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.

The Supreme Court held that Section 18 of the Limitation Act, 1963 applies to proceedings under the Insolvency and Bankruptcy Code, 2016 (IBC). It ruled ... Maintainability of application - initiation of CIRP - Corporate Debtor failed to make repayment of its dues - financial creditors - existence of debt and dispute or not - applicability of limitation act - HELD THAT:- Considering that the Limitation Act applies only to courts, unless made statutorily applicable to tribunals, the Committee was of the view that such Act should be made to apply to the IBC as well, observing that though the IBC is not a debt recovery law, the trigger being “default in payment of debt” would render the exclusion of the law of limitation “counter-intuitive”. Thus, it was made clear that an application to the IBC should not amount to resurrection of time-barred debts which, in any other forum, would have been dismissed on the ground of limitation - it is clear that the principle of Section 9 of the Limitation Act is to be strictly adhered to, namely, that when time begins to run, it cannot be halted, except by a process known to law. One question that arises before this Court is whether Section 18 of the Limitation Act, which extends the period of limitation depending upon an acknowledgement of debt made in writing and signed by the corporate debtor, is also applicable under Section 238A, given the expression “as far as may be” governing the applicability of the Limitation Act to the IBC. Whether an entry made in a balance sheet of a corporate debtor would amount to an acknowledgement of liability under Section 18 of the Limitation Act? - HELD THAT:- Several judgments of this Court have indicated that an entry made in the books of accounts, including the balance sheet, can amount to an acknowledgement of liability within the meaning of Section 18 of the Limitation Act - Reliance placed in the case of MAHABIR COLD STORAGE VERSUS COMMISSIONER OF INCOME-TAX [1990 (12) TMI 3 - SUPREME COURT]. The majority decision of the Full Bench in V. PADMAKUMAR VERSUS STRESSED ASSETS STABILISATION FUND (SASF) & ANR. [2020 (3) TMI 1244 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, NEW DELHI] is contrary to the aforesaid catena of judgments. The minority judgment of Justice (Retd.) A.I.S. Cheema, Member (Judicial), after considering most of these judgments, has reached the correct conclusion. Appeal allowed. 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.