Friday 25 December 2020

Bishal Jaiswal Vs Asset Reconstruction Company (India) Ltd. & Anr. - Reflection of a debt in the Balance Sheet/ Annual Return of a CD would not be acknowledgement U/s 18 of the Limitation Act

 NCLAT (22.12.2020) in Bishal Jaiswal Vs Asset Reconstruction Company (India) Ltd. & Anr. [Reference made by Three Member Bench in Company Appeal (AT) (Insolvency) No. 385 of 2020] held that;

  • As regards the issue raised whether reflection of a debt in the Balance Sheet/ Annual Return of a Corporate Debtor would amount to acknowledgement under Section 18 of the Limitation Act, suffice it to say that the finding has been recorded by the five Member Bench in the context of judgment or a decree passed for recovery of money by Civil Court/ Debt Recovery Tribunal which cannot shift forward the date of default for purposes of computing limitation for filing of an application under Section 7 of the I&B Code and the fact that filing of Balance Sheet/ Annual Report being mandatory under Section 92(4) of Companies Act, failing of which attracts penal action under Section 92(5) & (6).


Excerpts of the order;

A three member Bench of this Appellate Tribunal, which heard Company Appeal (AT) (Insolvency) No. 385 of 2020, was of the view that the judgment rendered by a five member Bench of this Appellate Tribunal in “V. Padmakumar Vs. Stressed Assets Stabilization Fund (SASF) & Anr.”, in Company Appeal (AT) (Insolvency) No. 57 of 2020, requires reconsideration. The issue formulated by the three member Referral Bench, as noticed in the order of reference, is as follows:-

  • “Hon’ble Supreme Court and various Hon’ble High Courts have consistently held that an entry made in the Company’s Balance Sheet amounts to an acknowledgement of debt under Section 18 of the Limitation Act, 1963, in view of the settled law, V. Padmakumar’s Case requires reconsideration.”


# 11. Having heard learned counsel for the parties on the limited issue of competence of reference made by the three Member Bench and after fathoming through the relevant material on record, we find that the Referral Bench failed to take note of the fact that the five Member Bench Judgment rendered in ‘V. Padmakumar’s Case’ with a majority of 4:1 was delivered to remove uncertainty arising out of the conflicting verdicts of Benches of co-equal strength in ‘V. Hotel’s Case’ and ‘M/s Ugro Capital Ltd.’s Case’. In view of this factual position, it was inappropriate on the part of the Referral Bench to doubt the correctness of the five Member Bench Judgment, which admittedly has not been appealed against and occupies the field till date. This is besides the fact that the five Member Bench has taken note of the authoritative pronouncements of the Hon’ble Apex Court relevant to the determinable issue. Therefore, relying upon Judgments of various High Courts on the subject is of no consequence. This Appellate Tribunal is not a Constitutional Court. It is the creation of a Statute viz. Companies Act, 2013. Therefore, this Appellate Tribunal has to apply the law as embodied in the Statutes and as laid down by the Hon’ble Apex Court. This Appellate Tribunal only interprets and applies the law as it is. Once a Larger Bench of this Appellate Tribunal came to be constituted in the wake of two conflicting judgments rendered by Benches of co-equal strength on the issue, one of the two Benches having failed to notice the judgment of the Hon’ble Apex Court on the subject, the issue raised by the Referral Bench can no more be said to be res integra, in so far as the jurisdiction exercised by this Appellate Tribunal under I&B Code is concerned. It was a matter of judicial discipline for the Referral Bench to follow the judgment of the five member Bench in ‘V. Padmakumar’s Case’ as a binding precedent and not question the correctness of the Judgment by adopting the ‘cut and paste’ methodology in branding the five Member Bench Judgment in ‘V. Padmakumar’s Case’ as ‘so very incorrect’, divorced of the context in which the Hon’ble Apex Court used this expression in ‘Raghubir Singh’s Case’ (supra) and ‘Pradeep Chandra Parija’s Case’ (supra). While expressing our shock on this aspect, we propose to first deal with the issue that is sought to be raised on the basis of gross misconception and misunderstanding of law before dealing with the aspect of judicial discipline.


