Summary
The corporate debtor's account was declared an NPA on 1 December 2008. The assignee financial creditor filed a Section 7 IBC application on 3 April 2018. NCLAT held the application time-barred, saying the books of account could not be treated as acknowledgments of liability. The Supreme Court reversed. Section 18 of the Limitation Act applies to IBC proceedings, and entries in a company's balance sheets and financial statements can amount to acknowledgment. The corporate debtor's 2011 settlement letter, repeated requests for extension of time, the 2013 part-payment and acknowledgment, and its balance sheets admitted the debtor-creditor relationship. Disputing only the interest rate did not stop them operating as acknowledgments. Admission was restored.
Issues
- Whether the corporate debtor's balance sheets and financial statements can be acknowledgments of liability under Section 18 of the Limitation Act that extend limitation for a Section 7 IBC application.
- Whether a Section 7 application filed more than three years after the NPA date was time-barred when the debt had been acknowledged in between.
- Whether documents and acknowledgments not pleaded in Form 1 can be relied on later in Section 7 proceedings.
Provisions considered
- Section 18, Limitation Act, 1963An acknowledgment in writing, signed before limitation expires, starts a fresh period. Balance-sheet entries can qualify. A note disputing only the rate of interest did not negate the admitted debtor-creditor relationship. (¶¶ 38, 81, 82, 83, 84, 85, 93, 97, 98)
- Article 137, Limitation Act, 1963A Section 7 application is governed by the three-year period under Article 137, running from the date of default. The period is extended by any valid acknowledgment. (¶¶ 68, 69, 70, 97)
- Section 238A, Insolvency and Bankruptcy Code, 2016The Limitation Act applies 'as far as may be', which permits a liberal, purposive application of Sections 14 and 18 to IBC proceedings. (¶¶ 65, 66, 67, 81)
- Section 7(2) to (5), Insolvency and Bankruptcy Code, 2016The Adjudicating Authority only has to find a debt and a default; a dispute over the amount is immaterial. The 14-day time limit is directory. Documents can be filed until final orders, and defects can be cured even after seven days. (¶¶ 39, 49, 51, 52, 62, 63, 64)
Held
- NCLAT erred in law in holding that the books of account of a company could not be treated as an acknowledgment of liability to a financial creditor. Entries in balance sheets can amount to an acknowledgment under Section 18 even though they are prepared under statutory compulsion. Whether a given entry is unequivocal or qualified is examined case by case. (¶¶ 34, 43, 85, 86, 87, 88, 89)
- Section 18 of the Limitation Act applies to proceedings under Sections 7 and 9 of the IBC. A Section 7 application is not barred merely because it is filed more than three years after the NPA date, if the debt was acknowledged before limitation expired; each acknowledgment extends limitation by three years. (¶¶ 81, 96, 97)
- Form 1 leaves no room for elaborate pleadings, so a Section 7 application cannot be judged like a plaint. Documents filed with or after the application, and later affidavits, form part of the pleadings. Babulal Vardharji Gurjar turned on its own facts and does not hold otherwise. (¶¶ 49, 62, 76, 77, 78, 79, 80)
- On an application under Section 7, the Adjudicating Authority has only to see whether a debt exists and a default has occurred. Disputes over the quantum are immaterial, and part-payments are appropriated first towards interest. The default here far exceeded the threshold. (¶¶ 39, 40, 41, 42)
- The IBC is a beneficial statute aimed at reviving the corporate debtor, not merely a recovery law. Its provisions and the rules under it must be construed liberally and purposively. (¶¶ 55, 56, 58, 59, 60, 61)
- After the NPA date, the corporate debtor acknowledged its liability in the settlement letter of 07.02.2011, in repeated requests for extension, in the part-payment of 19.04.2013, in its letter of 01.07.2013 and in its balance sheets. The application of 03.04.2018 was within the extended limitation period. (¶¶ 8, 12, 14, 17, 18, 19, 38, 98)
Result
Appeals allowed. The NCLAT judgment holding the Section 7 application time-barred was set aside, restoring NCLT's admission of the CIRP against the corporate debtor.