Acknowledgment of debts in Balance Sheet to Construe Limitation
In Asset Reconstruction Company (India) Limited v. Bishal Jaiswal, Civil Appeal No. 323 OF 2021 alongwith other, a 3 member bench of Supreme Court comprising of Justice Rohinton Nariman, Justice BR Gavai and Justice Hrishikseh Roy delivered this landmark judgement against the challenge to the order of 5 member bench of NCLAT which refused to review the order in the matter of V Padmakumar v. Stressed Assets Stabilization Fund.
It must be noted that in terms of Section 18 of the limitation Act, the triggering point for computing limitation shall be an acknowledgement of debt, whereas, the NCLT had held that an acknowledgement of debt in balance sheet of a corporate debtor will be construed as a triggering period for computing limitation for an application under Section 7 of IBC.
The NCLAT reversed the order of NCLT and then on reference by a 3 member of NCLAT, it was before 5 member NCLAT bench which itself rejected such a reference with a finding that;
“such misadventures” weaken the authority of law, dignity of institution as also shake people’s faith in rule of law and hoped that the members of the Referral Bench would “exhibit more serious attitude towards adherence of the binding judicial precedents and not venture to cross the red line”.
The Court proceeded with the provision of Section 238A of IBC which was introduced w.e.f. 06.06.2018.
Section 238A of IBC reads as follows:
“238A. Limitation.—The provisions of the Limitation Act, 1963 (36 of 1963) shall, as far as may be, apply to the proceedings or appeals before the Adjudicating Authority, the National Company Law Appellate Tribunal, the Debt Recovery Tribunal or the Debt Recovery Appellate Tribunal, as the case may be.
The Court proceeded on the very aspect of observation in In Jignesh Shah v. Union of India, (2019) 10 SCC 750, this Court referred to the Report of the Insolvency Law Committee of March, 2018, which led to the introduction of Section 238A.
The Court also observed that
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.
Applicability of Section 18 on IBC
The Court referred to the recent decision related to acknowledgement and applicability of Section 18 of the Limitation Act on IBC per se , as under:
1.In Sesh Nath Singh v. Baidyabati Sheoraphuli Co-operative Bank Ltd., Civil Appeal No. 9198 of 2019 (decided on 22.03.2021), after setting out the issues that arose in that case in paragraph 57, and after referring to Section 238A of IBC, held:
“66. Similarly under Section 18 of the Limitation Act, an acknowledgement of present subsisting liability, made in writing in respect of any right claimed by the opposite party and signed by the party against whom the right is claimed, has the effect of commencing of a fresh period of limitation, from the date on which the acknowledgement is signed. However, the acknowledgement must be made before the period of limitation expires.
67. As observed above, Section 238A of the IBC makes the provisions of the Limitation Act, as far as may be, applicable to proceedings before the NCLT and the NCLAT. The IBC does not exclude the application of Section 6 or 14 or 18 or any other provision of the Limitation Act to proceedings under the IBC in the NCLT/NCLAT. All the provisions of the Limitation Act are applicable to proceedings in the NCLT/NCLAT, to the extent feasible. 68. We see no reason why Section 14 or 18 of the Limitation Act, 1963 should not apply to proceeding under Section 7 or Section 9 of the IBC. Of course, Section 18 of the Limitation Act is not attracted in this case, since the impugned order of the NCLAT does not proceed on the basis of any acknowledgement.
2.In Laxmi Pat Surana v. Union Bank of India, Civil Appeal No. 2734 of 2020, a judgment delivered on 26.03.2021, this Court, after referring to various judgments of this Court, including the judgment in Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries (P) Ltd., (2020) 15 SCC 1 [“Babulal”], then held:
“35. The purport of such observation has been dealt with in the case of Babulal Vardharji Gurjar (II) [Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries (P) Ltd., (2020) 15 SCC 1]. Suffice it to observe that this Court had not ruled out the application of Section 18 of the Limitation Act to the proceedings under the Code, if the fact situation of the case so warrants. Considering that the purport of Section 238A of the Code, as enacted, is clarificatory in nature and being a procedural law had been given retrospective effect; which included application of the provisions of the Limitation Act on case-to-case basis. Indeed, the purport of amendment in the Code was not to reopen or revive the time barred debts under the Limitation Act. At the same time, accrual of fresh period of limitation in terms of Section 18 of the Limitation Act is on its own under that Act. It will not be a case of giving new lease to time barred debts under the existing law (Limitation Act) as such.
