2021 (4) TMI 753 - SC - Insolvency and Bankruptcy

Supreme Court extends limitation period in IBC cases through balance sheet entries.

ASSET RECONSTRUCTION COMPANY (INDIA) LIMITED Versus BISHAL JAISWAL & ANR.

ASSET RECONSTRUCTION COMPANY (INDIA) LIMITED Versus BISHAL JAISWAL & ANR. - 2021 AIR 5249, 2021 (6) SCC 366, 2021 (7) JT 562, 2021 (5) SCALE 711 Issues Involved1. Applicability of Section 18 of the Limitation Act, 1963 to proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC).2. Whether entries in balance sheets amount to an acknowledgment of debt for the purpose of extending the limitation period under Section 18 of the Limitation Act.3. Correctness of the majority judgment of the Full Bench of the NCLAT in V. Padmakumar v. Stressed Assets Stabilisation Fund.4. Procedural correctness and natural justice in the constitution of the NCLAT Bench.5. The impact of the acknowledgment of debt in balance sheets on the limitation period.Detailed Analysis1. Applicability of Section 18 of the Limitation Act to IBC ProceedingsThe Supreme Court analyzed the rationale behind Section 238A of the IBC, which makes the Limitation Act applicable to proceedings under the IBC. The Court cited previous judgments, including Jignesh Shah v. Union of India and Laxmi Pat Surana v. Union Bank of India, confirming that Section 18 of the Limitation Act, which extends the limitation period based on an acknowledgment of debt, applies to IBC proceedings. The Court emphasized that the IBC does not intend to revive time-barred debts but to ensure that the Limitation Act governs the proceedings.2. Acknowledgment of Debt in Balance SheetsThe Court examined whether entries in balance sheets can be considered acknowledgments of debt under Section 18 of the Limitation Act. It referred to multiple judgments, including Mahabir Cold Storage v. CIT, A.V. Murthy v. B.S. Nagabasavanna, and Bengal Silk Mills Co. v. Ismail Golam Hossain Ariff, which held that entries in balance sheets could amount to acknowledgments of liability. The Court clarified that while the preparation of balance sheets is mandatory under the Companies Act, the acknowledgment of debt within them is not necessarily compelled by law and must be assessed on a case-by-case basis.3. Correctness of the NCLAT Judgment in V. PadmakumarThe Supreme Court set aside the majority judgment of the Full Bench of the NCLAT in V. Padmakumar v. Stressed Assets Stabilisation Fund, which had held that entries in balance sheets do not amount to acknowledgments of debt. The Court found this judgment contrary to established legal principles and previous judgments that recognized balance sheet entries as valid acknowledgments under Section 18 of the Limitation Act.4. Procedural Correctness and Natural JusticeThe appellant argued that the constitution of the five-Member Bench of the NCLAT, which included members who had previously assented to the majority opinion in V. Padmakumar, was contrary to natural justice. The Supreme Court agreed that the procedural correctness and principles of natural justice were compromised, further invalidating the NCLAT's judgment.5. Impact of Acknowledgment of Debt on Limitation PeriodThe Court reiterated that an acknowledgment of debt in a balance sheet extends the limitation period under Section 18 of the Limitation Act. It emphasized that such acknowledgments must be unequivocal and can be qualified by notes or auditor's reports, which must be examined to determine their impact on the limitation period.ConclusionThe Supreme Court allowed the appeal, set aside the judgments of the NCLAT, and remanded the matters to the NCLAT for reconsideration in light of the principles laid down. The Court also provided an opportunity for parties to amend their pleadings to incorporate acknowledgments of liability in balance sheets, subject to costs. The judgments reinforced the applicability of Section 18 of the Limitation Act to IBC proceedings and clarified the legal standing of balance sheet entries as acknowledgments of debt.