Enforceability of Limitation Act on IBC – By Mr. Sajal Jain

Mr. Sajal Jain,
Student, Faculty of Law, University of Delhi

Enforceability of Limitation Act on IBC

ABSTRACT

This Article titled “Enforceability of Limitation Act on IBC” featuring the Hon’ble Supreme Court’s landmark judgement of Asset Reconstruction Company (India) Limited v. Bishal Jaiswal & Anr. (2021) ibclaw.in 55 SC, it deals with the application of provisions of Limitation act on Insolvency and Bankruptcy law, 2016. The Case comment extensively deals with introduction, background and analysis of the said judgement along with detailed discussion on statutory law and case laws cited in the judgement.

This case has cleared the void which was created with the widely criticized judgement of V. Padmakumar of Hon’ble NCLAT and also clears some other issues which arise in the present case. This judgement along with the judgement of Sesh Nath Singh and Laxmi Pati Surana has been the boon for the practitioners and litigants of Insolvency law. 

The Court set aside the impugned judgement and held that entries made in the balance sheet of the corporate debtor would amount to acknowledgement of the debt which would result in extended period of Limitation under Section 18 of Limitation Act, 1963.

ENFORCEABILITY OF LIMITATION ACT ON IBC

JUDGEMENTS SET ASIDE

  1. Padmakumar vs. Stressed Assets Stabilisation Fund (SASF) & Anr.  [2020] ibclaw.in 255 NCLAT [1]
  2. Bishal Jaiswal vs. Asset Reconstruction Company (India) Limited & Anr. (2020) ibclaw.in 414 NCLAT [2]

INTRODUCTION

The important question that arises in this appeal is that whether Section 18 of Limitation Act, 1963, with respect to Section 238A of Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as ‘IBC, 2016’) is applicable to application made under Section 7 of the IBC and if so the entries made in the balance sheet of the corporate debtor would amount to acknowledgement of liability under Section 18 of Limitation Act or not?

The NCLT held that entries made in balance sheet being acknowledgement of the debt due for the purposes of Section 18 of Limitation Act, thus Section 7 application is not barred by Limitation. The matter appealed to NCLAT which held the entries made in balance sheet would not amount to acknowledgement of debt for the purposes of Section 18 of Limitation Act, thus further refused to adjudicate the questions referred, stating the reference was itself incompetent. The Hon’ble Supreme Court accepted the view of NCLT and thus set aside the impugned judgement.

BACKGROUND

In 2009, the Corporate debtor availed the loan facility from various lenders, for the thermal power project in Jharkhand. On 31.07.2013, the account of corporate debtor was declared non-performing asset. On 31.03.2015, various original lenders assigned the debts owed by the corporate debtor to the appellant the Asset Reconstruction Company (India) Limited. The appellant filed the application under Section 7 of Insolvency and Bankruptcy Code 2016 before the National Company Law Tribunal, Calcutta for the default amounting to Rs. 5997 Crores (approx.).

The Hon’ble Supreme Court evaluated Section 238A of IBC with regard to Report of the Insolvency Law Committee of March 2018, committee was of view that Limitation Act should be made to apply to the IBC as well, thus it made clear that the application to the IBC should not amount to arise of any time-barred debts which, in any other forum, would be dismissed on grounds of limitation.

The Hon’ble Supreme Court with its two judgements applied the provisions of Limitation act in IBC, thus clearing the question of whether the provisions of Limitation Act are applicable on Section 238A of IBC. The observation made under these two cases is followed in below paragraphs.

The Supreme Court in the judgement of Sesh Nath Singh v. Baidyabati Sheoraphuli Co-operative Bank Ltd. (2021) ibclaw.in 49 SC [3] observed that:

“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. 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 11 NCLAT does not proceed on the basis of any acknowledgement.”

The Hon’ble Supreme Court in the judgement of Laxmi Pat Surana v. Union Bank of India (2021) ibclaw.in 53 SC [4] observed that:

“Notably, the provisions of Limitation Act have been made applicable to the proceedings under the Code, as far as may be applicable. For, Section 238A predicates that the provisions of Limitation Act shall, as far as may be, apply to the proceedings or appeals before the Adjudicating Authority, the NCLAT, the DRT or the Debt Recovery Appellate Tribunal, as the case may be. After enactment of Section 238A of the Code on 12 06.06.2018, validity whereof has been upheld by this Court, it is not open to contend that the limitation for filing application under Section 7 of the Code would be limited to Article 137 of the Limitation Act and extension of prescribed period in certain cases could be only under Section 5 of the Limitation Act. There is no reason to exclude the effect of Section 18 of the Limitation Act to the proceedings initiated under the Code.”

Section 18 of the Limitation Act, 1963 is as follows-

18. Effect of acknowledgement in writing.

(1) Where, before the expiration of the prescribed period for a suit or application 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, or by any person through whom he derives his title or liability, a fresh period of limitation 16 shall be computed from the time when the acknowledgement was so signed.

(2) Where the writing containing the acknowledgement is undated, oral evidence may be given of the time when it was signed; but subject to the provisions of the Indian Evidence Act, 1872 (1 of 1872), oral evidence of its contents shall not be received.

Explanation.—For the purposes of this section,— (a) an acknowledgement may be sufficient though it omits to specify the exact nature of the property or right, or avers that the time for payment, delivery, performance or enjoyment has not yet come or is accompanied by refusal to pay, deliver, perform or permit to enjoy, or is coupled with a claim to set off, or is addressed to a person other than a person entitled to the property or right, (b) the word “signed” means signed either personally or by an agent duly authorised in this behalf, and (c) an application for the execution of a decree or order shall not be deemed to be an application in respect of any property or right.”

