LIMITATION IS REFRESHED EACH YEAR WHEN CORPORATE DEBTOR ADMITS DEBT IN ITS FINANCIAL STATEMENTS

[Mr. M. GOVINDARAJAN]

Introduction

The provisions of the Insolvency and Bankruptcy Code, 2016 (‘Code’ for short)  are designed to ensure that the business and/or commercial activities of the Corporate Debtor are continued by a Resolution Professional, post imposition of a moratorium, which would give the Corporate Debtor some reprieve from coercive litigation, which could drain the Corporate Debtor of its financial resources. This is to enable the Corporate Debtor to improve its financial health and at the same time repay the dues of its creditors. The Code is not just another statute for recovery of debts. Nor is it a statute which merely prescribes the modalities of liquidation of a corporate body, unable to pay its debts. It is essentially a statute which works towards the revival of a corporate body, unable to pay its debts, by appointment of a Resolution Professional.

Limitation

There can be no dispute with the proposition that the period of limitation for making an application under Section 7 or 9 of the Code is three years from the date of accrual of the right to sue, that is, the date of default.   There is no specific period of limitation prescribed in the Limitation Act, 1963, for an application under the Code, before the Adjudicating Authority. An application, for which no period of limitation is provided anywhere else in the Schedule to the Limitation Act, is governed by Article 137 of the Schedule to the said Act. Under Article 137 of the Schedule to the Limitation Act, the period of limitation prescribed for such an application is three years from the date of accrual of the right to apply.

As per Section 18 of Limitation Act, an acknowledgement of present subsisting liability, made in writing in respect of any right claimed by the opposite party and signed by the party against whom the right is claimed, has the effect of commencing a fresh period of limitation from the date on which the acknowledgement is signed. Such acknowledgement need not be accompanied by a promise to pay expressly or even by implication. However, the acknowledgement must be made before the relevant period of limitation has expired.

Issue

The issue to be discussed in this article as to whether limitation is refreshed each year when corporate debtor admits debt in its financial statement with reference to decided case laws.

Financial statements are written records that convey the business activities and the financial performance of a company.  Financial statements include the following-

• Profit & Loss Account - This Statement primarily focuses on a company’s revenues and expenses during a particular period. Once expenses are subtracted from revenues, the statement produces a company's profit figure called net income.
• Balance Sheet - The balance sheet provides an overview of assets, liabilities, and shareholders' equity as a snapshot in time
• Cash flow statement – This Statement measures how well a company generates cash to pay its debt obligations, fund its operating expenses, and fund investments.

In the liability side of the Balance Sheet total liabilities of the company to the creditors are mentioned.  This will have a schedule in which the details of liabilities will be mentioned.  The liability enters in this whether will amount to acknowledgment of debt on that date?  We may refer some case laws in this regard.

Not an acknowledgment

The Supreme Court in ASSET RECONSTRUCTION COMPANY (INDIA) LIMITED VERSUS BISHAL JAISWAL & ANR. - 2021 (4) TMI 753 - SUPREME COURT, held that though the filing of a balance sheet is by compulsion of law, the acknowledgment of a debt is not necessarily so. In fact, it is not uncommon to have an entry in a balance sheet with notes annexed to or forming part of such balance sheet, or in the auditor's report, which must be read along with the balance sheet, indicating that such entry would not amount to an acknowledgment of debt for reasons given in the said note.

Acknowledgement

The Karnataka High Court in HEGDE AND GOLAY LIMITED VERSUS STATE BANK OF INDIA - 1985 (11) TMI 233 - KARNATAKA HIGH COURT  held that the acknowledgement of liability contained in the balance sheet of a company furnishes a fresh starting point of limitation. It is not necessary, as the law stands in India, that the acknowledgement should be addressed and communicated to the creditor.

In ‘Asset Reconstruction Company (India) Limited v. Tulip Star Hotels Limited and others’ – 2022 (8) TMI 70 – Supreme Court, the respondent No.1, Tulip Star Hotels Limited and the respondent No.2 Tulip Hotels Private Limited are the shareholders of the Corporate Debtor, V. Hotels Limited. The respondent Nos. 1 and 2 each hold 50% share in the Corporate Debtor. During March 2002, a loan agreement was executed by and between a consortium of banks and the Corporate Debtor.  The Consortium collectively sanctioned loan to the extent of Rs.129 crores to the Corporate Debtor.   The Corporate Debtor entered into an arrangement with Abu Dhabi Commercial Bank which agreed to advance USD 29,000,000/- to the Corporate Debtor for repayment of the loan taken by the Corporate Debtor from the Consortium under the loan agreement.

