Balance Sheets May Be Agreed to Debt – Insolvency/Bankruptcy/Restructuring


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Balance sheets can amount to acknowledgment of debt


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SC vide ruling dated April 15, 2021 in the case of
Asset Reconstruction Company (India) Ltd v Bishal Jaiswal & Anr. decided a critical legal question as to whether or not entries on the balance sheet would amount to an admission of debt for the purpose of extending the statute of limitations as provided in Section 18 of the Limitation Act, 1963 (Restriction Act).

In this landmark judgment that is undoubtedly important to all stakeholders under the Insolvency and Bankruptcy Code, 2016IBC), the Apex Court has noted that while the preparation of a balance sheet is a legal requirement under the provisions of the Companies Act, 2013, but the same may amount to an admission of guilt depending on the facts of the particular case . This judgment also overturned the majority decision of the National Company Law Appellate Tribunal (NCLAT) in the matter of: V. Padmakumar v. Stressed Asset Stabilization Fund

in which the majority opinion of the five-member bank was that entries on balance sheets would not amount to an admission of debt to extend the restriction under Section 18 of the Limitation Act.

Background facts

  • Asset Reconstruction Company (India) Ltd (ARCIL/appellant) filed an application under Section 7 of the IBC for the initiation of business insolvency resolution proceedings (CIRP) against Corporate Power Ltd. This application has been admitted by the National Company Law Tribunal, Kolkata Bench (NCLT) among other
    after noting that the corporate debtor had acknowledged his liability in the balance sheets before the expiry of the limitation period of 3 years from the date of default and therefore the application of Article 7 was not time-barred.
  • The aforementioned admission order was appealed to NCLAT by Bishal Jaiswal, a suspended director of Corporate Power Ltd. He invoked majority opinion in the NCLAT’s judgment in the case of V. Padmakumar v. Stressed Assets Stabilization Fund (SASF) & Anr1, which held that the entries on a balance sheet do not amount to an admission of debt within the meaning of section 18 of the Limitation Act. On the same basis, the suspended driver argued that the Section 7 application filed by ARCIL was time-barred.
  • The minority position in V. Padmakumar was adopted after reviewing several Supreme Court rulings (SC) and High Courts and have therefore held that entries on a balance sheet would amount to an admission of debt within the meaning of section 18 of the Limitation Act.
  • The appeal of the suspended director has been heard by a three-member bank of the NCLAT. ARCIL argued before the three-piece bench that the majority opinion in V. Padmakumar was per incuriam, as it did not take into account the catena of Supreme Court and various High Court rulings that entries on a balance sheet amount to an IOU in the sense of Article 18 of the Restriction Act.
  • In the order dated September 25, 2020, NCLAT’s three-member bank questioned the veracity of NCLAT’s five-member bank’s judgment in the V. Padmakumar case, noting that V. Padmakumar justifies reconsideration for holding that entries on a balance sheet do not constitute an IOU. within the meaning of Section 18 of the Limitation Act. Accordingly, the three-member bank has passed a referral order for the establishment of a five-member bank to reconsider the majority decision in V. Padmakumar.
  • Consequently, the reference was noted and heard by the five-member bank. Thereafter, vide statement dated December 22, 2020 (Disputed Order), the five-member bank noted that Section 18 of the Restriction Act would not apply to proceedings under the IBC. It was further noted that the majority opinion of the NCLAT in V. Padmakumar was a good law.
  • Offended by the Disputed Order passed by NCLAT, Appellant filed the caption Appeal to SC. It is pertinent to note that in addition to the said appeal, SC heard other appeals, including an appeal against the NCLAT’s ruling in V. Padmakumar, and decided the said cases by applying the law laid down in
    Asset Reconstruction Company (India) Limited vs. Bishal Jaiswal & Anru2

Problems at hand

  • Does Section 18 of the Limitation Act apply to proceedings under the IBC?
  • Whether entries in balance sheets amount to an admission of debt to extend the limitation under Section 18 of the Limitation Act and whether the NCLAT’s majority opinion was in V. Padmakumar
    per incuriam, as it was assumed in ignorance of binding precedents and established legislation?