The illuminating reach of the Section 18 of Limitation act, is also considered for its applicability on IBC. The Hon’ble Court in its earlier judgement of Khan Bahadur Shapoor Fredoom Mazda v. Durga Prasad[5] has discussed the scope of the Section 19 which corresponds to Section 18 of Limitation Act, held that “It is thus clear that acknowledgement as prescribed by Section 19 merely renews debt; it does not create a new right of action. It is a mere acknowledgement of the liability in respect of the right in question; it need not be accompanied by a promise to pay either expressly or even by implication. The statement on which a plea of acknowledgement is based must relate to a present subsisting liability though the exact nature or the specific character of the said liability may not be indicated in words…. In construing words used in the statements made in writing on which a plea of acknowledgement rests oral evidence has been expressly excluded but surrounding circumstances can always be considered”.

The question Hon’ble Supreme Court focused mainly is that whether an entry made in the balance sheet of the corporate debtor would amount to acknowledgement of debt under Section 18 of Limitation act or not, to assess and answer the question the Court revisited its earlier judgements some which are assessed here below.

The Hon’ble Supreme Court in the judgement of Mahabir Cold Storage v. CIT [6] held that:

“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.”

The Hon’ble Supreme Court in the judgement of S. Natarajan vs. Sama Dharman[7] held that:

“This Court further observed that under Sub-section (3) of Section 25 of the Contract Act, a promise, made in writing and signed by the person to be charged therewith, or by his agent generally or specially authorized in that behalf, to pay wholly or in part a debt of which the creditor might have enforced payment but for the law for the limitation of suits, is a valid contract… 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.”

The judgement of Shapoor Fredoom Mazda (supra) further made it plain that all that was necessary for the acknowledgement was to establish a jural relationship between the debtor and creditor, which is undoubtedly made in the facts of the present case.

Though it is clear from the above observations made by the court that the entries made in the balance sheet of the corporate debtor would amount to acknowledgement of debt in this present case but the judgement made by Hon’ble Calcutta High Court in the Bengal Silk Mills Co. v. Ismail Golam Hossain Ariff,[8] do slightly change the position of law, which held that an acknowledgement of liability that is made in a balance sheet can amount to an acknowledgement of debt. This judgment holds that though the filing of a balance sheet is by compulsion of law, the acknowledgement of a debt is not necessarily so. In fact, it is not uncommon to have an entry in a balance sheet with notes annexed to or forming part of such balance sheet, or in the auditor’s report, which must be read along with the balance sheet, indicating that such entry would amount to an acknowledgement of debt only when the reasons given in notes supports so.

On fair perusal of the statutory provision of Companies Act, 2013 related to balance sheet, annexed notes and auditor’s report the court reached to the conclusion that the law made in Bengal Mills Case (supra) is the correct position as it would depend on the facts and circumstances of each case as to the entries made in balance sheet would amount to acknowledgement of liability has been made or not, of course with the fair perusal of particulars and caveats in the annexed notes and auditor’s report, thereby extending the limitation under Section 18 of the Act.

ANALYSIS

The decision of Hon’ble Supreme Court is based on appropriate reasoning, Firstly the Court checked the rationale for Section 238A under IBC that makes Limitation Act applicable to the proceedings under the Act through the Insolvency Report. Secondly, the Hon’ble Supreme court considers the scope of Limitation Act and hold that the application of the Act to IBC should not amount to the resurrection of time-barred debts which, in any other forum, would have been dismissed on the ground of Limitation.

The Hon’ble court relied on many other judgements dealing with the issue that the acknowledgement of debt in the balance sheet would amount to extending the period of limitation or not. Irrespective of the fact that it was conveyed to the creditor. The Court not only set aside the impugned judgement but also set aside the majority judgement (five judge bench judgement) of V. Padmakumar (supra) and observed the minority judgement of Justice A.I.S Cheema to reach the correct conclusion.

As the reader, there was a void on applicability of principles of Limitation Act on IBC proceedings, judgement in this case sought to clear that void. Apart from settling the above, the court also answered basic question about the applicability of the Limitation Act. The reasoning in the present case was consistent with the reasoning in the case of Sesh Nath Singh (supra) and Laxmi Pati Surana (supra), these three recent judgements by the Hon’ble Court have cleared the position of law regarding applicability of Limitation Act in IBC.

The Court interpreted various laws in the present case, and have been judicious in implementing the provisions according to the case, the provisions of Companies Act, 2013 were consistent with the issue dealt in this case. The court has answered all the issues related with the application of Limitation Act.

CONCLUSION

The author, humbly supports the judgement of Hon’ble Supreme Court in present case, in which the court rightfully observed that the entries made in the balance sheet of the corporate debtor can amount to acknowledgement of debt and would, therefore, extend the period of limitation for the proceeding under IBC, of course this principle would not apply as straightjacketed formula, as it was observed by the court that the application of this principles would depend on the facts and circumstances of each case, along with the caveats in the annexed notes and auditor’s report with balance sheet of the corporate debtor.

The instant ruling has very cautiously reinstated the law laid down by this court in its earlier judgements, and judiciously answered the issues raised in appeal before the Court.

[1] [2020] ibclaw.in 255 NCLAT

[2] (2020) ibclaw.in 414 NCLAT

[3] (2021) ibclaw.in 49 SC

[4] (2021) ibclaw.in 53 SC

[5](1962) 1 SCR 140 (India)

[6] 1991 Supp (1) SCC 402 (India)

[7] Crl. A. No. 1524 of 2014 (India)

[8] 1961 SCC OnLine Cal 128: AIR 1962 Cal 115 (India)

 

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