Supreme Court (15.04.2021) in Asset Reconstruction Company (India) Limited Vs. Bishal Jaiswal & Anr. [Civil Appeal No. 323 of 2021] held that;
an entry made in the books of accounts, including the balance sheet, can amount to an acknowledgement of liability within the meaning of Section 18 of the Limitation Act. Thus, in Mahabir Cold Storage v. CIT, 1991 Supp (1) SCC 402, this Court 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. …”
An exhaustive judgment of the 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: . . . .Importantly, 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 not amount to an acknowledgement of debt for reasons given in the said note.
It is true the balance-sheet is a statutory document and perhaps is a separate document but the balance-sheet not confirmed or passed by the shareholders cannot be accepted as correct. Therefore, in order to validate the balance-sheet, it must be duly passed by the shareholders at the appropriate meeting and in order to do so it must be accompanied by a report, if any, made by the Directors. Therefore, even though the balance-sheet may be a separate document these two documents in the facts and circumstances of the case should be read together and should be construed together.
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.
Excerpts of the order;
Civil Appeal No.323 of 2021
1. In 2009, Corporate Power Ltd. [“the corporate debtor”] set up a thermal power project in Jharkhand, and for so doing, availed of loan facilities from various lenders, including the State Bank of India [“SBI”]. The account of the corporate debtor was declared as a non-performing asset by SBI on 31.07.2013. On 27.03.2015, SBI issued a loan-recall notice to the corporate debtor in its capacity as the lenders’ agent. On 31.03.2015, some of the original lenders of the corporate debtor, namely, India Infrastructure Finance Company Limited, SBI, State Bank of Hyderabad, State Bank of Bikaner and Jaipur, State Bank of Patiala, and State Bank of Travancore assigned the debts owed to them by the corporate debtor to the appellant, the Asset Reconstruction Company (India) Limited. On 20.06.2015, the appellant issued a notice under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 [“SARFAESI Act”] on behalf of itself and other consortium lenders to the corporate debtor. On 01.06.2016, the appellant took actual physical possession of the project assets of the corporate debtor under the SARFAESI Act. On 26.12.2018, the appellant filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 [“IBC”] before the National Company Law Tribunal, Calcutta [“NCLT”] for a default amounting to Rs.5997,80,02,973/- from the corporate debtor. As the relevant form indicating the date of default did not indicate any such date, this was made up by the appellant on 08.11.2019 by filing a supplementary affidavit before the NCLT, specifically mentioning the date of default and annexing copies of balance sheets of the corporate debtor, which, according to the appellant, acknowledged periodically the debt that was due. On 19.02.2020, the Section 7 application was admitted by the NCLT, observing that the balance sheets of the corporate debtor, wherein it acknowledged its liability, were signed before the expiry of three years from the date of default, and entries in such balance sheets being acknowledgements of the debt due for the purposes of Section 18 of the Limitation Act, 1963 [“Limitation Act”], the Section 7 application is not barred by limitation. In an appeal filed to the National Company Law Appellate Tribunal [“NCLAT”], the corporate debtor relied upon the Full Bench judgment of the NCLAT in V. Padmakumar v. Stressed Assets Stabilisation Fund, Company Appeal (AT) (Insolvency) No. 57 of 2020 (decided on 12.03.2020) [“V. Padmakumar”], in which a majority of four members [Justice (Retd.) A.I.S. Cheema, Member (Judicial), dissenting] held that entries in balance sheets would not amount to acknowledgement of debt for the purpose of extending limitation under Section 18 of the Limitation Act. After a preliminary hearing, a three-Member Bench passed an order on 25.09.2020 doubting the correctness of the majority judgment of the Full Bench and referred the matter to the Acting Chairman of the NCLAT to constitute a Bench of coordinate strength to reconsider the judgment in V. Padmakumar (supra).
# 2. A five-Member Bench of the NCLAT, vide the impugned judgment dated 22.12.2020, refused to adjudicate the question referred, stating that the reference to the Bench was itself incompetent.
# 3. Shri Ramji Srinivasan, learned Senior Advocate appearing on behalf of the appellant, has assailed the impugned judgment, arguing that the majority judgment of the Full Bench of the NCLAT in V. Padmakumar (supra) was clearly per incuriam as it has not considered various binding judgments of this Court and that the said judgment was wholly incorrect in rejecting the reference out of hand at a preliminary stage. For this purpose, he referred to a number of judgments of this Court in which it has been made clear that vide Section 238A of the IBC, Section 18 of the Limitation Act is applicable to a proceeding under Section 7 of the IBC. Also, according to the learned Senior Advocate, the judgments of the High Courts and the judgments of this Court have expressly held that entries made in signed balance sheets of the corporate debtor would amount to acknowledgements of liability and have, therefore, correctly been relied upon by the NCLT on the facts of this case. . . . . . . .
