Entries in the account book/balance sheet of a debtor company may be treated as an admission of liability for the debt payable to the financial creditor: Supreme Court

The Supreme Court observed that entries in the books of account/balance sheet of a company can be considered as an acknowledgment of liability for a debt owed to a financial creditor.

A claim under IBC Section 7 would not be barred, on the grounds that it was filed beyond three years from the reporting date of the Company’s loan account debtor as NPA, if there was an acknowledgment of the claim by the Debtor Company before the expiry of the three-year limitation period. the bench consisting of Justices Indira Banerjee and JK Maheshwari watched. In this case, the limitation period would be extended by a further period of three years,

The bench so observed while allowing an appeal filed against NCLAT, finding that the Corporate Insolvency Resolution Process (CIRP) initiated by Asset Reconstruction Company (India) Limited against the corporate debtor, V. Hotels Ltd. was prohibited by limitation. The NCLAT has ruled that books of account cannot be treated as an admission of liability for a debt due. The debtor company’s claim was that the IBC Section 7 application is hopelessly barred by limitation, as it was filed approximately eight/nine years after the debtor company’s account was declared NPA on 01.12.2008.

On appeal, the Apex Court noted that the Debtor Company’s amount had been declared NPA on December 1, 2008. By letter dated February 7, 2011, drawn up well within three years, the Debtor Company admitted liability and offered regulations. This was followed by several requests for extension of the payment deadline and revised regulations. On April 6, 2013, the debtor company requested an extension of time to pay Rs.239,88,27,673 outstanding as of March 31, 2013. On April 19, 2013, the debtor company made payment of Rs.17,50,00,000/ – . On July 1, 2013, the Debtor Company admitted its liability – this was after the Financial Creditor terminated the transaction by invoking the default clause. The debtor company recognized its liabilities in its financial statements from 2008-09 to 2016-17. The IBC Section 7(2) application was filed on April 3, 2018.

Distinguishing Babulal Vardharji Gurjar c. Veer Gurjar Aluminum Industries (P) Ltd, the bench observed:

Babulal Vardharji Gurjar (supra) is no authority for the proposition that the books of accounts of a corporate debtor could not be treated as an admission of liability to a financial creditor. Nor does the judgment set forth the proposition that affidavits or documents filed during the pendency of the proceedings cannot be taken into consideration……. It is well established that entries in the books of accounts and/or balance sheets of a company Debtor would amount to an acknowledgment under Section 18 of the Limitation Act.

While allowing the appeal on the basis that the claim under section 7 of the IBC was not statute-barred, the court observed:

In summary, in our reasoned opinion, an application under Article 7 of the CIB would not be time-barred, on the ground that it was filed beyond a period of three years from the date of declaration of the Debtor Company’s loan account as NPA, if there was an acknowledgment of debt by the Debtor Company before the expiry of the three-year limitation period, in which case the limitation period would be extended by a further period of three year.

Case details

Asset Reconstruction Company (India) Limited v Tulip Star Hotels Limited | 2022 LiveLaw (SC) 648 | CA 84-85 OF 2020 | August 1, 2022 | Judges Indira Banerjee and JK Maheshwari

Counsel: Sr. Adv Neeraj Kishan Kaul for the Appellant, Sr. Adv Nakul Dewan for the Respondent

Insolvency and Bankruptcy Code, 2016; Section 7 – Limitation Act 1963; Article 18 – Entries in the books of account/balance sheet of a company can be considered as an acknowledgment of responsibility with regard to a debt owed to a financial creditor. (Paragraph 85)

Insolvency and Bankruptcy Code, 2016; Article 7 – A claim under IBC Section 7 would not be barred, on the grounds that it was filed beyond three years from the reporting date of the Company’s loan account debtor as NPA, if there was an acknowledgment of the debt by the Debtor Company before the expiry of the three-year limitation period, in which case the limitation period would be extended by a further period of three years. (Paragraph 97)

Insolvency and Bankruptcy Code; Section 7 – Pleadings – A request under section 7 in the prescribed form cannot be compared to the complaint in a lawsuit, and cannot be judged by the same standards, as a complaint in a lawsuit, or any other pleading before a court – There is no room for elaborate pleadings – Documents filed with the application, or subsequently, and subsequent affidavits and applications should be construed as part of the pleadings (paragraphs 49, 76)

Limitation Act, 1963; Article 18 – Written acknowledgment of liability, signed by the party against whom this property or right is claimed – Even if the writing containing the acknowledgment is not dated, proof can be given of the time at which it was signed – A acknowledgment may suffice even if it is accompanied by a refusal to pay, to deliver, to perform or to allow enjoyment or is accompanied by a request for compensation, or is addressed to a person other than a holder of the property or right. “Signed” shall be construed as meaning signed personally or by an authorized agent. (Paragraph 93)

Insolvency and Bankruptcy Code 2016 – Limitation Act 1963; Section 14.18 – BAC does not exclude the application of Sections 14 or 18 or any other provision of the Limitation Act.

Previous – A judgment is a precedent for the question of law which is raised and decided and not for observations made in the facts of a particular case. (Paragraph 79)

Insolvency and Bankruptcy Code, 2016 ; Section 7 – The limitation period for filing a claim under Article 7 or 9 of the CIB is three years from the date of constitution of the right of action, that is to say the date of default. (Paragraph 69)

Insolvency and Bankruptcy Code, 2016 – The IBC is not just a debt collection law. Nor is it a law that merely prescribes the terms of liquidation of a legal person unable to pay its debts. It is essentially a statute that works to revive a legal person, unable to pay its debts, by appointing a resolution professional. (Paragraph 55)

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