National Company Law Appellate Tribunal, New Delhi

Company Appeal (AT) (Insolvency) No. 57 of 2020

PADMAKUMAR … Appellant

Vs.

STRESSED ASSETS STABILISATION FUND (SASF)& Anr …Respondents

On 12^th March 2020, a 5-member bench of NCLAT, Delhi (a first time occurrence in the appellate tribunal)passed a  4:1 judgment that an entry in the balance sheet did not amount to acknowledgement of debt or existence of liability for the purpose of section 18 of the Limitation Act, 1963. This is a complete U turn from the previous decided cases (both in India and abroad) that held that an entry in the balance sheet did indeed amount to acknowledgement of debt for the purpose of section 18 of the Limitation act.

The decision has triggered diverging views from the legal fraternity. A look at this landmark case.

Background & Facts of the Case

In the year 2000, IDBI had granted M/s Uthara Fashion Knitwear Limited a term loan of Rs. 6 crores. The loan was secured by way of hypothecation of plant & machinery together with machinery spares, tools and accessories, raw materials, semi-finished and finished goods, consumable stores, book debts and such other movables and equitable mortgage of properties.

In May 2002, the account of M/s Uthara Fashion Knitwear Limited became a nonperforming asset (NPA) in the books of IDBI. Debt recovery proceedings were initiated by IDBI against M/s Uthara Fashion Knitwear Limited in the year 2003. A decree was passed on 19^th June, 2009 and recovery certificate was issued to IDBI on 31^st August, 2009. This was reflected in the balance sheet dated 31^st March, 2012 of M/s Uthara Fashion Knitwear Limited.

In the year 2019, M/s.  Stressed Assets Stabilization Fund – SASF (Financial Creditor) filed an application u/s 7 of the Code for initiation of the corporate insolvency resolution process against M/s. Uthara Fashion Knitwear Limited (Corporate Debtor). The Adjudicating Authority by impugned order dated 21^st November 2019 admitted the application.

Arguments

The Director of M/s Uthara Fashion Knitwear Limited, Mr. Padmakumar (appellant) appealed that no demand notice was served on them before admitting the case before NCLT in November 2019. Else he would have proved that the said application u/7 was barred by limitation as M/s Uthara Fashion was declared an NPA on 31^st October 2002.

On the other hand, SASF (respondent) has relied on various precedent cases in submitting that it amounts to default under IBC and Limitation Act.

Due to the diverse views taken, the matter was referred to a larger bench of the NCLAT.

The Law

Section 7 relates to ‘initiation of corporate insolvency resolution process by financial creditor’. As per the section a Financial Creditor may file an application for initiation of CIRP against a Corporate Debtor when ‘a default has occurred’.

Section 18 of the Limitation Act deals with the effect of acknowledgement in writing. There have been several cases that expressly lays down the highlights of Section 18. It is as follows:

1. There must be an acknowledgement of liability in respect of property or right;
2. The acknowledgement must be in writing signed by the party against whom such right or property is claimed (or by any person) through whom he derives his title or liability;
3. The acknowledgement must be made before the expiration of the period prescribed for a suit or application (other than application for the execution of a decree) in respect of such property or right.

The explanation to Clause (a) further states that an acknowledgement may be sufficient for purposes of Section 18 even though,

1. It omits to specify the exact nature of the property or right;
2. It avers that the time for payment, delivery, performance or enjoyment has not yet come;
3. It is accompanied by refusal to pay, deliver, perform or permit to enjoy;
4. It is coupled with a claim to set off; or
5. It is addressed to a person other than a person entitled to the property or right.

Clause (b) of the explanation defines the word “signed” to mean signed either personally or by an agent duly authorized in that behalf.

Judgment

There were several decided case laws by the Apex court and High courts, such as (i) M/s. Ugro Capital Limited v. M/s. Bangalore Dehydrationand Drying Equipment Co. Pvt. Ltd.;(BDDE) (ii) B.K. Educational Services Private Limited Vs. Parag Gupta and Associates; (iii) Jignesh Shah & Anr vs UOI where it was held that an entry in the Balance sheet amounted to an acknowledgement (of debt) for the purpose of Limitation Act.

However, the NCLAT, Delhi by a majority of four members took a divergent on the issue. The NCLAT held that any entry in the Balance sheet will not (automatically) amount to acknowledgement of debt for the purpose of section 18 of the Limitation Act. In doing so, the NCLAT, Delhi reasoned thus:

1. Balance Sheet/ Annual Returns of a company must be filed annually (every year). It is a mandatory requirement under Section 92(4) of the Companies Act, 2013, failing of which attracts penal action under Section 92(5) & (6) of the Companies Act, 2013.
2. If the Balance sheet / Annual Return of the “Corporate Debtor” is  to be accepted as acknowledgement under section 18 of the Limitation Act, 1963, then it is to be interpreted that no limitation period would be applicable as the Balance sheet / Annual Return must be filed every year. Clearly, the purpose of preparation of balance sheet is only to comply with the statutory obligation required under the Companies Act, 2013 to avoid violation and ensuing penalties. It is not on voluntary basis.
3. Hence, the Balance Sheet / Annual Return of the ‘Corporate Debtor’ cannot be treated to be an acknowledgement under Section 18 of the Limitation Act, 1963.

A suit for recovery of money can be filed only when there is a default of dues. Even if the decree is passed, the date of default cannot be shift forward to the date of decree or date of payment for execution as a decree can be executed within specified period i.e. 12 years. If it is executable within the period of limitation, one cannot allege that there is a default of decree or payment of dues. Therefore, a Judgment or a decree passed by a Court for recovery of money by Civil Court/ Debt Recovery Tribunal cannot shift forward the date of default for the purpose of computing the period for filing an application under Section 7 of the Code.

There have been a host of decided cases (in the NCLT and NCLAT) besides High Courts and Supreme Court expressly stating that a signed balance sheet by Director(s) would indeed amount to an acknowledgement under section 18 of the Limitation Act, Consequently, it would attract the Limitation period. With the legal experts up in arms on this judgment (which will be binding on all NCLT benches and appellate tribunals), it seems to be only a matter of time to submit to the Apex court to reverse this decision.

Note: For full text of the Judgment

https://nclat.nic.in/Useradmin/upload/7982247415e6a2b56e8bef.pdf