# 6. 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, . .
A perusal of the above would show that considering that the Limitation Act applies only to courts, unless made statutorily applicable to tribunals, the Committee was of the view that such Act should be made to apply to the IBC as well, observing that though the IBC is not a debt recovery law, the trigger being “default in payment of debt” would render the exclusion of the law of limitation “counter-intuitive”. Thus, it was made clear that an application to the IBC should not amount to resurrection of time-barred debts which, in any other forum, would have been dismissed on the ground of limitation.
# 7. From the above, it is clear that the principle of Section 9 of the Limitation Act is to be strictly adhered to, namely, that when time begins to run, it cannot be halted, except by a process known to law. 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.
# 8. The aforesaid question is no longer res integra as two recent judgments of this Court have applied the provisions of Section 14 and Section 18 of the Limitation Act to the IBC. Thus, 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.”
# 13. The next question that this Court must address is 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.
# 14. Several judgments of this Court have indicated that an entry made in the books of accounts, including the balance sheet, can amount to an acknowledgement of liability within the meaning of Section 18 of the Limitation Act. Thus, in Mahabir Cold Storage v. CIT, 1991 Supp (1) SCC 402, this Court 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. …”
15. Likewise, in a case concerning the dishonour of a cheque under Section 138 of the Negotiable Instruments Act, 1881, this Court, in A.V. Murthy v. B.S. Nagabasavanna, (2002) 2 SCC 642 [“A.V. Murthy”], held:
“5. … It is also pertinent to note that under sub-section (3) of Section 25 of the Indian Contract Act, 1872, 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. Moreover, in the instant case, the appellant has submitted before us that the respondent, in his balance sheet prepared for every year subsequent to the loan advanced by the appellant had shown the amount as deposits from friends. A copy of the balance sheet as on 31-3-1997 is also produced before us. If the amount borrowed by the respondent 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. However, we do not express any final opinion on all these aspects, as these are matters to be agitated before the Magistrate by way of defence of the respondent.”
The judgment in A.V. Murthy (supra) was followed in S. Natarajan vs. Sama Dharman, Crl. A. No. 1524 of 2014 (decided on 15.07.2014) as follows:
“7. In this connection, we may usefully refer to a judgment of this Court in A.V. Murthy v. B.S. Nagabasavanna, [A.V. Murthy v. B.S. Nagabasavanna, (2002) 2 SCC 642] where the accused had alleged that the cheque issued by him in favour of the complainant in respect of sum advanced to the accused by the complainant four years ago was dishonoured by the bank for the reasons “account closed”. The Magistrate had issued summons to the accused. The Sessions Court quashed the proceedings on the ground that the alleged debt was barred by limitation at the time of issuance of cheque and, therefore, there was no legally enforceable debt or liability against the accused under the Explanation to Section 138 of the NI Act and, therefore, the complaint was not maintainable. While dealing with the challenge to this order, this Court observed that Under Section 118 of the NI Act, there is a presumption that until the contrary is proved, every negotiable instrument was drawn for consideration. This Court further observed that Section 139 of the NI Act specifically notes that it shall be presumed unless the contrary is proved, that the holder of a cheque received the cheque of the nature referred to in Section 138 of the NI Act for discharge, in whole or in part, of any debt or other liability. 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. 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. …”
# 16. An exhaustive judgment of the 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: . . . .
Importantly, 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 not amount to an acknowledgement of debt for reasons given in the said note.
# 21. We must now examine the position under the Companies Act, 2013 [“Companies Act”] qua any compulsion of law for filing of balance sheets and acknowledgements made therein. . . .
# 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.
# 23. The judgment in Bengal Silk Mills (supra) has been referred to with approval in various other judgments. Thus, 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:
46. . . . .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 acknowledgments of liability of the companies.
47. Shri Rameshwar Dial referred to the decision of the Privy Council in Consolidated Agencies Ltd. v. Bertram Ltd., (1964) 3 All. E.R. 282. We shall advert to this decision presently when we deal with another argument of Shri Rameshwar Dial, and it is sufficient to state so far as the argument under consideration is concerned that even in this decision of the Privy Council it has been recognised that balance-sheets could in certain circumstances amount to acknowledgements of liability. It cannot, therefore, be said as a general proposition of law that statements in balance-sheets of a company cannot operate at all as acknowledgements of liability as contended by Shri Rameshwar Dial.
