2022 (8) TMI 70 - SC - Insolvency and Bankruptcy

Financial statement acknowledgments extend limitation period for IBC applications

The Supreme Court held that the application under Section 7 of the Insolvency and Bankruptcy Code (IBC) was not barred by limitation. The acknowledgments ... Acknowledgement in writing under Section 18 of the Limitation Act - limitation for Section 7 IBC governed by Article 137 - three years from date of default - books of account / balance-sheet as acknowledgement of liability - application under Section 7 of the IBC in Form 1 - Part IV/V particulars and documents - applicability of the Limitation Act to IBC proceedings as modified by Section 238A - admission of application and commencement of CIRP under Section 7(5) of the IBCAcknowledgement in writing under Section 18 of the Limitation Act - limitation for Section 7 IBC governed by Article 137 - three years from date of default - Whether the Section 7 application was barred by limitation or saved by acknowledgements made by the corporate debtor thereby restarting the limitation period. - HELD THAT: - The Court held that Article 137 (three years from date of default) governs limitation for an application under Section 7 of the IBC, but an acknowledgement in writing under Section 18 of the Limitation Act restarts the period of limitation. The corporate debtor, having its account declared NPA on 1.12.2008, made written acknowledgements and settlement proposals (notably the letter dated 7.2.2011 and subsequent settlement/extension communications and payments) within three years and thereafter acknowledged liabilities in its financial statements. Those writings, signed and contemporaneous with the stated liabilities, amounted to acknowledgements of a present subsisting liability and therefore operated to compute a fresh three-year limitation period. The Section 7 application filed on 3.4.2018 thus fell within the extended limitation period arising from such acknowledgements and was not time-barred. [Paras 38, 68, 82, 98]The Section 7 application was not barred by limitation because acknowledgements in writing by the corporate debtor (including the 2011 settlement-related communications and subsequent financial statements) restarted the limitation period, making the 3.4.2018 application timely.Books of account / balance-sheet as acknowledgement of liability - applicability of the Limitation Act to IBC proceedings as modified by Section 238A - Whether entries in the corporate debtor's books of account and balance-sheets can constitute an acknowledgment under Section 18 of the Limitation Act so as to extend limitation for initiating CIRP under the IBC. - HELD THAT: - The Court rejected the NCLAT's conclusion that a company's books of account cannot be treated as an acknowledgment of liability to a financial creditor. On settled precedent and statutory interpretation, a balance-sheet or financial statement, read with its accompanying notes where necessary, can amount to an acknowledgement in writing of a subsisting liability if it indicates the jural relationship of debtor and creditor and is signed by an authorised person before expiry of the limitation period. The Court reviewed prior authorities and emphasised that Section 238A permits application of the Limitation Act 'as far as may be' to IBC proceedings; Sections 14 and 18 principles apply and must be construed purposively. Thus the financial statements and related documents in this case could properly be treated as acknowledgements under Section 18. [Paras 43, 81, 85]Entries in the corporate debtor's financial statements/books of account can constitute an acknowledgement in writing under Section 18 and extend the period of limitation for a Section 7 IBC application where the entries unambiguously indicate a subsisting liability.Application under Section 7 of the IBC in Form 1 - Part IV/V particulars and documents - admission of application and commencement of CIRP under Section 7(5) of the IBC - Whether the Adjudicating Authority was precluded from receiving or considering documents filed after presentation of the Section 7 Form 1, and whether additional documents/pleadings may be filed before final adjudication of the application. - HELD THAT: - The Court observed that a Section 7 application must be filed in the prescribed Form 1 but the Form does not preclude filing of additional documents until a final order admitting or dismissing the application is passed. The statutory timelines for the Adjudicating Authority in Section 7(4) are directory; the provisos require reasons if time-limits are not complied with, and Section 7(5)(b) mandates an opportunity to cure defects. Consequently, documents filed along with the application or subsequently (including financial statements and other evidence) may be considered