On 12 March, 2020, the National Company Law Appellate Tribunal (“NCLAT”) delivered a judgment in V. Padmakumar v. Stressed Assets Stabilisation Fund[1] (“Padmakumar”). This seemingly banal ruling of the NCLAT dismissed a Section 7 petition under the Insolvency and Bankruptcy Code, 2016[2] to commence the corporate insolvency resolution process. Consequently, it has prompted a debate relating to a well-known tenet of the law of limitation that has gripped the nation’s legal fraternity and commercial entities.
In the judgment, the NCLAT by the majority judgement held the Section 7 petition to be untenable as it was barred by limitation. In coming to its decision, the NCLAT found that acknowledgement of debt in the balance-sheet of a company would not be an “acknowledgement of liability” under Section 18 of the Limitation Act, 1963[3] (equivalent to Section 19 of the Limitation Act, 1908[4]) (“the Limitation Act”). This decision, delivered by a 5-Member Bench acting with a 4:1 majority, seems to be the culmination of the position of law surrounding acknowledgements of debt in balance-sheets that has been developed by the NCLAT over the course of two previous decisions[5]. The rationale of the NCLAT can be boiled down to one essential argument – since the balance-sheets are required to be filed every year by companies under company law (non-compliance of which attracts punitive action), acknowledgements of unpaid debts made therein cannot be allowed to annually extend the limitation period on recovery of the same.
At the outset, it is necessary to point out what appears to be a minor technical error in the judgment of Padmakumar. The NCLAT has refused to allow an acknowledgement of debt in a balance-sheet prepared under Section 92 of the Companies Act, 2013[6] (“the Companies Act”), to extend the limitation period, due to the penal provisions of sub-sections (5) and (6) of Section 92. However, Section 92 of the Companies Act, does not provide for the filing of the annual balance-sheet of the company, rather it deals with the filing of the annual return of the company with the Registrar of Companies. The annual return, filed as per Form MGT-7[7], does not envisage the filing of the company’s balance-sheet, but merely information in relation to indebtedness of the company, comprising a list of loans received by the company. The balance-sheet is prepared and filed with the financial statement of the company as per Form AOC-4[8]. Undoubtedly, non-filing of the annual balance-sheet with the Registrar of Companies is also made punishable under Section 137(3) of the Companies Act. Thus, the finding of the NCLAT that filing of balance-sheets is mandatory, is correct. However, the reliance placed on Section 92 instead of the mandatory provisions of Chapter IX of the Companies Act raises questions in and of itself.
Leaving aside this possible and minor glitch, the decision in Padmakumar seems to contradict a long line of High Court cases laying down the principle, which has also been recognised by the Supreme Court, that an acknowledgement of a debt or any other liability in the balance-sheets of a company amounts to an “acknowledgement of liability” under Section 18 of the Limitation Act.
To understand the jurisprudence around Section 18, we must first understand the unique role it plays in the general scheme of the Limitation Act. Under the Limitation Act, the period of limitation, once commenced, cannot be interfered with, without statutory provisions to that effect. Section 18 allows for the clock of limitation to be reset, with the period of limitation starting afresh, on the date a debtor admits his liability to a creditor in writing, within the original period of limitation, with the document also being signed by the debtor. The Supreme Court has clarified in S.F. Mazda v. Durga Prasad[9], that the essence of an ‘acknowledgement’ under Section 18 is the intended admission of a jural relationship by the debtor as against his creditor in relation to a subsisting liability on the date of such admission. Such intention to admit a jural relationship can be extrapolated from statements made in writing by the debtor and circumstances surrounding such statements, all of which are to be liberally construed in order to arrive at the true intention of the debtor.
Since the balance-sheet of a company contains categorical statements in relation to the financial well-being of and transactions undertaken by the company, it usually contains acknowledgements of debts of the company. In company law, such a balance-sheet must be approved and signed by the directors of the company[10], and adopted in the Annual General Meeting for every financial year[11]. A copy of the adopted balance-sheet must also be filed with the Registrar of Companies[12]. It is true that non-compliance with any of these provisions of company law result in penal action[13]. Resultantly, the annual balance-sheets are prepared under compulsion of statute.
However, the imposition of such a statutory duty does not ipso facto make statements made in a balance-sheet involuntary. In fact, a company is free to omit a time-barred debt from its liabilities in the balance-sheet, declare it to be unacknowledged or barred by limitation in its Directors’ and/or Auditors’ Reports, or list the debt as unacknowledged under the head ‘contingent liabilities and commitments’ in their balance-sheet[14]. Taking any one of these steps would amount to a clear denial of a subsisting jural relationship with respect to the time-barred debt. Resultantly, companies are able to exert sufficient control over the statements made by them in their balance-sheets in order for them to be treated as voluntarily made, and time-barred debts need not be perpetually acknowledged by a company on an annual basis as per the company law.