# 24. The judgment of Sabyasachi Mukharji, J. (as His Lordship then was), sitting singly in the Calcutta High Court, has, in Pandam Tea Co. Ltd., In re, 1973 SCC OnLine Cal 93 : AIR 1974 Cal 170, 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. Counsel appearing for petitioning creditor contended that under the statute the balance-sheet was a separate document and as such if there was unequivocal acknowledgement on the balance-sheet the statement of the Directors’ report should not be taken into consideration. It is true the balance-sheet is a statutory document and perhaps is a separate document but the balance-sheet not confirmed or passed by the shareholders cannot be accepted as correct. Therefore, in order to validate the balance-sheet, it must be duly passed by the shareholders at the appropriate meeting and in order to do so it must be accompanied by a report, if any, made by the Directors. Therefore, even though the balance-sheet may be a separate document these two documents in the facts and circumstances of the case should be read together and should be construed together. It was held by the Supreme Court in the case of L.C. Mills v. Aluminium Corpn. of India Ltd., (1971) 1 SCC 67 : AIR 1971 SC 1482, that it was clear that the statement on which the plea of acknowledgement was founded should relate to a subsisting liability as the section required and it should be made before the expiration of the period prescribed under the Act. It need not, however, amount to a promise to pay for an acknowledgement did not create a new right of action but merely extended the period of limitation. The statement need not indicate the exact nature or the specific character of the liability. The words used in the statement in question must, however, relate to a present subsisting liability and indicate the existence of a jural relationship between the parties such as, for instance, that of a debtor and a creditor and the intention to admit such jural relationship. Such an intention need not, however, be in express terms and could be inferred by implication from the nature of the admission and the surrounding circumstances. Generally speaking, a liberal construction of the statement in question should be given. That of course did not mean that where a statement was made without intending to admit the existence of jural relationship, such intention should be fastened on the person making the statement by an involved and far-fetched reasoning. In order to find out the intention of the document by which acknowledgement was to be construed the document as a whole must be read and the intention of the parties must be found out from the total effect of the document read as a whole.
# 25. 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 21 ] and Bengal Silk Mills Co. v. Ismail Golam Hossain Ariff [AIR 1962 Calcutta 115]). We see no substance in this contention either.”
# 27. 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-shareholder 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.”
In several judgments of this Court, this legal position has been accepted. In Daya Chand Uttam Prakash Jain v. Santosh Devi Sharma 67 (1997) DLT 13, S.N. Kapoor J. applied the principle in a case where the primary question was whether a suit under Order 37 CPC could be filed on the basis of an acknowledgment. In Larsen & Toubro Ltd. v. Commercial Electric Works 67 (1997) DLT 387 a Single Judge of this Court observed that it is well settled that a balance sheet of a company, where the defendants had shown a particular amount as due to the plaintiff, would constitute an acknowledgement within the meaning of Section 18 of the Limitation Act. In Rishi Pal Gupta v. S.J. Knitting & Finishing Mills Pvt. Ltd. 73 (1998) DLT 593, the same view was taken. The last two decisions were cited by Geeta Mittal, J. in S.C. Gupta v. Allied Beverages Company Pvt. Ltd. (decided on 30/4/2007) and it was held that the acknowledgement made by a company in its balance sheet has the effect of extending the period of limitation for the purposes of Section 18 of the Limitation Act. In Ambika Mills td. Ahmedabad v. CIT Gujarat (1964) 54 ITR 167, it was further held that a debt shown in a balance sheet of a company amounts to an acknowledgement for the purpose of Section 19 of the Limitation Act and in order to be so, the balance sheet in which such acknowledgement is made need not be addressed to the creditors. In light of these authorities, it must be held that in the present case, the disclosure by the assessee company in its balance sheet as on 31st March, 2002 of the accounts of the sundry creditors’ amounts to an acknowledgement of the debts in their favour for the purposes of Section 18 of the Limitation Act. The assessee’s liability to the creditors, thus, subsisted and did not cease nor was it remitted by the creditors. The liability was enforceable in a court of law.”
# 33. It is, therefore, clear that the majority decision of the Full Bench in V. Padmakumar (supra) is contrary to the aforesaid catena of judgments. The 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.
# 34. The NCLAT, in the impugned judgment dated 22.12.2020, has, without reconsidering the majority decision of the Full Bench in V. Padmakumar (supra), rubber-stamped the same. We, therefore, set aside the aforesaid impugned judgment also.
# 35. On the facts of this case, the NCLT, by its judgment dated 19.02.2020, recorded that the default in this case had been admitted by the corporate debtor, and that the signed balance sheet of the corporate debtor for the year 2016-2017 was not disputed by the corporate debtor. As a result, the NCLT held that the Section 7 application was not barred by limitation, and therefore, admitted the same. We have already set aside the majority judgment of the Full Bench of the NCLAT dated 12.03.2020, and the impugned judgment of the NCLAT dated 22.12.2020 in paragraphs 33 and 34. This appeal is, therefore, allowed, and the matter is remanded to the NCLAT to be decided in accordance with the law laid down in our judgment.
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