as part of the pleadings; the Adjudicating Authority has discretion to accept cured or additional documents for the ends of justice unless there is inordinate delay warranting refusal. [Paras 48, 62, 64]There is no absolute bar on filing additional documents in support of a Section 7 application prior to final adjudication; the Adjudicating Authority may accept and consider such documents subject to its discretion and compliance with the Code and Rules.Final Conclusion: The appeals are allowed; the NCLAT's conclusion that the CIRP initiated by the appellant was barred by limitation is set aside. The Court held that the corporate debtor's written acknowledgements (including settlement communications and financial statements) operated under Section 18 of the Limitation Act to restart limitation, the Section 7 application filed on 3.4.2018 was timely, and the Adjudicating Authority may consider documents filed in support of the application prior to final adjudication. Issues Involved:1. Whether the application under Section 7 of the Insolvency and Bankruptcy Code (IBC) filed by the Financial Creditor was barred by limitation.2. Whether the acknowledgments in the financial statements of the Corporate Debtor extended the period of limitation.3. The relevance and impact of the Corporate Debtor's payments and settlement proposals on the limitation period.4. The applicability of Section 18 of the Limitation Act to the proceedings under the IBC.5. The interpretation of financial statements and balance sheets as acknowledgments of debt.Detailed Analysis:Issue 1: Limitation Bar for Section 7 ApplicationThe primary issue revolved around whether the application under Section 7 of the IBC, filed by the Financial Creditor, was barred by limitation. The Corporate Debtor argued that the application was barred by limitation as it was filed about eight/nine years after the account was declared a non-performing asset (NPA) on 1st December 2008. The NCLAT had held that the application was barred by limitation, emphasizing that the Financial Creditor failed to bring any acknowledgment in writing by the Corporate Debtor acknowledging the liability in respect of the debt.Issue 2: Acknowledgments in Financial StatementsThe Financial Creditor contended that the Corporate Debtor acknowledged its liabilities in its financial statements from 2008-09 to 2016-17, which extended the period of limitation. The Supreme Court observed that the balance sheet for the financial year 2014-15, signed on 14th May 2015, acknowledged the continuance of the jural relationship of debtor and creditor between the Appellant and the Corporate Debtor and the existence of financial liability. The application under Section 7 of the IBC was filed on 3rd April 2018, within three years from the date on which the balance sheet was signed.Issue 3: Payments and Settlement ProposalsThe Corporate Debtor made several payments and proposals for settlement, which were considered by the Supreme Court. For instance, on 19th April 2013, the Corporate Debtor paid Rs.17,50,00,000/- towards part repayment of the aggregate assigned debt. The Supreme Court noted that any part payments made by the Corporate Debtor would first be appropriated towards the interest amount due, as held in previous judgments.Issue 4: Applicability of Section 18 of the Limitation ActThe Supreme Court reiterated that Section 18 of the Limitation Act applies to proceedings under the IBC. An acknowledgment of liability in writing, signed by the party against whom such property or right is claimed, would extend the period of limitation. The Court referred to previous judgments, including Sesh Nath Singh and Bishal Jaiswal, affirming that the IBC does not exclude the application of Section 18 of the Limitation Act.Issue 5: Interpretation of Financial Statements and Balance SheetsThe Court held that entries in the books of accounts and/or balance sheets of a Corporate Debtor amount to an acknowledgment under Section 18 of the Limitation Act. The Court cited various judgments, including Bengal Silk Mills and South Asia Industries, which held that statements in the balance sheet of a company could amount to an acknowledgment of liability. The balance sheets for the financial years 2014-15 and 2015-16, signed on 14th May 2015 and 29th August 2016 respectively, acknowledged the existence of the jural relationship of debtor and creditor and the financial liability of the Corporate Debtor to the Appellant.ConclusionThe Supreme Court concluded that the application under Section 7 of the IBC was not barred by limitation. The acknowledgments in the financial statements extended the period of limitation, and the application was filed within the extended period. The Court set aside the impugned judgment and order of the NCLAT, allowing the appeals.