Court findings

  • SC relied on a plethora of Court rulings, including but not limited to: Mahabir Cold Storage v. CIT3 , Jignesh Shah v. Union of India4 , AV Murthy v. BS Nagabasavanna5 and rulings of several High Courts noting that entries on a balance sheet would amount to an admission of guilt within the meaning of Section 18 of the Limitation Act. Further, the Apex Court also referred to the Calcutta High Court ruling in: Bengal Silk Mills Co v. Ismail Golam Hossain Ariff6
    and consequently the Court held that there is no doubt that the filing of a balance sheet in accordance with the provisions of the Companies Act, 2013, is mandatory, and that any violation thereof is punishable by law. However, there is no obligation to give a particular admission. Thus, to determine whether or not a acknowledgment of debt is acknowledged, it would depend on the facts of each case whether an entry in a balance sheet for a particular creditor is unambiguous or entered with reservations. These comments may be in the form of notes to accounts or other qualifications in the balance sheets.
  • SC also found that the minority judgment of Justice (Retd.) AIS Cheema, member (Justice) in V. Padmakumar has come to the correct conclusion. Accordingly, the Supreme Court rejected the majority view in the V. Padmakumar judgment that those entries on a balance sheet could not be considered an admission of guilt for the purpose of extending the statute of limitations under Section 18 of the Limitation Act.
  • In addition to the above, SC relied on its recent decisions in Sesh Nath Singh & Anr v. Baidyabati Sheoraphuli Co-operative Bank Ltd & Anr7 and
    Laxmi Pat Surana v Union Bank of India & Anr8 and noted that the arguments that Section 18 of the Limitation Act cannot be made applicable to proceedings under the IBC cannot be accepted.

Our point of view

With this judgment, SC has clarified a simple and clear statement that entries on a balance sheet can amount to an admission of debt with a view to extending the limitation period under Article 18 of the Prescription Act.

This proposal was made unnecessarily complicated by conflicting NCLAT rulings and the Apex Court has now clarified the factors to be taken into account when considering whether an entry on a balance sheet would be considered an acknowledgment under Section 18 of the Restriction Act . One such factor is whether such statements are accompanied by a warning that it is an admission of guilt. This would entail a factual analysis that would have to be conducted by the court in order to ultimately reach a conclusion on the application of Section 18 of the Restriction Act. This, in our view, places creditors and debtors on a level playing field and gives debtors a reasonable opportunity to be heard.

However, the judgment did not address a number of relevant aspects:

  • The judgment does not deal with the situation in which the debtor, who has made an entry on its balance sheet, also makes a counterclaim against the creditor. Although academically speaking, the said situation is clearly addressed by the interpretation of Article 18 of the Restriction Act, which states that the recognition may even be accompanied by a refusal to pay, to supply, to perform or to enjoy, or to with a claim. In other words, a counterclaim may be relevant to assess the debtor’s overall liability, but it would not be relevant to determine whether an entry on a balance sheet would be considered an acknowledgment to the debtor. purpose of Article 18 of the Restriction Act.
  • Likewise, this judgment does not answer the question of whether an entry in the “conditional liability” column would amount to an admission of guilt with a view to extending the limitation period.
  • While this judgment only examined the entries on the balance sheets to analyze their effect on the limitation period, the judgment does not take into account the effect of the various entries for other purposes, such as the adoption of admission decisions.

While this is a remarkable judgment that affects all stakeholders in the IBC ecosystem, especially the financial creditors, the relevant factors need to be considered on a case-by-case basis to determine whether an entry on a balance sheet would be considered an acknowledgment are within the meaning of Article 18 of the Restriction Act.

footnotes

1. Professional Occupation (AT) (Insolvency) No. 57 of 2020 (decided on March 12, 2020)

2. Civil Appeal No. 323 of 2021

3. 1991 Supp (1) SCC 402

4. (2019) 10 VCA 750

5. (2002) 2 SCC 642

6. 1961 SCC OnLine Cal 128

7. Civil Appeal No. 9198 of 2019

8. Civil Appeal No. 2734 of 2020

The contents of this article are intended to provide general guidance on the subject. Specialist advice should be sought regarding your specific circumstances.

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