On 01.12.2008, the account of the Corporate Debtor in the Bank of India was classified as non-performing asset (‘NPA’ for short) and on 31.12. 2008, an assignment agreement was executed by Bank of India assigning its receivables to the appellant Financial Creditor.  On 07.02.2011 the corporate debtor proposed a settlement as detailed below-

• to pay the settlement amount of Rs.150,75,83,970/-  being the aggregate amount in default as on 30.06.201 along with the accrued interest at the rate of 22% per annum to be compounded at monthly rests from 01.07.2010 till 30.09.2011.
• Rs. 10 crores  would be paid as upfront payment upon execution of the Settlement Agreement.
• The balance amount after adjusting the upfront payment of Rs.10 crores would be repaid on or before 30.09.2011.

The Corporate Debtor requested for extension for making payment till 31.03.2012 on condition that he would pay Rs.15 crores by 31.12.2011.  The Corporate Debtor now and then asked for further extensions.  Finally the Corporate Debtor acknowledged the outstanding aggregate assigned debt (inclusive of principal and interest) which had increased to Rs.239,88,27,673/- as on 31.03.2013. The Corporate Debtor offered to make an interim payment of Rs.91crores by 31.08.2013 and the balance outstanding amounts by 30.09.2013.

On 19.04.2013, the Corporate Debtor paid Rs.17.50 crores to the Appellant, towards part repayment of the aggregate assigned debt. On 17.06.2013, the appellant revoked the settlement and in terms of the default obligations under the Settlement Agreement, the rate of interest under the Deed of Variation was revised to 22%. By its letter dated 01.07.2013, the Corporate Debtor acknowledged its obligation to repay the aggregate assigned debt inclusive of interest.

The Corporate Debtor apparently acknowledged its liabilities towards the Appellant in its Financial Statements from 2008-09 to 2016-17.

On 03.04.2018, the appellant, as Financial Creditor, filed an application under Section 7(2) of the Code in the National Company Law Tribunal, Mumbai for initiation of the Corporate Insolvency Resolution Process against the Corporate Debtor.  The Corporate Debtor filed a miscellaneous application before the Adjudicating Authority for dismissal of the application by the Adjudicating Authority.  The Adjudicating Authority dismissed the application filed by the corporate debtor and allowed the application for corporate insolvency resolution process and appointed Interim Resolution Professional.  The Committee of Creditors was formed.

The Corporate Debtor filed appeal before the National Company Law Appellate Tribunal (‘NCLAT’ for short) against the order of Adjudicating Authority on miscellaneous application filed by it.  Besides the shareholders of the Corporate Debtor viz., Tulip Star Hotels Limited and Tulip Hotels Private Limited filed an appeal before the NCLAT against the order of Adjudicating Authority admitting the application for corporate insolvency resolution process by the Adjudicating Authority.

Before the NCLAT the corporate debtor put forth the following arguments-

• In the statutory notice issued by the appellant to the Corporate Debtor under Section 13(2) of the SARFAESI Act, the appellant had claimed that principal amount of Rs.90.35 crores was due from the Corporate Debtor to the appellant.
• The Corporate Debtor has paid the appellant much more than the Principal amount to the tune of Rs.106.54 crores.
• Even though the principal amount had been paid in the full, in the application under Section 7 of the Code, the appellant claimed that principal amount of Rs.35,43,72,852/- and Rs.149,91,24,581/- towards interest.
• There is no amount outstanding towards principal, and there is a long standing dispute in respect of the amount of interest payable by the Corporate Debtor to the appellant.
• By an order dated 19.10.2018, passed in relation to proceedings between the appellant and the Corporate Debtor in the Debt Recovery Tribunal, the High Court had held that the appellant was not entitled to claim 22% interest since it had revoked the settlement agreement on the basis of which such interest had been claimed. The High Court had, by its aforesaid order dated 19.10.2018 directed Debt Recovery Tribunal to determine the interest payable by the Corporate Debtor to the Appellant. Since no determination has been done by the Debt Recovery Tribunal, the interest amount has not become due and payable.
• The appellant could not have appropriated the amounts paid by the Corporate Debtor towards interest.
• The application of the appellant under Section 7 of the Code is hopelessly barred by limitation, the same having been filed about eight/nine years after the account of the Corporate Debtor was declared NPA on 01.12.2008.
• Even assuming the Corporate Debtor had acknowledged liability, the last letter of acknowledgment was written in April 2013. The period of limitation still expired in April 2016.
• The Corporate Debtor has not acknowledged any debt in its financial statements.