Balance Sheet & Limitation
The Court proceeded on the moot question as to 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.
Precedents of Supreme Court
The Court referred precedents of Supreme Court on acknowledgement as under;
1.In Mahabir Cold Storage v. CIT, 1991 Supp (1) SCC 402, this Court for Section 18 of the Limitation Act held:
“12. The entries in the books of accounts of the appellant would amount to an acknowledgement of the liability to M/s Prayagchand Hanumanmal within the meaning of Section 18 of the Limitation Act, 1963 and extend the period of limitation for the discharge of the liability as debt. …”
2. In S. Natarajan vs. Sama Dharman, Crl. A. No. 1524 of 2014 (decided on 15.07.2014), under Section 138 of NI Act, it was held that:
….. Referring to the facts before it, this Court observed that the complainant therein had submitted his balance sheet, prepared for every year subsequent to the loan advanced by the complainant and had shown the amount as deposits from friends. This Court noticed that the relevant balance sheet is also produced in the Court. This Court observed that if the amount borrowed by the accused therein is shown in the balance sheet, it may amount to acknowledgement and the creditor might have a fresh period of limitation from the date on which the acknowledgement was made. …”
Ratios of Various High Court Orders
The Court referred various High Court orders but preferred to focus more on Bengal Sild Mills Co. as being very exhaustive as under;
In Calcutta High Court in Bengal Silk Mills Co. v. Ismail Golam Hossain Ariff, 1961 SCC OnLine Cal 128 : AIR 1962 Cal 115 [“Bengal Silk Mills”] held that an acknowledgement of liability that is made in a balance sheet can amount to an acknowledgement of debt as follows:
11. To come under section 19 an acknowledgement of a debt need not be made to the creditor nor need it amount to a promise to pay the debt. In England it has been held that a balance-sheet of a company stating the amount of its indebtedness to the creditor is a sufficient acknowledgement in respect of a specialty debt under section 5 of the Civil Procedure Act, 1833 (3 and 4 Will — 4c. 42), see Re: Atlantic and Pacific Fibre Importing and Manufacturing Co. Ltd., 1928 Ch. 836 under section 1 of Lord Tentenden’s Act, 1828 (9 Geo. 4, c. 14) read with section 13 of the Mercantile Law Amendment Act, 1856 (19 and 20 Vict. c. 97), see Re: The Coliseum (Burrow) Ltd., (1930) 2 Ch. 44 at 47 and under sections 23 and 24 of the Limitation Act, 1939 (c. 21), see Ledingham v. Bermejo Estancia Co. Ltd., (1947) 1 A.E.R. 749 and Jones v. Bellgrove Properties Ltd., (1949) 2 K.B. 700, on appeal from (1949) 1 A.E.R. 498. Section 5 of the Civil Procedure Act, 1833 did not require that the acknowledgement should be given to the claiming creditor and consequently a balance-sheet containing an admission of indebtedness to the debenture holders was a sufficient acknowledgement of liability in respect of the debentures under that section, though it was sent only to the debenture holders who happened to be the shareholders of the company and not to the other debenture holders, see Re: Atlantic and Pacific Fibre Importing and Manufacturing Co. Ltd., (1928) 1 Ch. 836. Under Tentenden’s Act, 1828 as also under the Limitation Act, 1939 (c. 21) the acknowledgement must be made to the creditor or his agent and if the balancesheet is sent to a shareholder who is also a creditor the requirements of those Acts were satisfied, see Re: The Coliseum (Burrow) Ltd., (1930) 2 Ch. 44 at 47, Jones v. Bellgrove Properties Ltd., (1949) 1 A.E.R. 498 at 504 affirmed (1949) 2 K.B. 700. The decision in the last case has been followed in India and it has been held that an admission of indebtedness in a balance-sheet is a sufficient acknowledgement under section 19 of the Indian Limitation Act, see Raja of Vizianagram v. Official Liquidator, Vizianagram Mining Co. Ltd., (1951) 2 M.L.J. 535 at 550-1 : A.I.R. 1952 Mad. 136 at 145, Lahore Enamelling and Stamping Co. Ltd. v. A.K. Bhalla, A.I.R. 1958 Punjab 341 at 347, First National Bank Ltd. v. The Mandi (State) Industries Ltd., (1957) 59 Punjab Law Reports 589 and in an unreported decision of S.R. Das Gupta, J. in matter No. 449 of 1955 Re: Vita Supplies Corporation Ltd. decided on December 7, 1956.”
