The Supreme Court has ruled that entries in a corporate debtor’s balance sheet, coupled with an offer of one-time settlement (OTS), constitute a valid acknowledgment of debt under Section 18 of the Limitation Act, thereby extending the limitation period for initiating Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code (IBC), 2016. This decision clarifies a critical aspect of insolvency law, impacting how financial statements are interpreted in relation to extending the statutory timeline for insolvency actions.
Case Background:
The case, Vidyasagar Prasad v. UCO Bank & Anr. (Civil Appeal No. 1031 of 2022), originated from a dispute concerning the default in repayment of loans taken by a corporate debtor from UCO Bank. The loans were extended in 2010 and 2012 for setting up a thermal power plant, but repayment obligations were not met, leading to the account being classified as a Non-Performing Asset (NPA) on November 5, 2014.
UCO Bank initiated CIRP by filing an application under Section 7 of the IBC on February 13, 2019, before the National Company Law Tribunal (NCLT), Kolkata Bench. The application was contested by the corporate debtor, represented by its suspended director, Vidyasagar Prasad, primarily on the grounds of limitation, arguing that the application was time-barred as it was filed more than three years after the NPA declaration.
The NCLT admitted UCO Bank’s application, leading to an appeal by Prasad before the National Company Law Appellate Tribunal (NCLAT), which upheld the NCLT’s decision on October 4, 2021. The NCLAT’s ruling was then challenged in the Supreme Court by Prasad, bringing the case to its present conclusion.
Key Legal Issues Before the Supreme Court
1. Limitation for Initiating CIRP:
– The central question was whether entries in the corporate debtor’s balance sheets and an OTS proposal could be treated as acknowledgments of debt, thereby extending the limitation period for initiating CIRP under Section 7 of the IBC.
2. Nature of Acknowledgment in Balance Sheets:
– Another issue was whether the balance sheet entries could be considered clear and unequivocal acknowledgments of debt, despite not specifying the creditor’s name, and whether they were sufficient to trigger Section 18 of the Limitation Act.
3. Role of One-Time Settlement Proposal:
– The court also examined whether an OTS proposal made by the corporate debtor could be treated as an acknowledgment of liability, extending the limitation period for CIRP.
The Supreme Court’s Decision and Observations
The Supreme Court bench, comprising Justice Pamidighantam Sri Narasimha and Justice Sandeep Mehta, delivered the judgment affirming the NCLAT’s decision. The court ruled that both balance sheet entries and the OTS proposal made by the corporate debtor amounted to valid acknowledgments of debt, thereby extending the limitation period under Section 18 of the Limitation Act.
1. Acknowledgment in Balance Sheets:
– The court ruled that entries in the corporate debtor’s balance sheets, prepared in compliance with the statutory requirements under the Companies Act, 2013, can be treated as valid acknowledgments of debt for the purpose of Section 18 of the Limitation Act.
– Referring to the earlier Supreme Court decision in Asset Reconstruction Company (India) Ltd. v. Bishal Jaiswal (2021), the bench noted:
“The filing of a balance sheet in accordance with the Companies Act is mandatory, and such entries, if made within the original limitation period, can be relied upon as acknowledgment of debt, even if they do not specifically name the creditor.”
– The court emphasized that acknowledgment in balance sheets extends the limitation period by an additional three years, provided it is made within the initial three-year limitation period.
2. Role of One-Time Settlement (OTS) Proposals:
– The Supreme Court also analyzed the OTS proposal made by the corporate debtor to UCO Bank on June 7, 2016, which was not marked “without prejudice.” The court observed that the OTS proposal was indicative of the debtor’s intention to settle the outstanding dues, thus amounting to an acknowledgment of the subsisting liability.
– The court cited its ruling in Lakshmirattan Cotton Mills Co. Ltd. v. Aluminium Corporation of India Limited (1971), observing:
“An acknowledgment of debt need not indicate the exact nature of the liability but must point towards a present, subsisting liability and reflect a jural relationship between the parties.”
– The court concluded that the OTS proposal extended the limitation period for initiating CIRP, in line with the principles of Section 18 of the Limitation Act.
3. Extension of Limitation Period Under Section 18 of the Limitation Act:
– The court clarified that Section 18 of the Limitation Act applies to insolvency proceedings under the IBC. The judgment underscored:
“Section 18 is applicable to proceedings under the IBC, enabling the extension of limitation whenever there is acknowledgment of debt in writing, signed by the debtor, before the expiration of the original limitation period.”
– The court reiterated that the limitation period could be extended by three years each time a valid acknowledgment of debt is made, provided it occurs within the ongoing limitation period.
Counsel Details
– Appellant: The corporate debtor was represented by Senior Advocate Mr. Balbir Singh, who argued that the entries in the balance sheets were ambiguous and did not amount to clear acknowledgments of debt owed to UCO Bank. He contended that the balance sheets lacked specific mention of the financial creditor, which should prevent them from extending the limitation period.
– Respondent (UCO Bank): UCO Bank was represented by Advocate Mr. Partha Sil, who maintained that the balance sheets and OTS proposal were valid acknowledgments of debt. He emphasized that statutory compliance under the Companies Act did not require naming each creditor specifically, but that acknowledgment of a liability was sufficient to trigger Section 18 of the Limitation Act.