# 12. The five Member Bench in ‘V. Padmakumar’s Case’ has expressly referred to the judgment of Hon’ble Apex Court rendered in “B. K. Educational Services Pvt. Ltd. vs. Parag Gupta and Associates, (2019)11 SCC 633” wherein the Hon’ble Apex Court held that for purpose of Section 7 of I&B Code limitation Act, 1963 is applied from the date of inception of the Code. Article 137 of the Limitation Act would be applicable to applications under Section 7, 9 or 10 of the I&B Code. In “Jignesh Shah & Anr. vs. Union of India & Anr., (2019)10 SCC 750”, the Hon’ble Apex Court, after noticing various judgments, observed that when time begins to run it can only be extended in the manner provided in the Limitation Act. An acknowledgment of liability under Section 18 of the Limitation Act would certainly extend the limitation period but a suit for recovery which is a separate and independent proceeding distinct from the remedy of winding up would in no manner impact the limitation within which the winding up proceeding is to be filed, by somehow keeping the debt alive for the purpose of the winding up proceedings. Para’s 21 and 28 of the aforesaid judgment dealing with the issue of limitation have been extracted in the five Member Bench judgment rendered by this Appellate Tribunal in ‘V. Padmakumar’s Case’. The five Member Bench also took note of the Judgment delivered by the Hon’ble Apex Court in “Gaurav Hargovindbhai Dave vs. Asset Reconstructions Company (India) Limited & Another – (2019) 10 SCC 572”, wherein the Hon’ble Apex Court noted that the default having taken place and account having been declared NPA on 21st July, 2011, application filed under Section 7 of I&B Code in 2017 being clearly beyond three years under Article 137 of Limitation Act was time barred. The five Member Bench also took note of the judgment rendered by Hon’ble Apex Court in “Vashdeo R. Bhojwani vs. Abhyudaya Co-operative Bank Limited & Another – (2019) 9 SCC 158”, which laid down that since Limitation Act is applicable to applications filed under Section 7 and 9 of the I&B Code from the inception of the Code, Article 137 of the Limitation Act gets attracted. It is further held that right to sue accrues when a default occurs. The Hon’ble Apex Court relied upon its judgment rendered in “B. K. Educational Services’ Case” (supra), wherein in para 42 it was observed that if the default has occurred over three years prior to the date of filing of the application, the application would be barred under Article 137 of the Limitation Act, save and except in those cases where in the facts of the case, Section 5 of the Limitation Act may be applied to condone the delay in filing such application. The five Member Bench of this Appellate Tribunal also noticed the judgment rendered by this Appellate Tribunal in ‘V. Hotels’ Case’ (supra) wherein after noticing judgment of Hon’ble Apex Court in “Vashdeo R. Bhojwani”, this Appellate Tribunal made following observations in regard to applicability of Section 18 of the Limitation Act for extension of limitation:-

  • “22. The aforesaid provision makes it clear that for the purpose of filing a suit or application in respect of any property or right, an acknowledgment of liability in respect of such property or right has to be made in writing duly signed by the party against whom such property or right is claimed.

  • 23. In the present case, ‘Asset Reconstruction Company (India) Ltd.’- (‘Financial Creditor’) has failed to bring on record any acknowledgment in writing by the ‘Corporate Debtor’ or its authorised person acknowledging the liability in respect of debt. The Books of Account cannot be treated as an acknowledgment of liability in respect of debt payable to the ‘Asset Reconstruction Company (India) Ltd.’- (‘Financial Creditor’) signed by the ‘Corporate Debtor’ or its authorised signatory.”


The five Member Bench also took note of the observations of Hon’ble Apex Court in “Sampuran Singh and Ors. vs. Niranjan Kaur and Ors.─ (1999) 2 SCC 679”and held:

  • 24. In “Sampuran Singh and Ors. v. Niranjan Kaur and Ors.─ (1999) 2 SCC 679”, the Hon’ble Supreme Court observed that the acknowledgment, if any, has to be prior to the expiration of the prescribed period for filing the suit. In the present case, the account was declared NPA since 1st December, 2008 and therefore, the suit was filed. Thereafter, any document or acknowledgment, even after the completion of the period of limitation i.e. December, 2011 cannot be relied upon. Further, in absence of any record of acknowledgment, the Appellant cannot derive any advantage of Section 18 of the Limitation Act. For the said reason, we hold that the application under Section 7 is barred by limitation, the accounts of the ‘Corporate Debtor’ having declared NPA on 1st December, 2008.”


Thus, it was on the basis of the authoritative pronouncements and binding precedents of the Hon’ble Apex Court that the five Member Bench of this Appellate Tribunal arrived at the conclusion that for purpose of computing the period of limitation under Section 7, the date of default is NPA.


# 13. In “Babulal Vardharji Gurjar Vs. Veer Gurjar Aluminum Industries Ltd. & Anr.”, Civil Appeal No. 6347 of 2019, the Hon’ble Apex Court observed that Section 18 of the Limitation Act, 1963 would have no application to proceedings under I&B Code. Therefore, the issue raised as regards acknowledgement of liability by reflection in the Balance Sheet/ Annual Return would be irrelevant.


# 14. ………..   As regards the issue raised whether reflection of a debt in the Balance Sheet/ Annual Return of a Corporate Debtor would amount to acknowledgement under Section 18 of the Limitation Act, suffice it to say that the finding has been recorded by the five Member Bench in the context of judgment or a decree passed for recovery of money by Civil Court/ Debt Recovery Tribunal which cannot shift forward the date of default for purposes of computing limitation for filing of an application under Section 7 of the I&B Code and the fact that filing of Balance Sheet/ Annual Report being mandatory under Section 92(4) of Companies Act, failing of which attracts penal action under Section 92(5) & (6). …………… 


15. We are therefore of the considered view that the order of reference which, in letter and spirit, is more akin to a judgment of an Appellate Court appreciating the findings and judgment in ‘V. Padmakumar’s Case’ is incompetent and deserves to be rejected.


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The sole purpose of this post is to create awareness on the "IBC - Case Law" and to provide synopsis of the concerned case law, must not be used as a guide for taking or recommending any action or decision. A reader must refer to the full citation of the order & do one's own research and seek professional advice if he intends to take any action or decision in the matters covered in this post.

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