Provisions of Companies Act
The Court made a point to refer the relevant provisions of Companies Act as to why a balance sheet is required to be filed and then observed as under;
22. A perusal of the aforesaid Sections would show that there is no doubt that the filing of a balance sheet in accordance with the provisions of the Companies Act is mandatory, any transgression of the same being punishable by law. However, what is of importance is that notes that are annexed to or forming part of such financial statements are expressly recognised by Section 134(7). Equally, the auditor’s report may also enter caveats with regard to acknowledgements made in the books of accounts including the balance sheet. A perusal of the aforesaid would show that the statement of law contained in Bengal Silk Mills (supra), that there is a compulsion in law to prepare a balance sheet but no compulsion to make any particular admission, is correct in law as it would depend on the facts of each case as to whether an entry made in a balance sheet qua any particular creditor is unequivocal or has been entered into with caveats, which then has to be examined on a case by case basis to establish whether an acknowledgement of liability has, in fact, been made, thereby extending limitation under Section 18 of the Limitation Act.
Other High Court Decisions
After having dealt with the aforesaid aspects, the Court again referred to further decisions of various High Courts as under;
1.In South Asia Industries (P) Ltd. v. General Krishna Shamsher Jung Bahadur Rana, 1972 SCC OnLine Del 185 : ILR (1972) 2 Del 712, the Delhi High Court held that;
………So, the fact that the writing is contained in a balance-sheet is immaterial. In the second place, it is true that section 131 of the Companies Act, 1913 (section 210 of the Companies Act, 1956) makes it compulsory that an annual balance sheet should be prepared and placed before the Company by the Directors, and section 132 (section 211 of the Companies Act, 1956) requires that the balance-sheet should contain a summary, inter alia, of the current liabilities of the company. But, as pointed out by Bachawat J. in Bengal Silk Mills v. Ismail Golam Hossain Ariff, A.I.R. 1962 Calcutta 115 although there was statutory compulsion to prepare the annual balance-sheet, there was no compulsion to make any particular admission, and a document is not taken out of the purview of section 18 of the Indian Limitation Act, 1963 (section 19 of the Indian Limitation Act, 1908) merely on the ground that it is prepared under compulsion of law or in discharge of statutory duty. Reference may also be made to the decisions in Raja of Vizianagram v. Vizianagram Mining Co. Ltd., A.I.R. 1952 Madras 136, Jones v. Bellgrove Properties Ltd., (1949) 1 All E.R. 498; and Lahore Enamelling and Stamping Co. v. A.K. Bhalla, A.I.R. 1958 Punjab 341, in which statements in balance sheets of companies were held to amount to acknowledgements of liability of the companies.
2.In Pandam Tea Co. Ltd., In re, 1973 SCC OnLine Cal 93 : AIR 1974 Cal 170, Calcutta High Court held as follows:
“4. Now the question is whether the statements, which are contained in the profits and loss accounts and the assets and liabilities side indicating the liability of the petitioning creditor along with the statement of the Directors made to the shareholders as Directors’ report should be read together and if so whether reading these two statements together these amount to an acknowledgement as contemplated under Section 18 of the Limitation Act, 1963, or Section 19 of the Limitation Act, 1908. In my opinion, both these statements have to be read together. The balance-sheet is meant to be presented and passed by the shareholders and is generally accompanied by the Directors’ report to the shareholders. Therefore in understanding the balance-sheets and in explaining the statements in the balance-sheets, the balance-sheets together with the Directors’ report must be taken together to find out the true meaning and purport of the statements.
