Time Barred Debts in IBC & Written Acknowledgement of Liability Conundrum

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The Apex Court in a recent judgement has reaffirmed its position on applicability of the Limitation Act, 1963 (“Act”) upon initiation of Corporate Insolvency Resolution Process (“CIRP”) of a Corporate Debtor (“CD”).

The Hon’ble Supreme Court (“SC”) in Babulal Vardhar ji Gurjar Vs. Veer Gurjar Alumunium Industries Pvt. Ltd., overruled the decision of National Company Law Appellate Tribunal (“NCLAT”) dated 14.05.2019. After relying and subsequently elaborating on plethora of judgements it thus settled that an application by the financial creditor for initiation of CIRP can be made within 3 (Three) years from the date of default, and any claim thereafter is a debt barred by time in the eyes of law. However, a conflicting situation that may have arisen pursuant to the said judgement of SC is the revival of a time barred claim upon written acknowledgement of the same in the balance sheet of the CD in light of Section 18 of the Act. This contention has been fairly left unsettled and shall act as the bone of contention in various impending litigations that shall ensue from hereinafter.

Brief facts of the Case:

The date of default i.e. NPA, of the CD accrued on 08.07.2011. Thereafter, a demand notice was issued on 15.11.2011 under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI”). The total amount of default aggregated to INR 1,011,573,308 with interest charged over and above. The recovery proceedings were initiated against the CD. Even when the said proceedings were pending before the Debt Recovery Tribunal, Aurangabad for final disposal, an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“Code”) was filed by the financial creditor, on 21.03.2018 before the Adjudicating Authority (“AA”). The AA admitted the application and passed an order to the effect of initiating CIRP of the CD.

Thereafter, the CD preferred an appeal under Section 61 of the Code before the NCLAT. The NCLAT dismissed the appeal stating that even though proceedings under Section 19 of the SARFAESI are pending the same will not annul the proceedings under the Code. The CD, aggrieved by the aforesaid order dated 17.09.2018 preferred a civil appeal before the SC. The SC after listening to the arguments advanced was of the opinion that, the major issue pertaining to the applicability of the limitation was not even considered and deliberated by the NCLAT. Hence, the SC relegated the parties for fresh consideration before NCLAT.

NCLAT Impugned order dated 14.05.2019

A. Rejected qualms of CD of debt being time barred

The NCLAT after having reconsidered the facts and the well settled precedents in place proceeded on the view which were categorically inter alia as follows:

The limitation period pertaining to ‘Other Application’ under heads of Article 137 of the Act i.e. 3 (Three) years shall apply to an application under Section 7 of the Code.
The Appellate Tribunal was of the view that the application in question was not barred by limitation in the manner that the right to apply under Section 7 of the Code accrued to the financial creditor only on 01.12.2016, i.e. when the Code came into existence.
The Appellate Tribunal also observed that 9 (Nine) properties of the CD had been mortgaged with the financial creditor and pursuant to an Order of the DRT possession of the same were also recovered by the financial creditor. In light of the above the Appellate Tribunal stated that the limitation period vis-a-vis enforcement of mortgage securities shall be governed as per Article 62 of the Act and shall be 12 (Twelve) years.
NCLAT also pointed out the fact that CD had made a prayer for ‘One Time Settlement’ in the month of July, 2018 but did not recorded any specific finding about the same.

SC judgement dated 14.08.2020

No possibility of revival of time barred debts

The SC concluded its already settled stance on the applicability of Act to applications made under the Code and sided with CD’s proposition that time begins to run from the ‘date of default’ of the CD. As a result of which no new life or revival shall be rendered to the time-barred debts. The Apex Court was of the opinion that one shouldn’t be myopic while apprehending the scope and reach of the Code. It further went on to hold that the Code was not a debt recovery machinery at the hands of the creditors rather was enacted to protect the CDs and revive the economy nationally.

The Apex Court relying on catena of judgements such as B.K. Educational Services Private Limited v. Parag Gupta And Associates (AIR 2018 SC 5601), Innoventive Industries Ltd. Vs. ICICI Bank (2018 1 SCC 407), Swiss Ribbons Private Limited and Anr. Vs. Union of India and Ors. (2019 4 SCC 17), K.Sashidhar Vs. Indian Overseas Bank (2019) 12 SCC 150), Jignesh Shah and Anr. Vs. Union of India and Anr. (2019 SCC Online 1254), Sagar Sharma & Anr. Vs. Phoenix Arc Pvt. Ltd. & Anr. (Civil Appeal No. 7673 of 2019) etc., put forth the following findings:

The Code is a beneficial legislation intended to put the CD back on its feet and is not a mere money recovery legislation;
The CIRP is not intended to be adversarial to the CD but is aimed at protecting the interests of the CD;
The intention of the Code is not to give a new lease of life to debts which are time-barred;
The period of limitation for an application seeking initiation of CIRP under Section 7 of the Code is governed by Article 137 of the Act and is, therefore, 3 (Three) years from the date when right to apply accrues;
The trigger for initiation of CIRP by a financial creditor is default on the part of the CD, that is to say, the right to apply under the Code accrues on the date when default occurs;
The default referred to in the Code is that of actual non-payment by the CD when a debt has become due and payable; and
In case default had occurred over 3 (Three) years prior to the date of filing of the application, the application would be time-barred save and except in those cases where, on facts, the delay in filing may be condoned; and
An application under Section 7 of the Code is not for enforcement of mortgage liability and Article 62 of the Act does not apply to this application.

