Arrow Engineering Ltd. Vs. Golden Tobacco Limited - It is true that each Balance Sheet has to be examined on a case to case basis to establish whether acknowledgment of liability in fact has been made.

 NCLAT (02.12.2021) in Arrow Engineering Ltd. Vs. Golden Tobacco Limited [Company Appeal (AT) (Insolvency) No. 183 of 2021] held that;

• Held that acknowledgment in the Balance Sheet is sufficient for attracting the provisions of Section 18 of the Limitation Act, 1963.

• It is thus clear that acknowledgement as prescribed by Section 18 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. 

• Words used in the acknowledgement must, however, indicate the existence of jural relationship between the parties such as that of debtor and creditor, and it must appear that the statement is made with the intention to admit such jural relationship. 

• Such intention can be inferred by implication from the nature of the admission, and need not be expressed in words. If the statement is fairly clear then the intention to admit jural relationship may be implied from it. 

• The admission in question need not be express but must be made in circumstances and in words from which the court can reasonably infer that the person making the admission intended to refer to a subsisting liability as at the date of the statement.

• It is true that each Balance Sheet has to be examined on a case to case basis to establish whether acknowledgment of liability in fact has been made. 

Excerpts of the Order;

# 7. From the submissions of the Learned Counsel for the parties and record, following are the issues which arise for consideration in this Appeal:- 

• (i) Whether Corporate Debtor owed a financial debt to the Appellant in the facts of the present case? 

• (ii) Whether Balance Sheets for the years 2014-15, 2015-16, 2016- 17, 2017-18 and 2018-19, contained acknowledgment of debt within the meaning of Section 18 of the Limitation Act, 1963 so as to give benefit of fresh limitation period to the Appellant? 

• (iii) Whether the Application filed under Section 7 by the Appellant was barred by time and has rightly been rejected by the Adjudicating Authority? 

 

All the above questions being inter-related are being taken together

 

# 8. The word ‘debt’ has been defined in Section 3(11) in following words:- 

• “3. Definitions.- …………..

• (11) “debt” means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt”

 

# 10. One of the sub-clauses of Section 5(8) by which ‘financial debt’ is defined in clause (f) which provides:- 

• “(f) any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing”

 

# 13. When we look into the letters written by the Corporate Debtor to the Appellant and the terms and conditions of MoU dated 10.10.2011, it is clear that the Appellant was to give financial assistance and marketing service and advices. One of the clauses of letter dated 10.10.2011 was that in case where the Corporate Debtor terminate/ differ marketing arrangement then the Corporate Debtor shall pay back the amount advanced by the Appellant with interest. At this juncture, it is also relevant to notice the financial document i.e. Balance Sheet maintained by the Corporate Debtor where the receipt of amount of Rs. 40.75 Crores has been admitted. In the Balance Sheet for the year 2014-15 as on 31.03.2015, in the column ‘long term liabilities’, there is mention of Rs.40.75 Crores as ‘advance received towards project development (also refer note no. 25.7(a))’. We also need to refer to note 25.7(a) which also clearly acknowledged the advance of Rs. 40.75 Crores and in the above note, following has been stated:- 

• “The Parent Company has submitted MDRS to the Operating Agency (OA) appointed by BIFR sought for refunding above advances and also the advances of Rs. 40,75,00,000 received from a strategic investor against Vile Parle Property along with interest, if any as decided by BIFR by selling the said property. (Reference is invited to Note no. 25[1.1b(iii)] about the Hon’ble Supreme Court’s Order for not to encumber or in any way alienate the property).”

 

# 14. The Corporate Debtor was before BIFR and MDRS was submitted to the Operating Agency where advance of Rs. 40.75 Crores received by strategic investor i.e. Appellant was noticed and it was also mentioned that if decided by BIFR, by selling the said property the amount shall be refunded. 

 

15. Similarly, Balance Sheet of 2016-17 as on 31.03.2017 also in the Column of ‘other current liabilities’ mentions ‘advance received towards project development Rs. 407,500,000/-’. We may also refer to the Commercial Suit No. 782 of 2017 which was filed by the Appellant for recovery of Rs. 40.75 Crores with interest. The reply of Respondent in the Commercial Suit has been brought on record wherein paragraph 7 of the Affidavit, Notice of Motion was replied. It is useful to refer paragraph 7 of the reply which is to the following effect:- 

• “7. I shall now deal with the para wise comments of the said Notice of Motion: a) With reference to para 1 of the Affidavit it is submitted that Plaintiffs have paid a sum of Rs. 40.75 crores as the Plaintiffs acted as the marketing and finance consultant to the aforesaid property and it was further agreed that the Plaintiffs would pay a sum of Rs. 300 crores towards the aforesaid property so that the Defendants could pay the settled amount after negotiations to the Sheth Developers Pvt. Ltd. (SDPL) and Suraksha Realty Limited (SRL) to enable to terminate the agreement executed between the Defendants and SDPL and SRL. As the Plaintiff illegally and without any authority put the advertisement in the papers and tried to sell the land to third party because of which the whole process got derailed and the company’s reputation came to stake. This deliberate default on the part of the Plaintiffs caused huge financial loss to the Defendant Company. The plaintiffs are liable to pay compensation and damages for the same to the defendant company.” 

