2026 (1) TMI 528 - AT - IBC

Operational debt invoices and internal liability transfer journal entries under IBC s.9 held time-barred; insolvency claim rejected.

An application under IBC s.9 based on alleged operational debt was held time-barred because any acknowledgement after expiry of the three-year limitation ... Limitation principles - Operational debt - time barred - threshold limit - no terms and conditions for interest payment as per the invoices - entitlement to the benefit of Section 25(3) of the Indian Contract Act - acknowledgement of debt u/s 18 of the Limitation Act, 1963 - Whether in this case the Appellant meets the threshold and whether any dispute exists and for that reason the petition is not to be admitted in insolvency u/s 9 of the Code. - HELD THAT:- It is settled law ‘that any acknowledgement after the date of expiry of limitation period i.e., three years, would have no effect and limitation would not extend on the: basis of such acknowledgement. We have perused the Ledger account of Respondent-CD-Global Extrusion which is at page 100- which doesn’t bear any signature but presumably prepared after 31st March 2020 as the last entry pertains to the journal entry of that date. Very interestingly, the journal entry dated 31st March 2020 has been made, which transfers all the liabilities of the Jamnagar unit into the account in the Mumbai unit- which is claimed to be done by the Appellant based on mutual discussion. Even though it has been signed by both the parties, but the Respondent denies any such understanding. We find that firstly it cannot be treated as acknowledgement of debt as it is just the transfer of the sales and purchase entries of earlier times from its Jamnagar unit – which had been closed. Whatever dates of those sales and purchases in Jamnagar account will continue to remain with the original date and cannot give new date and new life for limitation purposes to the transactions, basis just a journal entry which just shifts the entries from one account to another as it is, while maintaining the original character of the transactions. Even otherwise, we find that it may not be of any assistance to the appellant for the reason that the first four entries for which journal entry has been made on 31st March 2020 are time barred under the Code and even if it is treated as an acknowledgement, the petition is beyond three years for these entries and this debt is time barred and therefore for these invoices Appellant cannot pursue under code. Though the ledger of Respondent- Global Extrusions is signed by the Respondent but it is not a clear promise to pay ₹ 1,19,67,353 and in such a situation it cannot be argued that it falls within Section 25(3) of the Contract Act and creates a fresh contractual obligation. In this case, the document is ambiguous and merely an internal ledger and a routine balance confirmation without promise language, thus, we cannot accept it as a Section 25(3) promise, and the operational debt would remain time‑barred for IBC purposes. We also find that no interest was payable as there are no terms and conditions for interest payment as per these invoices and the interest has been arbitrarily calculated. Appellant has computed the invoices raised by their Jamnagar Unit as being due on 11.03.2019, and the invoices raised by their Mumbai unit as being due on 02.01.2020 in the Chart of Computation. Appellant in an innovative attempt to extend the limitation using such adjustment of book entries and that too unilaterally is misleading us and thus the Appellant has been wasting the precious time of the Tribunal. Thus, we find that the conclusions arrived at regarding the threshold in the impugned order cannot be faulted upon. We dismiss the appeal. 1. ISSUES PRESENTED AND CONSIDERED (i) Whether the operational debt relied upon for admission under Section 9 was within limitation, particularly where older invoices of one unit were transferred by journal entry into another unit's ledger and adjusted against later transactions. (ii) Whether ledger entries/balance confirmation and a journal transfer entry constituted a valid acknowledgement of debt extending limitation under Section 18 of the Limitation Act, 1963, or a promise to pay a time-barred debt under Section 25(3) of the Contract Act, 1872. (iii) Whether, after excluding time-barred components, the claim met the statutory threshold for initiation of the insolvency process under Section 9. (iv) Whether interest claimed formed part of an admissible operational debt where the invoices relied upon did not provide for interest. 2. ISSUE-WISE DETAILED ANALYSIS Issue (i) & (iii): Limitation of principal operational debt and impact on threshold Legal framework (as discussed): The Court examined limitation principles applicable to operational debt under the Code and evaluated whether the claim, after removing time-barred invoices, still satisfied the threshold for Section 9 admission. The Court also considered the plea for exclusion of time during the Covid-19 period but only in relation to whether limitation had already expired for particular invoices. Interpretation and reasoning: The Court found that the earliest four invoices (dated in 2016 and forming a substantial portion of the claimed principal) were already time-barred by the time the insolvency petition was filed in 2022. It rejected the attempt to treat later book adjustments and the shifting of balances between unit-ledgers as creating a later 'due date' or extending limitation. The Court held that unilateral adjustment of purchases against earlier invoices and a later journal transfer were an 'innovative' method to surpass limitation, and limitation could not be revived merely by shifting entries from one account to another while retaining the original transaction dates and character. The Covid-19 exclusion period was held unavailable for those invoices because the three-year limitation had already lapsed before the relevant cut-off, so exclusion could not revive an already time-barred claim. Conclusion: Since key invoice components were time-barred and had to be excluded, the remaining principal debt fell below the required threshold; therefore, the Section 9 petition was not fit for admission and the dismissal on threshold grounds was upheld. Issue (ii): Whether ledger/balance confirmation and journal entry amounted to acknowledgement under Section 18 or promise under Section 25(3) Legal framework (as discussed): The Court considered whether the ledger materials relied upon could operate as an acknowledgement of liability extending limitation under Section 18 of the Limitation Act, 1963, and alternatively whether they could be treated as a promise to pay a time-barred debt under Section 25(3) of the Contract Act, 1872. Interpretation and reasoning: The Court analysed the ledger and the journal entry transferring liabilities of the closed unit into another unit's account. It held that the document functioned only as an internal accounting transfer/balance confirmation and did not amount to an acknowledgement that could grant a fresh limitation period for the original invoices. The Court reasoned that journal entries shifting liabilities between accounts do not alter original transaction dates or confer 'new life' for limitation purposes. It further held that even if treated as an acknowledgement, it could not assist where the underlying invoices were already beyond three years for limitation calculation under the Code. On Section 25(3), the Court found the ledger/balance confirmation did not contain a clear promise to pay; it was ambiguous and routine in nature, lacking promise language and therefore did not create a fresh contractual obligation capable of overcoming time-bar for IBC purposes. Conclusion: The ledger and journal transfer were held insufficient to extend limitation under Section 18 or to constitute an enforceable promise under Section 25(3); the operational debt remained time-barred to the extent of the older invoices. Issue (iv): Admissibility of interest claim Legal framework (as discussed): The Court examined whether interest could be claimed as part of the operational debt based on the invoices relied upon. Interpretation and reasoning: The Court found that interest was not payable because the invoices in question did not contain terms and conditions providing for interest, and the interest component was therefore arbitrarily calculated without contractual basis on those invoices. Conclusion: The interest claim was rejected; it did not support enhancement of the operational debt for Section 9 admission.