B. Abandoning of Section 18 approach vis-à-vis written acknowledgement in Balance Sheet

While the Apex Court yet again laid down the strait-jacket formula with respect to calculation of limitation applicable to an application under Section 7 of the Code and subsequently strengthened the well founded and established point of law. The SC was also of the opinion that the presence of the debt in the balance sheet of the CD will not amount to a ‘written acknowledgement of debt’ as per Section 18 of the Act. In doing the aforesaid, the Apex Court might have missed a suitable opportunity to clear the air that surrounds the said proposition.

The Section 18 of the said Act states as follows:

“Effect of acknowledgment in writing:

Where, before the expiration of the prescribed period for a suit of application in respect of any property or right, an acknowledgment 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 shall be computed from the time when the acknowledgment was so signed.

Where the writing containing the acknowledgment 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,—

an acknowledgment 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 a 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;

the word “signed” means signed either personally or by an agent duly authorised in this behalf; and

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.”

Therefore, a bare reading of the aforesaid Section makes it amply clear that a debt is resuscitated as and when an acknowledgment of its liability is made in writing. The same paves way to the birth of a fresh period of limitation of the said debt.

Therefore, reflection of a liability in the debtor’s financials has a pivotal role to play and results into a written acknowledgement of debt as per Section 18 of the Act. Similar position has time and again been propagated by various High Courts and the Apex Court itself. The point of law was directly taken up by a Division Bench of the Calcutta High Court in Bengal Silk Mills Co. v. Ismail Golam Hossain Ariff. (1961 SCC OnLine Cal 128) The Court held:

“It is true that the balance-sheets were required to be made both by the Companies Act, 1913 as also by the articles of association of the defendant company. There was a compulsion upon the managing agents to prepare the documents but there was no compulsion upon them to make any particular admission. They faithfully discharged their duty and in doing so they made honest admissions of the company’s liabilities. Those admissions though made in discharge of their duty are nevertheless conscious and voluntary admissions. A document is not taken out of the purview of Section 19 of the Limitation Act merely on the ground that it is made under compulsion of law … The balance-sheet contains admissions of liability; the agents of the company who makes and signs it intends to make those admissions. The admissions do not, cease to be acknowledgments of liability merely on the ground that they were made in discharge of a statutory duty.”

The Apex Court in M/s. Mahabir Cold Storage v. CIT, Patna (1991 Supp (1) SCC 402) held that the registers of a company are of prima facie evidence; and the balance sheet disclosing loans and borrowings and forming part of annual returns, indeed constitute the admission and acknowledgment of the CD of its indebtedness. The Delhi High Court in Sheetal Fabrics v. Coir Cushions Ltd. (2005 SCCOnLine Del 247) was also of the view that the balance sheets along with other attachments such as Director’s Report etc. shall be read together and in conjunction to ascertain the position of liability.

The Calcutta High Court in Darjeeling Commercial Co. Ltd. v. Pandam Tea Co. Ltd 1981 (SCC OnLine Cal 236) and Bhajan Singh Samra v. Wimpy International Ltd. 2011 (SCC OnLine Del 4888) has held even winding-up proceedings shall deem to be maintainable pursuant to the unpaid debts being acknowledged in the balance-sheets of the respondent-company, and such acknowledgements saving the debt from being barred by limitation.

Despite a crystal-clear, settled and reaffirmed position of law on the aforementioned proposition, SC was of the opinion that reflection of debt in the balance sheet of the CD in the present case does not result into the written acknowledgement of the debt and shall not revive a time-barred claim as no averments or pleadings were made in this respect in the pleadings of the financial creditor.

At this juncture, it is imperative to note that NCLAT in its impugned order dated 14.05.2019 had also observed about the consistent presence of financial creditor’s debt in the balance sheet of the CD. The NCLAT had also analysed the Annual Report of the CD and therefore it is safe to say that the same must have been examined prior to the appeal to the SC. Therefore, the SC’s decision to abandon the proposition put forth pertaining to written acknowledgement merely on the grounds that the same was not pleaded was a pedantic approach and nothing short of hair-splitting of technicalities. The adversary party in the present case was fully aware of the case it has to meet and hence arguments to this respect were also advanced before the SC itself. Notably, the financial creditor did not travel beyond the scope of its existing pleadings. Therefore, in case the SC would have relied upon the Section 18 approach in regard to the written acknowledgement of debt in the balance sheet of the CD the same would have been essential to the essence of the appeal and the point of law in question.

Conclusion

The SC’s judgement although clearly put forth and resettled that the limitation period of 3 (Three) years shall govern the applications under Section 7 of the Code. However, the absence of substantial and cogent reasoning as to why the debt already present in the balance sheet of the CD shall not revive the period of the time-barred debts appears to be a misleading position and a lost opportunity. Undoubtedly, the same shall give way to multitude of litigations where the Corporate Debtors would want to hide behind the curtains of this precedent even though the debts stand acknowledged as a result of its statutory duties, namely in balance sheets, directors report etc. Therefore, it is expected that sooner than later the Apex Court revisits the said position and rectify and facilitate the intermingling of the Act and the Code to meets the ends of justice.

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