3.In Hegde & Golay Limited v. State Bank of India, 1985 SCC OnLine Kar 428 : ILR 1987 Kar 2673, the Karnataka High Court held as follows:
“43. Re. Point (e). The acknowledgement of liability contained in the balance-sheet of a company furnishes a fresh starting point of limitation. It is not necessary, as the law stands in India, that the acknowledgement should be addressed and communicated to the creditor. We are in respectful agreement with the view taken by the Learned Company Judge on the point. The position of law that an acknowledgement of debts in the balance-sheets of a Company does furnish fresh starting point of limitation is too well settled to need any elaborate discussion (See: Jones v. Bellgrove Properties Ltd. [1949 (1) All ER 498], In Re: Campania de Electricidad [1980 Ch D 146], Babulal Rukmanand v. Official Liquidator [AIR 1968 Rajasthan 214] and Bengal Silk Mills Co. v. Ismail Golam Hossain Ariff [AIR 1962 Calcutta 115]). We see no substance in this contention either.”
4.In Bhajan Singh Samra v. M/s. Wimpy International Ltd., 2011 SCC OnLine Del 4888 : (2011) 185 DLT 428, the Delhi High Court held:
“13. Having heard the parties, this Court is of the opinion that the petitioning-creditor has to satisfy the Court that the debt on which the petition is based was due and payable on the date of the petition. Certainly a time barred debt cannot be the basis of a winding up petition. However, admission of a debt either in a balance sheet or in the form of a letter duly signed by the respondent, would amount to an acknowledgement, extending the period of limitation. Section 18(1) of the Limitation Act, 1963 incorporates the said principle.
5.In CIT-III v. Shri Vardhman Overseas Ltd., 2011 SCC OnLine Del 5599 : (2012) 343 ITR 408, the Delhi High Court held:
“17. In the case before us, as rightly pointed out by the Tribunal, the assessee has not transferred the said amount from the creditors’ account to its profit and loss account. The liability was shown in the balance sheet as on 31st March, 2002. The assessee being a limited company, this amounted to acknowledging the debts in favour of the creditors. Section 18 of the Limitation Act, 1963 provides for effect of acknowledgement in writing. It says where before the expiration of the prescribed period for a suit in respect of any property or right, an acknowledgement of liability in respect of such property or right has been made in writing signed by the party against whom such property or right is claimed, a fresh period of limitation shall commence from the time when the acknowledgement was so signed. In an early case, in England, in Jones v. Bellgrove Properties, (1949) 2KB 700, it was held that a statement in a balance sheet of a company presented to a creditor-share holder of the company and duly signed by the directors constitutes an acknowledgement of the debt. In Mahabir Cold Storage v. CIT (1991) 188 ITR 91 : 1991 Supp (1) SCC 402, the Supreme Court held: “The entries in the books of accounts of the appellant would amount to an acknowledgement of the liability to Messrs. Prayagchand Hanumanmal within the meaning of Section 18 of the Limitation Act, 1963, and extend the period of limitation for the discharge of the liability as debt.”
6.In Shahi Exports Pvt. Ltd. v. CMD Buildtech Pvt. Ltd., 2013 SCC OnLine Del 2535 : (2013) 202 DLT 735, the Delhi High Court held:
“7. It is hardly necessary to cite authorities in support of the well-established position that an entry made in the company’s balance sheet amounts to an acknowledgement of the debt and has the effect of extending the period of limitation under section 18 of the Limitation Act, 1963. However, I may refer to only one decision of the learned single judge of this Court (Manmohan, J.) in Bhajan Singh Samra v. Wimpy International Ltd. 185 (2011) DLT 428 for the simple reason that it collects all the relevant authorities on the issue, including some of the judgments cited before me on behalf of the petitioners. This judgment entirely supports the petitioners on this point.”
