2024 (10) TMI 1184 - SC - IBC

Balance sheet entries and settlement proposals constitute valid debt acknowledgment under insolvency proceedings despite limitation challenges

The SC upheld concurrent findings by NCLT and NCLAT that CIRP proceedings were validly initiated despite limitation objections. The court held that ... Acknowledgement of debt under Section 18 of the Limitation Act - applicability of the Limitation Act to proceedings under the IBC via Section 238A - entries in balance sheet and auditor's note as evidence of acknowledgement - one-time settlement (OTS) proposal as acknowledgement of subsisting liability - initiation of CIRP under Section 7 of the IBC upon default - competency of authorised bank officer to sign Section 7 applicationAcknowledgement of debt under Section 18 of the Limitation Act - applicability of the Limitation Act to proceedings under the IBC via Section 238A - entries in balance sheet and auditor's note as evidence of acknowledgement - Whether entries in the corporate debtor's balance sheets and accompanying auditor's note constitute an acknowledgement in writing under Section 18 of the Limitation Act thereby extending the period of limitation for filing a Section 7 IBC application. - HELD THAT: - The Court applied the settled principle that Section 238A makes the Limitation Act applicable to IBC proceedings and that Section 18 operates to commence a fresh limitation period when there is an acknowledgement of liability in writing. Having examined the balance-sheet entries and Note 3.4 for the year ending 31.03.2017, which recorded defaults in repayment of term loans and continuing defaults and referred to long-term borrowings, the Adjudicating Authority and the NCLAT were held to have correctly concluded that these entries amounted to an unequivocal acknowledgement of liability. The Supreme Court followed the reasoning in Bishal Jaiswal, Laxmi Pat Surana and Dena Bank to hold that such statutory-format financial statements and auditor's note can, on the facts, demonstrate a present subsisting liability sufficient to attract Section 18 and thereby extend the limitation period for the Section 7 claim. [Paras 4, 10, 11]Entries in the balance sheet and the auditor's note amounted to an acknowledgement in writing under Section 18, extending the limitation period and rendering the Section 7 application timely.One-time settlement (OTS) proposal as acknowledgement of subsisting liability - acknowledgement of debt under Section 18 of the Limitation Act - Whether the corporate debtor's One Time Settlement (OTS) proposal constituted an acknowledgement of present and subsisting liability attractable under Section 18 of the Limitation Act. - HELD THAT: - Applying precedents that an offer of one-time settlement or an offer acknowledging a live claim can amount to an acknowledgment for the purposes of Section 18, the Court agreed with NCLAT and the Adjudicating Authority that the OTS letter dated 07.06.2016 acknowledged prior debts owed to the bank, was not on a 'without prejudice' basis, and indicated the jural relation between the parties. The Court held that such an unequivocal acknowledgement, made within the relevant period, brings Section 18 into play and supports the extension of limitation for instituting proceedings under Section 7. [Paras 11, 12]The OTS proposal constituted an acknowledgement of liability under Section 18 and contributed to the extension of the limitation period for the Section 7 petition.Competency of authorised bank officer to sign Section 7 application - initiation of CIRP under Section 7 of the IBC upon default - Whether the Section 7 application was validly signed by a competent officer of the bank and whether there existed a debt/default enabling initiation of CIRP under Section 7. - HELD THAT: - The Adjudicating Authority found that the General Manager was legally authorised as the bank's attorney to sign the Section 7 application. The Authority and NCLAT examined the sanction letters, credit agreements and concluded that loans were disbursed and the corporate debtor had defaulted on repayment of principal and interest. The Supreme Court found these concurrent findings on competency to sign and existence of debt/unpaid dues to be unimpeachable and upheld admission of the Section 7 application. [Paras 4, 5]The Section 7 petition was validly signed by an authorised bank officer and there was a constituted debt/default permitting initiation of CIRP; the admission was lawful.Final Conclusion: The concurrent findings of the Adjudicating Authority and NCLAT that the balance-sheet entries and the OTS proposal constituted acknowledgements under Section 18 (with the Limitation Act being applicable to IBC proceedings via Section 238A), together with the validity of the bank's signatory and existence of default, are upheld; the appeal is dismissed. Issues Involved:1. Competency of the Bank to file the petition under Section 7 of the Insolvency and Bankruptcy Code (IBC).2. Existence of debt and default by the Corporate Debtor.3. Application of the Limitation Act, particularly Section 18, to the proceedings under the IBC.4. Acknowledgment of debt in the balance sheets and its impact on the limitation period.5. One Time Settlement (OTS) proposal as an acknowledgment of debt.Issue-wise Detailed Analysis:1. Competency of the Bank to File the Petition:The Adjudicating Authority held that the General Manager of the Bank was legally authorized to act on behalf of the Bank and sign the application under Section 7 of the IBC. This was challenged by the Corporate Debtor, but the Authority found that the General Manager had the requisite authority, thus affirming the Bank's competency to file the petition.2. Existence of Debt and Default:The Adjudicating Authority examined the credit agreements and terms of the loan to conclude that the Corporate Debtor defaulted on repayment of both principal and interest. The contention that there was no debt was rejected based on the evidence of disbursed loans and the default.3. Application of the Limitation Act:The Adjudicating Authority applied Section 18 of the Limitation Act, which allows for the extension of the limitation period upon acknowledgment of debt. The Authority found that the acknowledgment in the financial statements and auditor's report for the year ending 31.03.2017 was sufficient to reset the limitation period, making the CIRP initiation on 13.02.2019 timely.4. Acknowledgment of Debt in Balance Sheets:The NCLAT and the Adjudicating Authority found that entries in the balance sheets amounted to an acknowledgment of debt, thus extending the limitation period. The Supreme Court reiterated that the balance sheet prepared as per statutory requirements need not specify each creditor's name. It emphasized that acknowledgment of debt in the balance sheet suffices for extending the limitation period under Section 18 of the Limitation Act.5. One Time Settlement (OTS) Proposal:The Corporate Debtor's OTS proposal to UCO Bank was considered an acknowledgment of debt. The proposal indicated a subsisting liability and a jural relationship between the parties, which, according to precedents, constitutes an acknowledgment under Section 18 of the Limitation Act. The Supreme Court upheld this view, stating that such proposals, even if not specifying the exact nature of the liability, indicate acknowledgment of debt.Conclusion:The Supreme Court upheld the findings of the Adjudicating Authority and NCLAT, dismissing the appeal. The Court found no merit in the appellant's arguments regarding the lack of clear acknowledgment of debt in the balance sheets and the OTS proposal. The entries in the balance sheet and the OTS letter were deemed sufficient to acknowledge the debt, thus extending the limitation period under Section 18 of the Limitation Act. The appeal was dismissed with no order as to costs.