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Synopsis

The Supreme Court recently observed that the commencement of a fresh period of limitation from the time of acknowledgment of the debt is part of the statutory scheme as Section 238A of the Insolvency and Bankruptcy Code extends the applicability of the provisions of the Limitation Act to the proceedings under the Code. 

The court further explained with the extension of the Limitation Act to the provisions of the Code, the benefit of Section 18 of the Limitation Act dealing with the effect of acknowledgment of a debt in writing applies. 

A bench of Justices P S Narasimha and Sandeep Mehta dismissed an appeal filed by one Vidyasagar Prasad, suspended director of a corporate debtor, against the order of the 2021 order of the NCLAT affirming the order of the Adjudicating Authority admitting the application under Section 7 of IBC for initiating CIRP (Corporate Insolvency Resolution Process) proceedings against the corporate debtor.

The apex court upheld concurrent findings of the forums below about acknowledgment of debts as "unimpeachable".

The corporate debtor, represented by its Insolvency Resolution Professional (IRP), availed loan and credit facilities from UCO Bank and other consortiums of banks between 2010 to 2012 for funding a thermal power plant.

Having defaulted on repayment of principal as well as interest, corporate debtor’s account was declared as a Non-Performing Asset (NPA) in 2014. 

In 2019, when UCO Bank filed an application under Section 7 of the Code to initiate CIRP proceeding against the corporate debtor before the Adjudicating Authority (NCLT, Kolkata Bench), these proceedings were resisted by the corporate debtor, primarily on the grounds of limitation. Additionally, Section 7 application was also challenged on the grounds that it was not signed by a competent person and also that there was no liability to pay as per the terms of the agreement and as such there was no debt.

The Adjudicating Authority i.e. NCLT examined the contract, the terms and conditions of the sanction letter as well as the relevant credit agreements in detail and came to the conclusion that the amount was disbursed as a loan and the corporate debtor had in-fact defaulted in repayment of principal as well as interest levied thereupon. 

The main objection to the initiation of CIRP proceedings on the basis of limitation was rejected by the Adjudicating Authority on the ground that there was an acknowledgment of debt in the financial statements as well as auditor’s report of the corporate debtor for the year ending on March 31, 2017.

On the basis of Section 238A of the Code, incorporating the Limitation Act, the Adjudicating Authority relied on Section 18 of the Limitation Act to reckon the period of limitation from the date of acknowledgment of the debt and concluded that the institution of CIRP on February 13, 2019, was within the period of limitation. 

The other contention of the corporate debtor that the name of UCO Bank, the financial creditor, was not specifically mentioned in the relied upon entry in the balance sheet was rejected by NCLT by referring to the Explanation to Section 7(1) of the Code providing that the proceedings thereunder gott triggered even in the case of a default by debtor in respect of any financial creditor other than the applicant.

Aggrieved by the admission of Section 7 application, initiation of CIRP, and appointment of IRP, the appellant preferred an appeal to the NCLAT, Principal Bench, Kolkata, which was also rejected. 

Before the apex court, the appellant mainly contended that there was no clear and unequivocal acknowledgment of debt of the corporate debtor in the entries of the balance sheets and the financial creditor could not have the benefit of Section 18 of the Limitation Act to extend the period of limitation which commenced on November 05, 2014.

The Bank's counsel submitted the balance sheets of a company are prepared in the prescribed statutory format as per Section 129, read with Schedule III of the Companies Act 2013, which does not provide for giving specific names of each and every Secured and Unsecured creditor. 

The counsel relied upon the judgment in Asset Reconstruction Company (India) Ltd Vs Bishal Jaiswal (2021) where it was observed that there was no compulsion for Companies to make any particular admissions in the balance sheet, except for what is prescribed.

"Having considered the specific facts and circumstances of this case, the Adjudicating Authority as well as the NCLAT have concurrently held that the entries in the balance sheets amount to clear acknowledgment of debt. We agree with the findings," the bench said.

Further, the court pointed out that the note, appended to said balance sheet entry on March 31, 2017, mentioned that the “company had made certain defaults in the repayment of term loans and interest", a continuing default and long-term borrowings. 

"The Adjudicating Authority as well as the NCLAT have examined the case in detail and have come to the conclusion that the entry made in the balance sheet coupled with the note of the auditor of the appellant clearly amounts to acknowledgement of the liability," the bench said.

The court further noted that their findings were fortified when examined from another perspective.

In this case, the Adjudicating Authority and NCLAT had also considered the corporate debtor’s proposal of One Time Settlement (OTS) to UCO Bank. The proposal made by letter of June 07, 2016 acknowledged that there were prior debts owed to UCO Bank. 

Both these factors, acknowledgment of debt in the balance sheet as well as in the OTS proposal, have been considered by NCLAT while dismissing the appeal, the bench noted.

"We are of the opinion that the findings arrived at by the Adjudicating Authority and NCLAT are correct in law and fact," the bench said, finding no merit in the appeal and dismissing it, accordingly.

Case Title: Vidhyasagar Prasad Vs UCO Bank & Anr