IBC UPDATE | RECORDING OF ENTRIES IN BALANCE SHEET  ACKNOWLEDGEMENT OF DEBT

The Supreme Court of India, in the case of Asset Reconstruction Company (India) Limited v Bishal Jaiswal has analysed the impact of an acknowledgment of a liability towards a loan in the balance sheet of a corporate debtor vis-à-vis Section 18 of the Limitation Act, 1963 (Limitation Act), which provides that a fresh period of limitation begins to run as and when a written acknowledgment of a liability is made.

Question of law for adjudication: The pertinent question adjudicated upon and answered in the aforementioned decision was 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?.

Background of Case: In the present case, Corporate Power Limited (Corporate Debtor) had obtained loans from various lenders, including State Bank of India (SBI), to set up a thermal project. Subsequently, Corporate Debtor failed to repay the lenders and their account was declared as a non-performing asset. Some of the lenders, including SBI, Infrastructure Finance Company Limited, etc assigned the loans to an asset reconstruction company (ARC). ARC filed a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) acting as a financial creditor, before National Company Law Tribunal, Calcutta (NCLT) for an outstanding amounting to around Rs 6000 crores.

NCLT Order: NCLT admitted the petition under Section 7 of the IBC on the ground that the balance sheet of the Corporate Debtor had an acknowledgment which was signed on behalf of the company before the expiry of a period of 3 years from date of default and such entries would amount to an acknowledgment of debt for the purpose of Section 18 of the Limitation Act. Accordingly, NCLT held that the petition was not barred by limitation as entries of the balance sheet amounted to an acknowledgment of debt.

NCLAT Order: An appeal was referred to NCLAT against the order of the NCLT. NCLAT overturned the order passed by the NCLT and held that the acknowledgment in the balance sheets does not amount to acknowledgment of debt for the computation of limitation. This judgment was challenged before the Supreme Court in this appeal.

Supreme Court Order: The argument raised before the NCLAT, which was reconsidered by the Supreme Court, was that it was mandatory under the Companies Act, 2013 to file a balance sheet and disclose all facts necessary therein on an annual basis. In these circumstances, as it is a statutory obligation of the Corporate Debtor, the same cannot be the basis of extension of limitation period. The Supreme Court observed that while there is a statutory requirement to prepare a balance sheet, there is no such compulsion to make any acknowledgment of debt therein and that an entry in a balance sheet qua any particular creditor can also be made with caveats in the auditor’s statement filed by the company. Accordingly, the Apex Court, relying on its earlier rulings in Mahabir Cold Storage , along with the judgment passed by the Calcutta High Court in Bengal Silk Mills , set aside the NCLAT decision.

The Supreme Court also held that whether an acknowledgement of debt has been made is to be determined on a case by case basis and would depend on the facts of each case as to whether an entry made in a balance sheet with respect to any particular creditor is unequivocal or has been entered into with caveats.

MHCO Comment : The Supreme Court, in this judgment, has provided much-need clarity on a common question of law which was causing confusion and misinterpretation of the law. However, the Supreme Court’s observation that the aforesaid position cannot be applied in a straight-jacket formula and instead differs from case to case, may cause some more confusion in future cases.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.com for any assistance.

 IBC UPDATE | PRE PACKAGED INSOLVENCY RESOLUTION PROCESS

The Central Government has recently promulgated an Ordinance wherein it has introduced a new Chapter-IIIA in the Insolvency and Bankruptcy Code, 2016 (IBC) providing for an application for initiating pre-packaged insolvency resolution process. This update seeks to broadly set out the important changes brought about by the Ordinance, to the IBC.

• Pre-Packaged Insolvency Resolution Process (PIRP): PIRP is a form of restructuring that allows the corporate debtor and creditors to work on an informal resolution plan i.e. base resolution plan and submit it for approval to the committee of creditors. As per the newly introduced Section 54A of the IBC, an application for initiating PIRP may be made in respect of Mirco, Small and Medium enterprises (MSME) or in respect of a corporate debtor who commits a default of the amount specified by the Central Government, which cannot exceed Rupees One Crore. Subject to certain restrictions, a corporate applicant (which includes the corporate debtor itself) may file an application with the adjudicating authority for initiating PIRP.

• Approval from Financial Creditors: Before initiating PIRP, a corporate debtor must seek an approval from its financial creditors representing not less than 66% of its financial debt in value. Further, the financial creditors must propose and approve the resolution professional (RP) who shall conduct the PIRP.

• Base Resolution Plan: Under PIRP, the corporate debtor shall submit the base resolution plan to the RP and the RP shall present the same to the committee of creditors (CoC). The CoC may approve the base resolution plan in case if it does not impair any claims owed by the corporate debtor to its operations creditors. In case the CoC does not approve the base resolution plan, RP shall invite resolution plans from eligible applicants.

• Moratorium: On the commencement of PIRP, the adjudicating authority shall declare a moratorium as provided under Section 14 of the IBC qua the corporate debtor and cause a public announcement to be made with respect to the same.

• Timeline: PIRP shall be completed within a period of 120 days from the date of admission of the PIRP application.

• Management of the Corporate Debtor: In case of PRIP, the management of the affairs of the corporate debtor continue to vest in the Board of Directors or the partners, as the case may be, of the corporate debtor, unless the committee of creditors, during PIRP resolve, by a vote of not less than 66% of the voting shares, to vest the management of the corporate debtor with the RP.

• CoC may initiate Corporate Insolvency Resolution Process: At any time after PIRP has commenced, but before the approval of the resolution plan, the CoC may by a vote of 66% of the voting shares, may resolve to initiate a corporate insolvency resolution process (CIRP) in respect of the corporate debtor, if such corporate debtor is eligible for CIRP under Chapter II of IBC. In this case, the adjudicating authority shall pass an order terminating PIRP.

• Termination of PIRP and Liquidation: In cases where no resolution plan is approved by the CoC within the specified time frame, or in case where the affairs of the corporate debtor have been conducted in a fraudulent manner / gross mismanagement of the affairs of the corporate debtor, the adjudicating authority shall within 30 days terminate the PPIRP and pass an order of liquidation in respect of the corporate debtor.

MHCO COMMENT: : This Ordinance is a welcome step towards the resolution of distressed MSMEs in light of the impact that COVID-19 pandemic has had on the businesses and the economy. The corporate debtor under PIRP will get to trigger the bankruptcy process, and thus, it is expected to yield much faster resolution than CIRP and cut cost of litigation.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.com for any assistance.