This is why the High Courts have refused to accept the contention that an acknowledgement of debt made in a balance-sheet, owing to the mandatory nature of the filing of such balance-sheets, is not sufficient for the purpose of Section 18 of the Limitation Act. This point of law was directly addressed by a Division Bench of the Calcutta High Court in Bengal Silk Mills Co. v. Ismail Golam Hossain Ariff[15]. The simple question before the Court was whether the balance-sheets duly adopted in the Annual General Meetings of the defendant company containing acknowledgements of a long-standing debt amounted to acknowledgements starting the period of limitation afresh as per Section 18 of the Limitation Act. The Court answered in the affirmative. Repelling the argument that such acknowledgements could not be made under compulsion of statute, the Court held-
“It is true that the balance-sheets were required to be made both by the Companies Act, 1913 as also by the articles of association of the defendant company. There was a compulsion upon the managing agents to prepare the documents but there was no compulsion upon them to make any particular admission. They faithfully discharged their duty and in doing so they made honest admissions of the company’s liabilities. Those admissions though made in discharge of their duty are nevertheless conscious and voluntary admissions. A document is not taken out of the purview of Section 19 of the Limitation Act merely on the ground that it is made under compulsion of law … The balance-sheet contains admissions of liability; the agents of the company who makes and signs it intends to make those admissions. The admissions do not, cease to be acknowledgments of liability merely on the ground that they were made in discharge of a statutory duty.”
(emphasis supplied)
The judgment drew on earlier precedents in both English[16] and Indian Courts[17] all coming to the same conclusion concerning the sufficiency of acknowledgements of debt in balance-sheets for extending the period of limitation. Subsequent rulings, like those of the Calcutta and Delhi High Courts in In Re Pandam Tea Co. Ltd.[18] and Sheetal Fabrics v. Coir Cushions Ltd.[19], respectively, developed the law further by stating that the balance-sheets must be read along with the attached reports, such as the Directors’ Report, and they must be construed liberally in order to properly arrive at the intention of the debtor.
The High Courts across the country have come to accept that an acknowledgement in a duly adopted and signed balance-sheet, if not treated as unacknowledged liability either in the balance-sheet or other ancillary document, shall be deemed to admit a jural relationship between the debtor and the creditor. This is clear from cases like Darjeeling Commercial Co. Ltd. v. Pandam Tea Co. Ltd.[20] and Bhajan Singh Samra v. Wimpy International Ltd.[21] where winding-up proceedings were held to be maintainable owing to the unpaid debts being acknowledged in the balance-sheets of the respondent-company, and such acknowledgements saving the debt from being barred by limitation. It has also been accepted in taxation cases such as Commissioner of Income Tax III v. Shri Vardhman Overseas Ltd.[22] where, while dealing with cessation of liability to a creditor under Section 41(1) of the Income Tax Act, 1961, the Court held that the liability of the debtor was still subsisting owing to acknowledgements made by it in its balance-sheets.
The law established by the High Courts has even found reference in judgments of the Supreme Court. The first clear reference to it can be seen in a matter concerning development rebate under Section 33 of the Income Tax Act, 1961, Mahabir Cold Storage v. CIT[23]. In this matter, an acknowledgement of a transfer of funds between the parties, in the balance-sheet of the appellant, was sought to evidence transfer of ownership of the machinery and the plant, in relation to which the rebate was sought, from the appellant. Though rejecting that argument, the Supreme Court held that the acknowledgement of the transfer of funds would still be an acknowledgement of an unpaid debt, even if it did not amount to a transfer of capital assets. The Supreme Court held-
“The entries in the books of accounts of the appellant would amount to an acknowledgement of the liability to Messrs Prayagchand Hanumanmal within the meaning of Section 18 of the Limitation Act, 1963, and extend the period of limitation for the discharge of the liability as debt.”
