NCLAT on Whether Entries in Balance Sheet are an Acknowledgment of Debt

[Mohak Thukral is a IV year B.A., LL.B. (Hons.) student at the Jindal Global Law School]

According to an order in  Bishal Jaiswal v Asset Reconstruction Company (India) Ltd (dated December 22, 2020), a five-member bench of the National Company Law Appellate Tribunal (“NCLAT”) rejected a reference order made by a three-member bench for the reconsideration of the decision in V. Padmakumar v. Stressed Assets Stabilization Fund (SASF). In V. Padmakumar, another five-member bench held that entries in books of accounts would not amount to an acknowledgement of debt under section 18 of the Limitation Act, 1963 for proceedings under the Insolvency and Bankruptcy Code (“IBC”).

The latest order held that the judgement in V. Padmakumar was passed in view of the recent ruling of the Supreme Court in Babulal Vardharji Gurjar v. Veer Gurjar Aluminum Industries Ltd., whereby the apex court observed that section 18 of the Limitation Act, 1963 (acknowledgement in writing) has no application on the proceedings under the IBC. Hence, the issue of acknowledgement of the debt by entries or reflection in the Balance Sheet is irrelevant for proceedings under IBC. Additionally, the order stated that since the judgement in V. Padmakumar has not been appealed against, and neither has the apex court taken a contrary view, it is binding precedent on any subsequent Bench of lesser or co-equal strength and therefore, the reference order is “incompetent” and “inappropriate”.

This post seeks to explain the recent debate on if entries in the balance sheet would qualify as an acknowledgement of debt for proceedings under the IBC, and traces the trajectory of judicial decisions starting from the V. Padmakumar case to the latest order of the Five-Member Bench in Bishal Jaiswal.

Application of Limitation Act in Proceedings under IBC

The Insolvency & Bankruptcy Code (Second Amendment) Act, 2018 inserted section 238A to the IBC that made the provisions of Limitation Act applicable to proceedings before the Adjudicating Authorities and Appellate Authorities under the IBC. The Supreme Court in B.K Educational Services Pvt Ltd v. Parag Gupta and Associates held that the Article 137 of the Schedule to the Limitation Act would govern the applications filed under section 7 and section 9 of the IBC, which provides for three years of Limitation on the proceedings. Further, the Apex Court in Sagar Sharma v. Phoenix ARC Pvt Ltd, held that the Limitation period for such applications would be calculated from the date of default, and not from the date of IBC’s coming into force.

Applicability of section 18 of Limitation Act for application under section 7 and section 9 of the IBC

Despite these judicial decisions, the confusion regarding the applicability of acknowledgement of liability under section 18 of the Limitation Act, 1963 to the IBC Proceedings remained unsettled. Acknowledgement in section 18 of the Limitation Act means an admission of an existing liability in lieu of which the period of Limitation is extended. For the applicability of section 18, the acknowledgement of liability must be in writing, unqualified, and signed by the person or authorized agent admitting such liability. The effect of section 18 is that a fresh period of Limitation is computed from the time when the acknowledgement is signed.

While in the past, multiple Benches of the High Courts and even the Supreme Court, have held that an authentic and signed Balance Sheet of an entity would qualify as a written acknowledgement of debt and be sufficient for a fresh period of Limitation to be instituted. However, the adjudicating and appellate authorities under the Code ruled contrary judgments while deciding acknowledgement of debt in the balance sheet. This memo will trace the trajectory of the three recent judicial decisions which have finally brought an end to this confusion.

V. Padmakumar (5-Member Bench)

Through a 4:1 majority decision, the NCLAT Bench reiterated the earlier decision of the two-member Bench of Sh. G Eswara Rao v. Stressed Assets Stabilisation Fund, and ruled that entries in the balance sheet or an annual return, which is required to be prepared to comply with statutory requirements, cannot be treated as an acknowledgement under section 18 of the Limitation Act for the purpose of filing an application for initiation of the Corporate Insolvency Resolution Process under the IBC.

The Bench held that the filing of Balance Sheet or Annual Return is mandatory as per the section 92(4) of the Companies Act, 2013, and failing to do the same would attract penal action under section 92(5) and section 92(6). Hence, the statements are made under statutory requirements and are not voluntary in nature. Additionally, since it is mandatory to file Balance Sheet and Annual Returns every year, there would be no Limitation if such Balance Sheet or Annual Returns are treated as an acknowledgement of debt. Therefore, the Balance Sheet of the Corporate Debtor cannot be treated to be an acknowledgement under section 18. However, the minority view held that the Balance Sheet of the Company must be treated as an acknowledgement of debt for the purpose of section 18 of the Limitation Act, 1963.

