LIMITATION IN INSOLVENCY PROCEEDINGS – VALIDITY OF BOOK ENTRIES ?

According to section 238A of the Insolvency and Bankruptcy Code, 2016 (IBC, in short), limitation period has to be kept in mind in corporate insolvency resolution process proceedings.

On limitation period, section 238A of IBC provides for limitation as follows:

“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 Tribunal or the Debt Recovery Appellate Tribunal, as the case may be.”

Coming to limitation prescribed under the Limitation Act, 1963, section 18 provides for ‘effect of acknowledgment in writing. Accordingly, it reads as under:

“18. Effect of acknowledgement in writing

(1) Where, before the expiration of the prescribed period for a suit or application in respect of any property or right, an acknowledgement of liability in respect of such property or right has been made in writing signed by the party against whom such property or right is claimed, or by any person through whom he derives his title or liability, a fresh period of limitation shall be computed from the time when the acknowledgement was so signed.

(2) Where the writing containing the acknowledgement is undated, oral evidence may be given of the time when it was signed; but subject to the provisions of the Indian Evidence Act, 1872 (1 of 1872), oral evidence of its contents shall not be received.

Explanation : For the purposes of this section-

(a) an acknowledgement may be sufficient though it omits to specify the exact nature of the property or right, or avers that the time for payment, delivery, performance or enjoyment has not yet come or is accompanied by a refusal to pay, deliver, perform or permit to enjoy, or is coupled with a claim to set-off, or is addressed to a person other than a person entitled to the property or right;

(b) the word 'signed' means signed either personally or by an agent duly authorised in this behalf; and

(c) an application for the execution of a decree or order shall not be deemed to be an application in respect of any property or right.”

In one of the recent pronouncements, Supreme Court of India in IL & FS FINANCIAL SERVICES LIMITED Versus ADHUNIK MEGHALAYA STEELS PRIVATE LIMITED- 2025 (8) TMI 99 - Supreme Court , has held that the Limitation Act, 1963 shall as far as may be, apply to proceedings under the IBC. The entries in balance sheets can constitute a valid acknowledgment of debt under section 18 of the Limitation Act, 1963.

In the instant case, a loan was granted by way of pledge of shares in March, 2018. Appellant filed an application under section 7 of IBC stating that debt was acknowledged in the balance sheet for FY 2019-20 and that the same was within the prescribed limitation. The adjudicating authority, NCLT, dismissed the application, stating that there was no acknowledgment of liability in the balance sheet for the financial year 2019-20, as the name of the financial creditor did not appear in it. The NCLT held that the application was barred by limitation, as it should have been filed on or which extended the limitation period. On appeal, the NCLAT upheld the NCLT’s decision, stating that even if the entry in the balance sheet for the financial year 2019-20 was considered, limitation would have extended only up to 30.05.2022. The NCLAT concluded that the Section 7 petition should have been filed on or before 30.05.2022 and dismissed the appeal.

The matter came up before Supreme Court where in it was observed that it is now well settled in view of section 238A of the IBC that the Limitation Act, 1963 shall, as far as may be, apply to the proceedings under the Code. It is also well settled that article 137 of the first Schedule to the Limitation Act providing a period of three years from the date when the right to apply accrues will govern the situation. Further, entries in balance sheets could constitute a valid acknowledgement and in fact it could not have been disputed, in view of the categoric pronouncement of Apex Court in ASSET RECONSTRUCTION COMPANY (INDIA) LIMITED Versus BISHAL JAISWAL & ANR. - 2021 (4) TMI 753 - Supreme Court.

The court observed that the entries in the balance sheet clearly constitutes a valid acknowledgment of a subsisting liability and indicated the existence of a jural relationship and an admission as to the existence of such relationship. This is said so for the following reasons:

1. The general tenor and context of the balance sheet of financial year 2019-20 considered in the background of surrounding circumstances arising from the balance sheets of financial years 2015-16, 2016-17 & 2017-18 clearly points to the fact that the entry in the balance sheet of financial year 2019-20 constitutes a valid acknowledgement and pertains to the same borrowing as was reflected in the balance sheet of financial years 2015-16, 2016-17 & 2017-18.
2. Under the Indian Accounting Standards (Ind AS) 7, a cash flow statement is appended to the financial statement. The cash flow statement indicates that in financial year 2018-19 there was proceeds from borrowings of Rs.72,30,902/- and added to Rs.23,68,91,933/-, a figure of Rs. 24,41,22,835/- is arrived at.
3. More importantly, in the cash flow statement it was indicated that no part of cash flow proceeds was utilised in the repayment of existing borrowings under the financial activities since the amount under the head ‘cash flows from (used in) financial activities’ is nil. This clearly indicated that the debt remained unpaid even in 2019-20.

Further, the balance sheet for the financial year 2019-20 was admittedly signed by the board of directors on 12-8-2020. This date was within the subsisting period of limitation for the reason that taking 1-3-2018 as the commencement of limitation, limitation ordinarily would have continued till 28-2-2021. Since an acknowledgement came into effect on 12-8-2020, limitation would have stood extended till 11-8-2023. However, Covid-19 intervened resulting in the Supreme Court passing a series of orders extending the period of limitation.

The apex court therefore, set aside the impugned judgments of NCLT and NCLAT and allowed the appeals by remitting it to the adjudicating authority for fresh adjudication treating the same as being filed within the prescribed limitation.