The Supreme Court has also directly addressed the issue in A.V. Murthy v. B.S. Nagabasavanna[24] (“A. V. Murthy”). The Supreme Court, in this case, held that a criminal proceeding initiated on complaint of dishonour of a cheque was maintainable, because the cheque was issued pursuant to a debt that could be saved from limitation owing to an acknowledgement of the debt made in the balance-sheet of the defendant. For such reasons, the criminal proceedings could not be quashed on the ground of there not being a debt legally enforceable against the defendant. The relevant passage of the judgment reads as follows-
“Moreover, in the instant, the appellant has submitted before us that the respondent, in his balance sheet prepared for every year subsequent to the loan advanced by the appellant, had shown the amount as deposits from friends. A copy of the balance sheet as on 31st March, 1997 is also produced before us. If the amount borrowed by the respondent is shown in the balance sheet, it may amount to acknowledgement and the creditor might have a fresh period of limitation from the date on which the acknowledgement was made.”
(emphasis supplied)
The Court left it open for the trial court to decide if the acknowledgement definitively expressed intent to admit a jural relationship, as the same can be proven to not be the case depending on the facts of the case, as was shown in In re Pandam Tea[25] and Sheetal Fabrics[26].
Though the Supreme Court, in both these decisions, failed to elaborate on the law surrounding acknowledgements in balance-sheets, their recognition of the law developed and followed in the High Courts of the country over the last 50 years is unmistakably clear. In A.V. Murthy[27], the principle that acknowledgements made in the balance-sheets can start the period of limitation anew even forms part of the ratio decidendi. In effect, the principle has been treated as settled law by the Supreme Court, and additional elaboration of the same has seemingly been deemed unnecessary.
From the above discussion, it is clear that acknowledgements in balance-sheets, unless controverted in the document itself or the reports attached to it, though prepared, adopted and signed on pains of punitive action as per statute, have long been considered by Indian Courts to be valid acknowledgements for the purpose of extending the period of limitation. The position has remained unchanged for a substantial amount of time and has been in complete consonance with the jurisprudence around Section 18 of the Limitation Act declared by the Supreme Court. The decision of the NCLAT in Padmakumar has sought to disrupt this status quo by seemingly going against the express pronouncements of the High Courts. It appears that the NCLAT has sought to do this without noticing or dealing with any of the decisions cited in this article. Indubitably, the decisions of the High Courts do not form a binding precedent on NCLAT. However, it can be reasonably argued that a long-standing legal principle developed by the numerous High Courts should have significant persuasive value in the eyes of the NCLAT. This apart, the decision of the NCLAT has not considered the ratio of the Supreme Court’s decision in A.V. Murthy[28], whose letter and spirit is binding on it by virtue of Article 141 of the Constitution[29], possibly making Padmakumar a decision per incuriam. As a result, the propriety of the decision, both as a sound exposition of the law surrounding Section 18 of the Limitation Act and a binding legal precedent for Benches of the National Company Law Tribunal, might be an open question going forward.
* Principal Associate, Khaitan and Co.
**5th year student, Dept. of Law, University of Calcutta
Views are personal only and not of the Firm. For any queries, comments or suggestions, please contact Anunoy Basu, Principal Associate, Khaitan & Co. (E-mail: anunoy.basu@khaitanco.com). Shounak Mukhopadhyay, Student, Department of Law, University of Calcutta (E-mail: shounakmukherjee96@gmail.com).
[1] Company Appeal (AT) (Insolvency) No. 57/2020, judgment dated 12-3-2020
[2] Insolvency and Bankruptcy Code, 2016
[5] V. Hotels Ltd. v. Asset Reconstruction Company (India) Ltd., 2019 SCC OnLine NCLAT 911 ; G. Eswara Rao v. Stressed Assets Stabilisation Fund, Company Appeal (AT) (Insolvency) No. 1097/2019, judgment dated 7-2-2020
[7] Rule 11 of the Companies (Management and Administration) Rules, 2014
[8] Rule 12 of the Companies (Accounts) Rules, 2014
[9] (1962) 1 SCR 140
[10] Section 134(1) of the Companies Act, 2013
[11] Section 129(2) of the Companies Act, 2013
[12] Section 137(1) of the Companies Act, 2013
[13] Sections 129(7), 134(8), 137(3) of the Companies Act, 2013
[14] Clause T, Part I, Division I, Schedule III of the Companies Act, 2013
[16] Jones v. Bellgrove Properties, (1949) 2KB 700; Ledingham v. Bermejo Estancia Co. Ltd., (1947) 1 All ER 749
[17] Rajah of Vizianagaram v. Official Liquidator, Vizianagaram Mining Company Limited 1951 SCC OnLine Mad 56; Lahore Enamelling and Stamping Co. Ltd. v. A.K. Bhalla, 1958 SCC OnLine P&H 9
[24] (2002) 2 SCC 642
[27] (2002) 2 SCC 642
[28] Ibid
[29] Sagar Sharma v. Phoenix ARC Pvt. Ltd., (2019) 10 SCC 353