Tribunal Overturns Insolvency Order; Debt Acknowledgment in Balance Sheets Didn't Extend Limitation Period.

The Tribunal set aside the NCLT's order admitting the Section 7 application, declaring it barred by limitation since the default occurred in 2002 when the account was declared NPA. The acknowledgment of debt in Balance Sheets did not extend the limitation period. Consequently, all actions by the Interim Resolution Professional were deemed illegal, and the Corporate Debtor was allowed to resume operations through its Board of Directors. The Tribunal directed the Adjudicating Authority to determine the fees and costs associated with the corporate insolvency resolution process, to be borne by the Financial Creditor.

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Issues Involved:
1. Whether the application under Section 7 of the Insolvency and Bankruptcy Code, 2016 was barred by limitation due to the account being declared NPA in 2009 and a decree being passed in 2013.
2. Whether the reflection of debt in the Balance Sheet of the Corporate Debtor amounts to acknowledgment of debt under Section 18 of the Limitation Act, 1963.

Issue-wise Detailed Analysis:

1. Limitation Period for Application under Section 7 of I&B Code:
The primary issue was whether the application under Section 7 filed by the Financial Creditor was barred by limitation. The Corporate Debtor's account was declared as a Non-Performing Asset (NPA) on 29th May 2002, and a decree was passed on 19th June 2009. The Financial Creditor filed the application under Section 7 in 2019, which the Appellant argued was beyond the limitation period.

The Tribunal referred to several judgments to determine the applicability of the Limitation Act, 1963 to applications under Section 7 of the I&B Code. In "B.K. Educational Services Private Limited Vs. Parag Gupta and Associates," the Supreme Court held that Article 137 of the Limitation Act applies to applications under Section 7, and the limitation period starts from the date of default. This principle was reiterated in "Jignesh Shah and another vs. Union of India and another," where the Supreme Court emphasized that the date of default is crucial for computing the limitation period.

The Tribunal concluded that the application under Section 7 was barred by limitation since the default occurred when the account was declared NPA in 2002, and the decree in 2009 did not extend the limitation period.

2. Acknowledgment of Debt in Balance Sheets:
The Tribunal also examined whether the reflection of debt in the Balance Sheet of the Corporate Debtor amounts to acknowledgment of debt under Section 18 of the Limitation Act, 1963. The Appellant argued that the debt was acknowledged in the Balance Sheets for the financial years 2011-2012 and 2012-2013 onwards.

The Tribunal referred to various judgments, including "G Eswara Rao v. Stressed Assets Stabilisation Fund," which held that the filing of Balance Sheets/Annual Returns under Section 92 of the Companies Act, 2013, is mandatory and cannot be treated as an acknowledgment under Section 18 of the Limitation Act. The Tribunal emphasized that if Balance Sheets were considered acknowledgments, it would imply no limitation period, as companies are required to file these documents annually.

However, a separate judgment by another member of the Tribunal highlighted that several High Courts, including the Delhi High Court, have treated entries in Balance Sheets as acknowledgments of debt under Section 18 of the Limitation Act. The judgment in "The Commissioner of Income Tax-III v. Shri Vardhman Overseas Ltd." was cited, where the Delhi High Court held that entries in Balance Sheets amount to acknowledgment of debt.

The Tribunal concluded that the Balance Sheets cannot be outright ignored and must be examined to determine if they constitute acknowledgment of debt. However, in the present case, the Tribunal held that the application under Section 7 was barred by limitation, and the acknowledgment in Balance Sheets did not extend the limitation period.

Conclusion:
The Tribunal set aside the impugned order dated 21st November 2019, passed by the Adjudicating Authority (NCLT), Division Bench, Chennai, which admitted the application under Section 7. The Tribunal declared all subsequent orders and actions taken by the Interim Resolution Professional as illegal and dismissed the application under Section 7 filed by the Financial Creditor. The Corporate Debtor was allowed to function independently through its Board of Directors. The Tribunal also directed the Adjudicating Authority to fix the fee of the Interim Resolution Professional and the corporate insolvency resolution process cost, to be paid by the Financial Creditor.

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