27 April 2021

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.