2023 (7) TMI 484 - AT - Insolvency and Bankruptcy

Application for initiation of CIRP - barred by time limitation or not - abatement of proceedings of sick units - exclusion of period during reference under Section 15 r/w Section 16 of SICA - entries in the balance sheets tantamount to acknowledgments of debt for purpose of extending the limitation or not - reliability on letter of of UTL/ Uniworth Group as an admission of acknowledgment of alleged dues - HELD THAT - the Adjudicating Authority has discussed applicability of Section 14(1) of the Limitation Act, 1963, according to which the Financial Creditor had to prove that reference to BIFR by the Corporate Debtor was a wrong forum. The Adjudicating Authority held that BIFR was a correct forum and therefore, Section 14(1) and 14(2) of the Limitation Act, 1963 are not satisfied which would entitle the Appellant herein, to exclude the period of limitation. The Adjudicating Authority also referred to Judgment of Jignesh Shah 2019 (9) TMI 1121 - SUPREME COURT wherein it was held that a suit for recovery based upon a cause of action that is within limitation cannot in any manner impact the separate and independent remedy and the time can be extended in the manner only as provided in the Limitation Act. The Adjudicating Authority held that the time started in the present case from 20.11.2007 and time taken before the BIFR and DRT could not stop the time to run in this case - it is noted from Section 14 (1) of the Limitation Act, 1963 that in computing the period of limitation for any suit during which the plaintiff having prosecuting him in the court in good faith with due diligence against the defendant (the Respondent herein/ Corporate Debtor) shall be excluded. Whether filing a Petition by the Corporate Debtor before BIFR and subsequently order of AAIFR would be considered as appropriate forum or not and its subsequent impact on Limitation period? - HELD THAT - It was the Corporate Debtor and not the Appellant herein, who moved the petition before the BIFR in 2004. There is no dispute that the Code came into existence only in 2016, hence the only forum available for the aggrieved party was BIFR initially and AAIFR as Appellant forum later. The Corporate Debtor moved the petition in 2004 and the same was dismissed by AAIFR vide order dated 22.05.2013 - it is already noted that AAIFR in its order categorically mentioned that the appeal No. 176/11 filed by the Corporate Debtor along with all proceedings relating to the reference of the Corporate Debtor pending before the BIFR stand abated. It is pertinent to note that in terms of Section 22 (5) of SICA, in computing the period of limitation for the enforcement of any right, privilege, obligation or liability, the period during which it or the remedy for the enforcement therefore remains suspended under the Section shall be excluded. By virtue of Section 22 of the SICA, sick industrial units get protection with respect to suspension of those legal proceedings. It is therefore, clear that the period of petition before BIFR and AAIFR, once abated by the competent Judicial Forum (AAIFR in present case) such period ought to have been excluded by the Adjudicating Authority. Based on this analysis the period up to the order by AAIFR dated 22.05.2013 should be excluded from counting the relevant period under Limitation Act, 1963. Whether the mere entry in the Balance Sheet of the amount of the outstanding debt should be taken as acknowledgment or only debt without any stigma or adverse note denying the liability should be taken as acknowledgment? - HELD THAT - Mere entry in the Balance Sheet cannot be taken as unqualified acknowledgment of the debt. However, it may also not be correct to take every note or caveat regarding entries made in the Balance Sheet as ground to denying acknowledgement of debt in order not to extend the limitation period from such acknowledgment period. It is therefore desirable that while looking such entries of debt amounting to acknowledgment, one has to consider the overall scenario which may be evident from Director s Report, Auditor s Report, notes to the accounts etc. - It may also be relevant to consider the entire series of events starting from such loans/ debts to the filing of application under section 7 of the Code, to gauge the true intent of such entries and caveats, if any, which impact the intended acknowledgements or genuine denial of liability on part of the Corporate Debtor. While doing this examination, it may be worthwhile to look into the overall eco system of such transactions which may help in understanding the impact on limitation period based on such acknowledgements. From the entries in the Balance Sheet of 2016-17 and Director s Report it is clear that the debt indeed finds place in the Balance Sheet with admission as a Corporate Debtor that they are in process of negotiation with the term lenders for rescheduling/ restructuring. This establishes that the loan/ debt has been taken and acknowledged by the Corporate Debtor - On the face of these facts and recording by the management, it cannot be straight away considered as clear unconditional acknowledgement of debt. Therefore, this Appellate Tribunal would like to go into further records connected with the same debt i.e., pre 2016-17 Balance Sheet and post 2016-17 Balance Sheet with a view to understand whether such dispute has been recorded by the management from day one or can be construed as single/ few/ stray/ isolated caveats. On a quick perusal of perusal of various Balance Sheets from 2006-07 to Balance Sheets of 2013-14, this Appellate Tribunal do not find any apparent denial of debts by the Corporate Debtor - this Appellate Tribunal has to consider that there were acknowledgements of due in the Balance Sheets and the acknowledgement letter of the Corporate Debtor which would extend the limitation period, in terms of Section 18 of Limitation Act, 1963. The Adjudicating Authority erred in rejecting the application filed under Section 7 of the Code by the Appellant on the ground of limitation - case is remanded back to the Adjudicating Authority for decision on the merit of the application in accordance with the law - Appeal allowed.

Summary

Issues Involved:
1. Whether the application under Section 7 of the Insolvency & Bankruptcy Code was barred by limitation.
2. Whether the entries in the balance sheets amounted to acknowledgments of debt for the purpose of extending the limitation.
3. Whether the letter dated 11.11.2016 from the Corporate Debtor can be relied upon as an admission of acknowledgment of alleged dues.

Summary:

Issue 1: Application under Section 7 Barred by Limitation
The Appellant argued that the period during which the Corporate Debtor's case was pending before the BIFR (2004-2013) should be excluded from the limitation period as per Section 22(5) of SICA. The Respondent contended that the limitation period should not be extended and cited various judgments, including Jignesh Shah, to support their argument. The Tribunal noted that the period from 2004 to 22.05.2013 should be excluded from the limitation period. Additionally, the Tribunal referred to the Supreme Court judgment in Sabarmati Gas Limited vs. Shah Alloys Ltd., which supported the exclusion of the period during which legal proceedings were suspended under SICA.

Issue 2: Entries in Balance Sheets as Acknowledgment of Debt
The Appellant relied on various acknowledgments of debt in the Corporate Debtor's balance sheets from 2006-07 to 2018-19. The Respondent argued that mere entries in the balance sheets should not be construed as acknowledgments, especially when disputed in the Director's Report. The Tribunal referred to the Supreme Court judgment in Bishal Jaiswal, which held that entries in the balance sheets could amount to an acknowledgment of debt for extending the limitation period. The Tribunal concluded that despite some disputes recorded in the Director's Reports for certain years, the overall entries in the balance sheets indicated acknowledgment of debt, thereby extending the limitation period.

Issue 3: Letter Dated 11.11.2016 as Acknowledgment of Debt
The Appellant argued that the letter dated 11.11.2016 and subsequent communications from the Corporate Debtor acknowledged the debt and offered a settlement, which should extend the limitation period. The Respondent contended that these letters were issued "without prejudice" and should not be considered as acknowledgments. The Tribunal found that the letters, despite being part of a group settlement, acknowledged the debt and extended the limitation period.

Conclusion:
The Tribunal held that the Adjudicating Authority erred in rejecting the application under Section 7 of the Code on the ground of limitation. The case was remanded back to the Adjudicating Authority for a decision on the merits. The appeal succeeded, and the Impugned Order dated 17.03.2020 was set aside. Both parties were directed to appear before the Adjudicating Authority on 28.07.2023.