The NCLAT allowed both the appeals.  The NCLAT held that the financial creditor has failed to bring on record any acknowledgment in writing by the ‘Corporate Debtor’ or its authorized person acknowledging the liability in respect of debt. The Books of Account cannot be treated as an acknowledgement of liability in respect of debt payable to the ‘Asset Reconstruction Company (India) Ltd.’- (‘Financial Creditor’) signed by the ‘Corporate Debtor’ or its authorized signatory.  The Adjudicating Authority, without taking the above facts, simply dismissed the miscellaneous application filed by the appellant and also allowed the corporate insolvency resolution  application. 

Against the order of NCLAT the appellant filed the present appeal before the Supreme Court.  The appellant submitted the following before the Supreme Court-

• For the purpose of computing limitation, the most relevant balance-sheet is the balance-sheet for the financial year 2014-15, 
• any part payments made by the Respondent would first be appropriated towards the interest amount due.

The respondents submitted the following before the Supreme Court-

• The Financial Statements would not constitute acknowledgement for the reasons as demonstrated in the Written Notes of submissions of the Corporate Debtor.
•  a perusal of the above Statements from 2014-2015 to 2016-2017 shows that the Corporate Debtor has not made any unequivocal acknowledgment of debt.
• the recovery in the present case is not of “public monies”. Nor is the recovery beneficial to the public. There is no public funding in the form of holdings by any Public Sector Banks in the subject transaction.

The Supreme Court held that-

• The balance-sheet acknowledged the continuance of the jural relationship of debtor and creditor between the appellant and the Corporate Debtor and the existence of financial liability of the Corporate Debtor to the Appellant.  
• The application of the appellant under Section 7 of the Code was filed on 3.4.2018, well within three years from 14.5.2015, being the date on which the balance sheet was signed. 
• The balance-sheet for the following financial year signed on 29.8.2016 also acknowledged the existence of jural relationship of debtor and creditor between the Appellant and the Corporate Debtor and the existence of financial liability of the Corporate Debtor to the Appellant.
• The NCLAT erred in law in holding that the Books of Account of a company could not be treated as acknowledgement of liability in respect of debt payable to a financial creditor.

It is well settled that entries in books of accounts and/or balance sheets of a Corporate Debtor would amount to an acknowledgment under Section 18 of the Limitation Act.   

Section 18 of the Limitation Act speaks of an Acknowledgment in writing of liability, signed by the party against whom such property or right is claimed. Even if the writing containing the acknowledgment is undated, evidence might be given of the time when it was signed. The explanation clarifies that an acknowledgment may be sufficient even though it is accompanied by refusal to pay, deliver, perform or permit to enjoy or is coupled with claim to set off, or is addressed to a person other than a person entitled to the property or right. ‘Signed’ is to be construed to mean signed personally or by an authorized agent.

In this case, the amount of the Corporate Debtor was declared NPA on 01.12.2008. By a letter dated 07.02.2011, written well within 3 years, the Corporate Debtor acknowledged its liability and proposed a settlement. This was followed by several requests of extension of time to make payment and revised settlements. On 06.04.2013, the Corporate Debtor sought extension of time to pay Rs.239,88,27,673 outstanding as on 31.03.2013. On 19.04.2013 the Corporate Debtor made payment of Rs.17,50,00,000/-. On 01.07.2013, the Corporate Debtor acknowledged its liability – this was after the Appellant Financial Creditor revoked the settlement invoking the default clause. The Corporate Debtor acknowledged its liabilities in its financial statements from 2008-09 till 2016-17. The application under Section 7(2) of the IBC was filed on 03.04.2018, well within the extended period of limitation.

The Supreme Court held that Section 7 of the Code would not be barred by limitation, on the ground that it had been filed beyond a period of 3 years from the date of declaration of the loan account of the Corporate Debtor as NPA, if there were an acknowledgement of the debt by the Corporate Debtor before expiry of the period of limitation of three years, in which case the period of limitation would get extended by a further period of three years.  In this case, the amount of the Corporate Debtor was declared NPA on 1st December 2008. By a letter dated 07.02.2011, written well within three years, the Corporate Debtor acknowledged its liability and proposed a settlement. This was followed by several requests of extension of time to make payment and revised settlements.  The Corporate Debtor acknowledged its liabilities in its financial statements from 2008-09 till 2016-17. The application under Section 7(2) of the Code was filed on 03.04.2018, well within the extended period of limitation.

Conclusion

From the above it can be inferred that limitation is refreshed each year when corporate debtor admits debts in its financial statements.