 

# 16. The Bombay High Court in Commercial Suit No. 782 of 2017 on Notice of Motion No. 68 of 2018 has passed an order on 14.10.2019 where the High Court noticed the stand of the Defendant. It is useful to look into paragraph 9 of the judgment of the High Court which is to the following effect:- 

• “9. On behalf of the defendant, it is submitted by learned counsel that only an amount of Rs. 40,75,00,000/- has been received; however, while admitting the liability, it is contended that the defendant is not liable to repay at this stage in view of the counter claim lodged by the defendant as against the plaintiff. As on date, he submits that no money is payable to the plaintiff. On a specific query as to the state of the attachment levied, it is submitted that the Income Tax Authority has lifted the attachment and in that behalf, he relies upon a copy of the letter dated 3rd January, 2018 issued by the Tax Recovery Officer, whereby the attachment was withdrawn with immediate effect. The defendant has communicated about it to the plaintiff; however, there is some difference of opinion between the learned counsel on this aspect. However, on a query from the court, the learned counsel fairly conceded that the Income Tax department has filed an appeal, which is pending in this court.” 

 

# 17. High Court of Bombay had issued interim injunction order expressing the opinion that there is a clear admission of liability, hence, the Plaintiff cannot be denied the relief. The Commercial Suit is said to be pending.

 

# 18. The materials as noted above clearly indicate that amount of Rs.40.75 Crores was advanced by the Appellant to the Respondent as financial assistance to develop S.V. Road property situated at Vile Parle. The MoU dated 10.10.2011, which cannot be denied by any of the parties, do contain the manner in which the advance received from the Appellant shall be dealt with. In the MoU dated 10.10.2011 in clause (i) following was stated:- 

• “i) In a case where GTL terminate/ defers this marketing arrangement then GTL shall pay back the amount advance by you with interest.” 

 

# 19. We have further noticed that in the Balance Sheets which are required to be mandatorily maintained under the Companies Act, 2013, the receipt of advance of Rs.40.75 Crores from the Appellant has been acknowledged and admitted. In the Balance Sheet, it was also mentioned that in the Notes-25 (7)(a) that if BIFR so directs the advance of Rs. 40.75 Crores shall be refunded with interest. When we look into the relevant material that were brought on record the conclusion is inescapable that the Appellant was to finance the development project of the Corporate Debtor with regard to which amount of Rs. 40.75 Crores was admittedly advanced by the Appellant. It is also on the record that earlier the Corporate Debtor had entered into MoU on 26.12.2009 with one ‘Sheth Developers Pvt. Ltd.’ and ‘Suraksha Reality Ltd.’ for development of the said property. There being some order by the Civil Court in a suit filed by the Shareholders, the said MoU could not be given effect to and it was only thereafter the Corporate Debtor decided to develop the property on his own and hence discussion and understanding was arrived with the Appellant for financing the development of the land. The above material clearly proves that the amount was advanced as financial advances and it is a financial debt which debt has been duly and clearly acknowledged by the Corporate Debtor in his Balance Sheets as noted above.

 

# 21. When we consider all the above documents and correspondences including the Balance Sheets, the conclusion is inescapable that the amount of Rs. 40.75 Crores advanced by the Appellant was nothing but was a financial debt within the meaning of ‘I&B Code’ and the Adjudicating Authority committed error in holding that the Appellant is not a ‘Financial Creditor’. 

 

# 22. Now we come to the question as to whether the acknowledgment contained in the Balance Sheets as noted above, the Appellant will have a fresh period of limitation as per Section 18 of the Limitation Act. The Appellant has filed the petition under Section 7 claiming the date of default as 12.07.2017 when he filed Commercial Suit for recovery of Rs. 41.75 Crores with interest. The Adjudicating Authority has observed that the said date cannot be treated to be date of default and when the document dated 03.06.2011 is taken into consideration the Application became time barred. According to the Adjudicating Authority, the document dated 03.06.2011 was not executed between the parties whereas the MoU between the parties was entered on 10.10.2011 as noted above. It has further come on the record that even after advance of Rs. 40.75 Crores the development project could not be taken up further by the Corporate Debtor and there were some issues between the parties with regard to which reference has been made in the reply filed by the Corporate Debtor before the High Court in Commercial Suit No. 782 of 2017. The reply which was filed in the Commercial Suit by the Corporate Debtor, as referred above, clearly indicates that although the advance of Rs. 40.75 Crores was not denied but in paragraph 7, as extracted above, the Corporate Debtor has instead of accepting his liability to repay the amount to the Appellant has stated that he is entitled to damages from the Appellant. The said reply can be very well treated as stand of the Respondent not to make any payment. The reply having been filed after 12.07.2017, on which date Commercial Suit was filed, the Application filed by the Appellant under Section 7 is well within three years from the said denial of claim of the Appellant by the Respondent. In his submissions, the Respondent has come up with the case that the default shall be treated to have occurred on 01.09.2012. Even assuming for argument’s sake that default has taken place on 01.09.2012, we may notice the following submissions of the Corporate Debtor as contained in paragraph 5 (vi) of the written submissions: 

