Summary
The Supreme Court held that a financial creditor's Section 7 IBC application filed on 15/01/2024 was within limitation because the corporate debtor's balance sheet for F.Y. 2019-20, signed on 12/08/2020 and read in the context of its earlier balance sheets and cash flow statement, was a valid acknowledgment of a subsisting debt under Section 18 of the Limitation Act even though it did not name the creditor, and because Para 5(I) of the Court's Covid-19 order of 10/01/2022 excluded the whole period from 15/03/2020 to 28/02/2022, making the application timely; the NCLT and NCLAT orders dismissing the application as time-barred were set aside.
Issues
- Whether an entry in the corporate debtor's balance sheet for F.Y. 2019-20, which did not mention the financial creditor's name or the loan agreement, constituted a valid acknowledgment of debt under Section 18 of the Limitation Act, 1963.
- Whether a balance sheet relied on as an acknowledgment must be read as a standalone document or may be construed in the light of earlier financial statements and surrounding circumstances.
- Whether Para 5(I) or Para 5(III) of the Supreme Court's order dated 10/01/2022 in In Re: Cognizance for Extension of Limitation governed the computation of limitation for the Section 7 application.
Provisions considered
- Section 18, Limitation Act, 1963An acknowledgment in writing signed before expiry of the prescribed period gives a fresh period of limitation; it merely renews the debt, must relate to a subsisting liability and indicate the jural relationship of debtor and creditor, the intention to admit which may be inferred by implication, with surrounding circumstances considered and a liberal construction favoured. Applying these principles, the entries in the F.Y. 2019-20 balance sheet were held to be a valid acknowledgment, and limitation ran afresh from 12/08/2020. (¶¶ 6, 23, 24, 27, 39, 40, 41, 44)
- Article 137, Limitation Act, 1963Reiterated as settled that Article 137, prescribing three years from when the right to apply accrues, governs applications under the IBC. (¶ 22)
- Section 238A, Insolvency and Bankruptcy Code, 2016The Limitation Act applies, as far as may be, to proceedings under the Code, and Section 18 of the Limitation Act therefore applies to a Section 7 application; the Court noted that in IBC proceedings Section 18 cannot be construed with pedantic rigidity. (¶¶ 22, 34, 39)
- Section 7, Insolvency and Bankruptcy Code, 2016The financial creditor's application to initiate the corporate insolvency resolution process, dismissed by the NCLT and NCLAT as time-barred, was directed to be treated as filed within limitation and remitted to the adjudicating authority for decision in accordance with law. (¶¶ 1, 4, 15, 16, 46, 47)
- Section 134(7) and Schedule III, Companies Act, 2013Following Bishal Jaiswal, notes annexed to financial statements are recognised by Section 134(7) and balance-sheet entries must be examined case by case for an unequivocal acknowledgment; the Court also noted, as held in Vidyasagar Prasad, that the statutory Schedule III format of a balance sheet does not provide for naming each secured or unsecured creditor. (¶¶ 33, 39)
Held
- An acknowledgment under Section 18 of the Limitation Act merely renews the debt and does not create a new right of action; it must relate to a subsisting liability and indicate a jural relationship of debtor and creditor with an intention to admit it, which may be inferred by implication from the nature of the admission. Surrounding circumstances, including earlier correspondence or documents, can be considered and courts lean towards a liberal construction, though intention cannot be fastened by an involved or far-fetched process of reasoning. (¶¶ 26, 27, 29, 30, 32, 39)
- A balance sheet relied on as an acknowledgment need not be read as a standalone document; it may be construed in the context of the earlier financial statements and other admitted documents. Entries in balance sheets can constitute a valid acknowledgment, to be examined case by case, and the omission of the creditor's name is not fatal since the statutory format of a company's balance sheet does not require every creditor to be named. (¶¶ 32, 33, 36, 39)
- The F.Y. 2019-20 balance sheet, signed by the directors on 12/08/2020, was a valid acknowledgment of a subsisting liability: read with the balance sheets of F.Y. 2015-16 to 2017-18 (which named the creditor and the pledge of shares as security) the secured borrowing entry pertained to the same loan; the Ind AS 7 cash flow statement showed the figure of Rs. 24,41,22,835 was the earlier borrowing of Rs. 23,68,91,933 plus Rs. 72,30,902 raised in F.Y. 2018-19; and the nil figure for cash used in financing activities showed no part of the borrowings had been repaid. (¶¶ 41, 43, 44)
- Where the corporate debtor's reply to the Section 7 application met detailed averments on the series of audited financial statements with only a bare denial that the balance sheet could be treated as an acknowledgment, that is a relevant circumstance, though the finding of acknowledgment rested on construction of the entry itself and not on the mere non-denial. (¶¶ 42, 43)
- Where limitation, reckoned from an acknowledgment on 12/08/2020, would ordinarily have run till 11/08/2023 and so did not expire between 15/03/2020 and 28/02/2022, Para 5(I) of the order dated 10/01/2022 applies and the entire period from 15/03/2020 to 28/02/2022 is excluded, so that limitation commenced on 01/03/2022 and continued till 28/02/2025; Para 5(III), which gives 90 days from 01/03/2022 only where limitation would have expired within the excluded period, has no application. The application filed on 15/01/2024 was therefore within time. (¶¶ 44, 45, 46)
Result
Appeal allowed; judgments of the NCLAT dated 25/03/2025 and the NCLT dated 16/05/2024 set aside; matter remitted to the adjudicating authority to proceed with and decide the Section 7 IBC application in accordance with law, treating it as filed within limitation; no order as to costs.