUALS Restructuring and Insolvency Law Journal 