The decision in V. Padmakumar faced critique for ignoring several precedents laid down by the Supreme Court and High Courts of the country. Similarly, the decision followed a route contrary to the judicial position in most foreign jurisdictions, including the United Kingdom and Australia, where the balance sheet, if duly signed by the directors, is considered capable of being an effective acknowledgement.

Bishal Jaiswal v. Asset Reconstruction Company (India) Ltd (Referral Bench)

In this case, a 3-Member Bench (Referral Bench) of the NCLAT dealt with an appeal filed by a Corporate Debtor against the order of the NCLT admitting the insolvency petition beyond the period of 3 years from the date of classifying of the account as Non-Performing Asset (“NPA”). The NCLT ruled that the debt stood acknowledged by the entries in the books of accounts and hence was not time-barred, owing to the applicability of section 18 of the Limitation Act.

Instead of following the precedent laid down in V. Padmakumar, the Three-Member Bench held that the decision in V. Padmakumar requires reconsideration. The Bench relied on the Supreme Court Decision in the case of Pradip Chandra Parija v. Pramod Chandra Patanaik to hold that if a Bench of lesser strength concludes that an earlier Judgment of a bench with a stronger strength is “so very incorrect” that in no circumstances can it be followed; it must be referred to a Bench with stronger strength with reasons of the disagreement.

The Referral Bench stated that the Supreme Court and High Courts of different states had taken a consistent view that entries in the Balance Sheet must be treated as an acknowledgement of debt for the purpose of section 18 of Limitation Act. The majority decision in V. Padmakumar is contrary to settled law and offers no reasons or precedents for taking this view. Furthermore, the High Court of Calcutta and the High Court of Delhi have clarified that merely because the Balance Sheet is prepared under the compulsion of law and in the discharge of statutory duty, it cannot be held that the Balance Sheet of the Company cannot amount to an acknowledgement of liability. Additionally, the Referral Bench went on to state that the Balance Sheet is a material document with sanctity used for obtaining a business loan and investments and is also submitted to Registrar of Companies. The Referral Bench focused on section 397 of the Companies Act which states that documents filed for the purpose of Companies Act, and Rules made thereunder by a Company with the Registrar shall be admissible in any proceedings thereunder as direct evidence.

Owing to these reasons, the Referral Bench through an order dated September 25, 2020, referred the decision in V. Padmakumar to a Five-Member Bench of NCLAT for reconsideration.

Bishal Jaiswal v. Asset Reconstruction Company (India) Ltd (5-Member Bench)

In this case, a Five-Member Bench of the NCLAT held that the Referral Bench failed to take note of the fact that judgment in V. Padmakumar was itself a result of reference to a larger Bench constituted in the wake of two conflicting judgments rendered by Benches of co-equal strength on the issue (V Hotels Limited v. Asset Reconstruction Company Limited and the Ugro Capital Limited v. Bangalore Dehydration and Drying Equipment Co. Pvt. Ltd). Further, the Appellate Tribunal is not a Constitutional Court, and instead, is a creation of a statute. Appellate Tribunal must only apply the laws in the Statutes and as laid down by the Apex Court. Once a Larger Bench decides upon a question of law, the issue raised by the Referral Bench can no more be said to be res integra and another reference to decide the same question of law does not arise. Therefore, it was inappropriate to doubt the correctness of the judgement rendered by a Five-Member Bench judgment which has not been appealed against and stands as a binding precedent.

The Five-Member Bench further referred to the Supreme Court’s decision in Babulal Vardharji Gurjar v. Veer Gurjar Aluminum Industries Ltd. whereby it was observed that section 18 of the Limitation Act, 1963 would have no application to proceedings under the IBC. Therefore, any issue raised as regards acknowledgement of liability by reflection in the Balance Sheet/Annual Return would be irrelevant. The Bench stated that it is clear that findings in the V. Padmakumar were based on the latest judgments of the Supreme Court, where the remedy available under the IBC was recognized as distinct and independent from the recovery mechanism in civil jurisdiction. IBC provides a timeline for resolution of insolvency issues and proceedings are governed by Article 137 of Limitation Act. The Referral Bench, while citing precedents of various judicial decisions, failed to draw this distinction between the two forms of remedies.

Further, the Five-Member Bench rebuked the Referral Bench for “judicial indiscipline” and “crossing the red line by disregarding the binding precedent” and rejected the referral order as a misadventure which has overlooked all legal considerations.

Conclusion

The order of the Five-Member Bench of the NCLAT in Bishal Jaiswal brought the much-needed clarity on the treatment of entries in the balance sheet as an acknowledgement of debt in the realm of IBC proceedings. As held in V. Padmakumar, the final position remains that entries in the balance sheet would not amount to an acknowledgement of debt under section 18 of the Limitation Act, 1963 for proceedings under the Insolvency and Bankruptcy Code, 2016.

– Mohak Thukral