NCLAT: Acknowledgment of debt under the Limitation Act and its effects on the Insolvency and Bankruptcy Code

All suits filed before the courts and tribunals are supposed to be in adherence to the limitation period provided under the Limitation Act. An acknowledgement of debt in writing under Section 18 of the Limitation Act, starts a fresh period of limitation from the time the acknowledgement was so signed.

There has been an ambiguity surrounding the acknowledgement of debt under Section 18 of the Insolvency and Bankruptcy Code (IBC). The IBC, as mentioned in its objectives, is meant for the quick restructuring of CD. The Bankruptcy Law Reforms Committee (BLRC), mentioned that

“the intent of the IBC is not to give lease of life to debts which are already time bared”.

Thus, all applications filed under the IBC are not intended to give a safety valve to the lenders to reinforce the rights which are already exhausted through other remedies available to them. This ambiguity was resolved by the National Company Law Appellate Tribunal (NCLAT) in the case of V Padmakumar v. Stressed Assets Stabilization Fund (SASF) and Anr. and Ishrat Ali Vs. Cosmos Cooperative Bank Ltd.

Background

The Account of the M/S. Uthara Fashion Knitwear was declared a Non-performing Asset (NPA) on 31^st October 2002. Post its declaration as a final decree for recovery of such debt was passed in the year 2013. Due to non-enforcement of the decree, the dues against the Corporate Debtor (CD) remained unpaid. To recover the amount against the CD, on 21^st November 2019, an application to initiate Corporate Insolvency Resolution Process (CIRP) was made before the National Company Law Tribunal (NCLT), Chennai Bench under Section 7 of the Insolvency and Bankruptcy Code (IBC). The application was accepted by the NCLT, and an order to initiate the CIRP was passed.

Facts  

An appeal against the decree passed by the NCLT was made by the CD before the NCLAT. In pursuance to filling of the appeal, a bench consisting of five members was constituted.

Issues before the NCLAT

Primary plea of the appellant was that the application for initiation of CIRP was barred by the limitation period provided under Article 137 of the Limitation Act. Contending this plea, the respondents raised the following arguments before the NCLAT:

Filling of a recovery suit before a court or tribunal shifts the date of committing a default under the IBC-

The respondents contended that the date of the judgment passed by the courts or tribunals must be considered as a fresh date for meeting the threshold for ‘default’ under Section 7 of the IBC. Further, the period of pendency of a suit before a court or a tribunal should be excluded from the aggregate period of limitation, applicable to claim the IBC, against a CD.

Acknowledgement of debt by the CD extends the period of limitation under Section 18 of the Limitation Act-

An acknowledgement of debt in writing by the debtor, under Section 18 of the Limitation Act would start a fresh period of limitation from the date of such acknowledgement. It was claimed by the respondents that the application under Section 7 of the IBC was not barred by the period of limitation, as the debt has been acknowledged by the CD under Section 18.

According to the claim, the owed to the creditor was mentioned in the audited Balance Sheet of the CD filed as annual returns to the Registrar of Companies under Section 92 of the Companies Act 2013.

Judgment and Reasoning

The NCLAT, in a ratio of 4:1, declared the application filed under Section 7 to be barred by the limitation Act. In pursuance to the ruling, it set aside the order passed by the NCLT and rendered it to be unmaintainable. The NCLAT’s ruling can be bifurcated into two segments:

Concerning shifting of date of default, due to the pendency of a recovery suit before a court or tribunal-

Concerning this issue, the NCLAT held that the date of default, to calculate the limitation period cannot include the pending recovery proceedings before the tribunals.

Reference was made to judgments of M/s. Urgo Capital Ltd v. M/s. Bangalore Dehydration and drying equipment Co Pvt. Ltd. and. Jignesh Shah and Ors. V. Union of India. In these judgments, the Supreme Court of India held that inability to pay debts under the Companies Act, or default under the IBC is treated to be the date on which the account of the CD has declared an NPA or the date on which the IBC came into effect. Thus, while referring to the limitation period mentioned under article 137 of the Limitation Act (which is 3 years), the NCLAT concluded that the application made before the NCLT crossed the prescribed period.

Concerning the extension of the limitation period with acknowledgement of debt-

Majority judgment

The NCLAT considered that the annual audited balance sheet submitted by a company under section 92 of the Companies Act is a statutory compulsion. Thus, it cannot be treated as a voluntary acknowledgement under Section 18 of the Limitation Act. IT cited the Supreme Court’s judgment of BK Education Services Private Limited v. Parag Gupta and Associates, wherein, it was held that filing of the audited balance sheet by a company under Section 92, being a statutory mandate, failing of which attracts penal sanctions, cannot be treated as a valid acknowledgement of debt under Section 18 of the Limitation Act.

The NCLAT, while concluding from the statutory interpretations and references, declared the following to be the ratio:

1. The filing of Balance Sheets, as annual returns, being a statutory compulsion, cannot be treated as an acknowledgement under Section 18.
2. If the argument is accepted that the Balance Sheet/Annual Return of the ‘Corporate Debtor’ amounts to acknowledgement under Section 18 of the Limitation Act, 1963 then in such case, it is to be held that no limitation would be applicable, because every year, it is mandatory for the ‘Corporate Debtor’ to file Balance Sheet/Annual Return, which is not the law.

Dissenting judgment

AIS Chemma J. delivered the dissenting judgment of the case. Reservations were raised regarding the part of acknowledgement of debt and extension of the limitation period.

Contradicting the majority view, hon’ble Chemme J. mentioned that the mention of debt in the balance sheets do amount to a valid acknowledgement of debt under Section 18. The Delhi High Court’s Judgment of In re Padam Tea Co Ltd was cited. The High Court, in this case, considered the mention of debt under the Company’s annual Balance sheet to be a valid acknowledgement of debt under the Limitation Act. The principle of law laid down under the case was that the statement in the balance sheet indicating liability is to be read along with the director’s report. Since all annual returns are filed with balance sheets attached with a director’s report, together they amount to a valid acknowledgement of debt under Section 18.

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