7. In N.S. Atwal v. Jindal Steel and Power Ltd., 2013 SCC OnLine Del 3902, the Delhi High Court held:
“11. This Court in ESPN Software India (P) Ltd. v. Modi Entertainment Network Ltd.,  173 Comp Cas 465 (Delhi), noted that: “17. Admission in balance-sheet is per-se an admission of liability… xxx xxx xxx 19. This entry clearly states that an amount of Rs. 8,00,04,000/- is due and payable by the respondent in accordance with the terms of the contract. This document has been signed by the directors of the company and its Company Secretary on 31.10.2002.” Similarly, in Bhajan Singh Samra v. Wimpy International Ltd.,  173 Comp Cas 455 (Delhi), the Court noted: “13. Having heard the parties, this Court is of the opinion that the petitioning-creditor has to satisfy the Court that the debt on which the petition is based was due and payable on the date of the petition. Certainly a time barred debt cannot be the basis of a winding up petition. However, admission of a debt either in a balance sheet or in the form of a letter duly signed by the respondent, would amount to an acknowledgement …”
8.In M/s. Al-Ameen Limited v. K.P. Sethumadhavan, 2017 SCC 50 Ker 11337 : (2017) 4 KLJ 80, the Kerala High Court held:
“7. The inclusion of a debt in a balance sheet duly prepared and authenticated would amount to admission of a liability and therefore satisfies the requirement of law for a valid acknowledgement under Section 18 of the Act.
9.In Zest Systems Pvt. Ltd. v. Center for Vocational and Entrepreneurship Studies, 2018 SCC OnLine Del 12116, the Delhi High Court held:
“5. In Shahi Exports Pvt. Ltd. v. CMD Buildtech Pvt. Ltd. (supra) this court held as follows:—
“7. It is hardly necessary to cite authorities in support of the well-established position that an entry made in the company’s balance sheet amounts to an acknowledgement of the debt and has the effect of extending the period of limitation under section 18 of the Limitation Act, 1963. However, I may refer to only one decision of the learned single judge of this Court (Manmohan, J.) in Bhajan Singh Samra v. Wimpy International Ltd., 185 (2011) DLT 428 for the simple reason that it collects all the relevant authorities on the issue, including some of the judgments cited before me on behalf of the petitioners. This judgment entirely supports the petitioners on this point.”
10.In Agni Aviation Consultants v. State of Telangana, 2020 SCC OnLine TS 1462 : (2020) 5 ALD 561, the High Court of Telangana held:
“107. In several cases, various High Courts have held that an acknowledgement of liability in the balance sheet by a Company registered under the Companies Act, 1956 extends the period of limitation though it is not addressed to the creditor specifically. (Zest Systems Pvt. Ltd. v. Center for Vocational and Entrepreneurship Studies, 2018 SCC OnLine Del 12116, Bhajan Singh Samra v. Wimpy International Ltd., 2012 SCC OnLine Del 2939, Vijay Kumar Machinery and Electrical Stores v. Alaparthi Lakshmi Kanthamma, (1969) 74 ITR 224 (AP), and Bengal Silk Mills Company, Raja of Vizianagram v. Official Liquidator, Vizianagram Mining Company Limited, AIR 1952 Mad 1361). 108. Therefore it is not necessary that the acknowledgement of liability must be contained in a document addressed to the creditor i.e. the petitioners in the instant case.”
The Court while putting its reliance of the aforesaid decisions even went on to conclude that minority judgment of Justice (Retd.) A.I.S. Cheema, Member (Judicial), after considering most of these judgments, has reached the correct conclusion. We, therefore, set aside the majority judgment of the Full Bench of the NCLAT dated 12.03.2020.
The order will open a pandora box with afresh limitations with many creditors and especially with a fact that during Covid-19, Supreme Court has also excluded one year from 15th March,2020 to 14th March,2021 to be excluded period, so the computation of 3 years for the purpose of limitation.
The concept of acknowledgement in balance sheet is justified as it is also a trite that where any central Government requires a mandatory disclosure then such disclosure also carry equal weightage for other laws as well and there cannot be half way stop to its validation at any given point of time.
The heart of this decision was that there is a compulsion in law to prepare a balance sheet but no compulsion to make any particular admission.hence, it forms the basis of applicability of Section 18 for triggering the limitation period.
Ultimately, it is a landmark decision and will bring a big relief to operational creditors at large.