• “vi. It is therefore submitted that if at all there was a default on part of the Corporate Debtor the said default would have been committed only on 1st September, 2012 as opposed to the claim of the Appellant. A petition under the provisions of the Insolvency and Bankruptcy Code, 2016 in respect of a default committed on 1st September, 2012 is hopelessly barred by limitation inasmuch as the limitation for filing the such a petition is only of three years.” 

 

# 23. Thus, even if 01.09.2012 is treated to be the date of default, the three years’ period will be there till 31.08.2015 and there being acknowledgment of the debt in the Balance Sheet for the years 2014-15 upto 2018-19 there shall be fresh period of limitation on each acknowledgment and Application filed on March, 2020 cannot be said to be barred by time. The question as to whether the acknowledgment in the Balance Sheet can give lease of fresh period of limitation is no more res integra in view of the recent judgment of the Hon’ble Supreme Court in “Asset Reconstruction Company (India) Limited vs. Bishal Jaiswal and Anr.- (2021) 6 SCC 366”. The Hon’ble Supreme Court in the said judgment after considering all earlier judgments of the Hon’ble Supreme Court and High Courts has held that acknowledgment in the Balance Sheet is sufficient for attracting the provisions of Section 18 of the Limitation Act, 1963. The Hon’ble Supreme Court in the above case has quoted an earlier judgment of the Hon’ble Supreme Court in “Khan Bahadur Shapoor Fredoom Mazda vs. Durga Prasad Chamaria and Ors.- AIR 1961 SC 1236”, a passage from the above judgment was quoted. Para 15 of the judgment is as follows:- 

• “15. In an illuminating discussion on the reach of Section 18 of the Limitation Act, including the reach of the Explanation to the said Section, this Court, in Khan Bahadur Shapoor Fredoom Mazda v. Durga Prasad, (1962) 1 SCR 140 [“Shapoor Fredoom Mazda”], after referring to Section 19 of the Limitation Act, 1908, which corresponds to Section 18 of the 1963 Act, held:

-  “6. 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. Words used in the acknowledgement must, however, indicate the existence of jural relationship between the parties such as that of debtor and creditor, and it must appear that the statement is made with the intention to admit such jural relationship. Such intention can be inferred by implication from the nature of the admission, and need not be expressed in words. If the statement is fairly clear then the intention to admit jural relationship may be implied from it. The admission in question need not be express but must be made in circumstances and in words from which the court can reasonably infer that the person making the admission intended to refer to a subsisting liability as at the date of the statement. 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. Stated generally courts lean in favour of a liberal construction of such statements though it does not mean that where no admission is made one should be inferred, or where a statement was made clearly without intending to admit the existence of jural relationship such intention could be fastened on the maker of the statement by an involved or far-fetched process of reasoning. Broadly stated that is the effect of the relevant provisions contained in Section 19, and there is really no substantial difference between the parties as to the true legal position in this matter.” 

 

# 24. In paragraph 40 of the judgment, the Hon’ble Supreme Court after considering all relevant case on the subject laid down following:- “

• 40. …………………………In light of these authorities, it must be held that in the present case, the disclosure by the assesse company in its balance sheet as on 31-3-2002 of the accounts of the sundry creditors’ amounts to an acknowledgment 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.”

 

# 25. It is true that each Balance Sheet has to be examined on a case to case basis to establish whether acknowledgment of liability in fact has been made. We have noted that all the Balance Sheets referred above clearly establish acknowledgment of liability by the Corporate Debtor. Thus, Section 18 is clearly attracted giving fresh period of limitation even in the event, we accept the submission of the Respondent that default was committed on  01.09.2012. We, thus, are of the opinion that the Adjudicating Authority committed error in rejecting the Application filed by the Appellant under Section 7. The Appeal deserves to be allowed. The impugned judgment dated 25.01.2021 is set aside. We further direct the Adjudicating Authority to pass consequential orders including the order of Moratorium within one month from the date of copy of this order is produced before the Adjudicating Authority during which period it is always open to the parties to endeavor to enter into a settlement. 

 

The Appeal is allowed accordingly.

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