Acknowledgement of Debts within prescribed Period Extends the Limitation Period under the IBC

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Acknowledgement of Debts within prescribed Period Extends the Limitation Period under the IBC

The National Company Law Appellate Tribunal (NCLAT) in its recent ruling in Vivek Jha v. Daimler Financial Services India Private Ltd. & Anr.,[1] (decided on 13 January, 2020) has held that the acknowledgement of debts by the Corporate Debtor within the prescribed period will give rise to the new limitation period for the Creditor to set out its claim against the Debtor under the Insolvency and Bankruptcy Code (IBC). The Appellate Tribunal while referring to the decision given by the Hon’ble Supreme Court of India in the case of Union of India v. M.C. Pandey,[2], has observed that an application if filed before the expiration of the three years from the date of the previous acknowledgment of debts will not be barred by limitation and gets the protection of Article 18 of the Limitation Act, 1963. Acceptance of debts by the Debtor not only protects the limitation period but also provides for the continuous cause of action to the Creditor to submit its claim.

In the present case in hand, the NCLAT observed following facts:

Appellant- Corporate Debtor had an agreement with the Respondent for the purchase of a car under which a part payment was done at the time of agreement and the rest was admitted to be given in instalments bearing interest. Appellant made a default in payment of the instalment amount on 30/03/14, as a result of which the Respondent sent a demand notice on 06/05/14 for the due amount to be paid till 27/03/16. In the meantime, Corporate Debtor paid Rs 3 Lakhs to the Respondent in lieu of the demand notice sent and again after this defaulted in the repayment of the due amount left. A new demand notice was issued to the Debtor under section 7 of the IBC on 17/08/17 after which an application under section 7 was admitted by the Adjudicating Authority on 16/12/17, which was appealed by the Appellant stating it to be barred by limitation. Lastly, on 28/03/18 the Corporate Debtor acknowledged the debt and agreed to pay the same.

The Appellate tribunal held that the petition admitted Under Section 7 is maintainable and is not barred by Limitation for the reason that the application was filed within 3 years from the date on which the Corporate Debtor was asked to pay the debts, i.e., 27/03/16. Further, it observed that in this case, the limitation period will not begin to run from the date of default as held in the case of B.K. Educational Services Private Limited v. Parag Gupta and Associates, 2019.[3] Lastly, the NCLAT held that the protection of Article 18 of the Limitation Act will be given to the Respondent which provides for the extension of the Limitation period from the last acknowledgement of the debt. Hence, the limitation period will further gets extended for a period of three years from the date of acknowledgement of debts by the Debtor, i.e., from 28/03/18.  

Further, in the case of Munish Kumar Bhunsali & Anr. v. Kotak Mahindra Bank & Anr.,[4] (as decided by the NCLAT on 08 January, 2020,) the Appellate Tribunal held that the acknowledgement of debts by the Debtor after the limitation period will not give life to the dead claims of the Creditor. The facts in the present case relates to the default made by the Appellant in repayment of the loan taken from the Respondent in June, 2015, as a result of which the Appellant’s account was declared as Non Performing Asset on 30/09/15. After this, a series of litigation went to the Debt Recovery Tribunal which were pending. Meanwhile the Corporate Debtor proposed for a One Time Settlement (OTS) of the debts on 12/12/18, which was not accepted by the Financial Creditor. Respondent later filed an application under section 7 of IBC on 30/01/19 which was admitted by the Adjudicating Authority.

An appeal was filed by the Appellant in NCLAT stating the application admitted by the Adjudicating Authority to be barred by limitation as the period of 3 years from the date of default were elapsed. The Appellate Tribunal accepted the contentions raised by the Appellant and set aside the decision of the Adjudicating Authority. The NCLAT observed that the rejected OTS proposal by the Respondent will not give rise to the new limitation period even though the debt is acknowledged. It further observed that for an acknowledged debt to give rise to new limitation period under Article 18 of Limitation Act, it is required to be done before the expiry of the prescribed period from the last acknowledgement of debts. Also, another essential of Article 18 is that there should be written acknowledgement of the liability which must be signed by the opposite party against whom the property or right is claimed. Hence, in the factual matrix of the present case the debt acknowledged was after the expiry of the limitation period and also not properly acknowledged, thus cannot extend the limitation period. 

Also, as held by the NCLT bench of Mumbai in the case of TJSB Sahakari Bank v. Unimetal Castings Limited,[5] the application under section 7 of IBC will be accepted even after three years from the date of default if the Corporate Debtor has acknowledged the liability in his financial statements during the limitation period and concluded that the new limitation period will start from the acknowledgement of liability and not from the date of default. The Tribunal relied upon a number of judgements which laid down the principle that the liability shown in the balance sheet of the company is a valid acknowledgement of debt. The facts of the case were that the Corporate Debtor’s account was declared as Non Performing Asset on 30/06/15 by the Petitioner due to the default in payment of the loan amount. The Respondent in the financial statements of the year 2017 admitted the liability they owe to the Petitioner. On 23/08/18 an application was filed by the Financial Creditor under section 7 of IBC, which was after the expiry of three years from the date of default. The Adjudicating Authority admitted the application and stated it to be not barred by limitation as the period of limitation got extended for a period of three years from the date of acknowledgement.     

Conclusion

The Supreme Court’s ruling in the case of B.K. Educational Services Private Limited v. Parag Gupta and Associates holds good, i.e., the limitation period for the application under the IBC shall start from the date of default. This means that, if an application under the IBC is filed after three years from the date of default, the same shall not be accepted provided if there is a condonation of delay or continuous cause of action. Thus, acknowledgement of debt comes under the category of continuous cause of action and will give rise to the new limitation period if done within the prescribed period from the last acknowledgement of liability.

Reference:

[1] Company Appeal (AT) Insolvency No. 756 of 2018

[2] 2009 NOC Page 494 (UTR).

[3] Civil Appeal No. 23988/17

[4] Company Appeal (AT) Insolvency No. 1349 of 2019

[5] CP (IB) -3622/I&BP/MB/2018

Author:

Varun Akar

Student, Institute of Law, Nirma University

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