NCLAT | Whether reflection of debt in Balance Sheet of a Corporate Debtor would amount to acknowledgement under S. 18 of Limitation Act? 5-Member Bench decodes Interplay between IBC & Limitation Act; discusses ‘Judicial Indiscipline’

Bhumika Indulia

4 years ago

National Company Law Appellate Tribunal (NCLAT), New Delhi: The Bench of Justice Bansi Lal Bhat (Acting Chairperson) and Justice Venugopal M. (Judicial Member), Justice Anant Bijay Singh (Judicial Member), Kanthi Narahari (Technical Member) and Shreesha Merla (Technical member), while addressing the present matter observed that:

“…for purpose of computing the period of limitation under Section 7 of I&B Code, the date of default is NPA.”

Background

The three-member Bench of this Appellate Tribunal had opined that the decision rendered by the 5-member Bench of this Appellate Tribunal in V. Padmakumar v. Stressed Assets Stabilization Fund (SASF),2020 SCC OnLine NCLAT 417required reconsideration.

Issue formulated by the three-member Referral Bench, as noticed in the reference order was as follows:

“Hon’ble Supreme Court and various Hon’ble High Courts have consistently held that an entry made in the Company’s Balance Sheet amounts to an acknowledgement of debt under Section 18 of the Limitation Act, 1963, in view of the settled law, V. Padmakumar’s Case requires reconsideration.”

Facts and Contentions

Corporate Debtor had defaulted in repaying the dues availed as a loan from the Consortium Lenders leading to recalling of the loan facility by the Financial Creditor — State Bank of India and the Consortium Lenders issuing notices under Section 13(2) of the SARFAESI Act, 2002 demanding total amount of Rs 59,97,80,02,973.

Corporate Debtor failed to discharge its liability.

When the Financial Creditor initiated CIRP under Section 7 of the Insolvency and Bankruptcy Code, 2016 against the Corporate Debtor, Lenders had assigned the debt in favour of ‘Asset Reconstruction Company (India) Ltd. NCLT, Kolkata Bench on being satisfied that debt and default were established, admitted the application. Further on being aggrieved with the same, Ex-Director of Corporate Debtor filed an appeal against the admission order in light of Corporate Debtor’s account being declared as NPA in 2014 and application under Section 7 was filed in 2018 after a delay of around 5 years, hence the same was barred by limitation.

Financial Creditor contended that the right to sue for the first time accrued to it upon the classification of the accounts as NPA in 2013 but thereafter, Corporate Debtor had admitted time and again and unequivocally acknowledged its debt in the Balance Sheets for the years ending 31st March, 2015, 31st March, 2016 and 31st March, 2017.

Hence, the right to sue stood extended in terms of Section 18 of the Limitation Act, 1963.

Referral Bench had declined to accept the argument that Section 18 of the Limitation Act, 1963 is not applicable Insolvency Cases and proceeded to record the reasons for reconsideration of V. Padmakumar’s Judgment.

Analysis, Law and Decision

Bench noted that in ‘V. Padmakumar’s Case’, IDBI had advanced financial assistance of Rs 600 Lakhs by way of Term Loan Agreement dated 02-03-2000 to the Corporate Debtor and the loan was duly secured.

Further, the Corporate Debtor’s account was classified as NPA in 2002, later IDBI initiated recovery proceedings in 2007. Recovery Certification was issued in 2009 which was reflected in the Balance Sheet dated 31-03-2012.

Limitation Period

This Appellate Tribunal noted the decisions delivered by Supreme Court in Jignesh Shah v. Union of India – (2019) 10 SCC 750, Gaurav Hargovindbhai Dave v. Asset Reconstructions Company (India) Ltd. – (2019) 10 SCC 572, Vashdeo R. Bhojwani v. Abhyudaya Co-operative Bank Ltd. – (2019) 9 SCC 158, and the decision of this Appellate Tribunal in V. Hotels Ltd. v. Asset Reconstruction Company (India) Ltd.– Company Appeal (AT) (Insolvency) No. 525 of 2019, decided on 11-12-2019, was of the view that for the purpose of computing the limitation period for application under Section 7 the date of default was NPA and hence a crucial date.

5-Member Bench further dealt with the acknowledgement of claim in audited Balance Sheet of Corporate Debtor to arrive at a finding as to whether such acknowledgement would fall within the ambit of Section 18 of Limitation Act, 1963.

Bench expressed that the Referral bench failed to take note of the fact that the 5-Member Bench Judgment rendered in ‘V. Padmakumar’s Case’ with a majority of 4:1 was delivered to remove uncertainty arising out of the conflicting verdicts of Benches of co-equal strength in ‘V. Hotel’s Case’ and ‘ Ugro Capital Ltd.’s Case’.

Once a Larger Bench of this Appellate Tribunal came to be constituted in the wake of two conflicting judgments rendered by Benches of co-equal strength on the issue, one of the two Benches having failed to notice the judgment of the Supreme Court on the subject, the issue raised by the Referral Bench can no more be said to be res integra, in so far as the jurisdiction exercised by this Appellate Tribunal under I&B Code is concerned.

Observations:

For purpose of computing, the period of limitation under Section 7, the date of default is NPA.
In Supreme Court’s decision of Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries Ltd., Civil Appeal No. 6347 of 2019, it was observed that Section 18 of the Limitation Act, 1963 would have no application to proceedings under the I&B Code. Therefore the issue raised as regards acknowledgement of liability by reflection in the Balance Sheet/Annual Return would be irrelevant.
The remedy available under the I&B Code is a remedy distinct from remedy available in civil jurisdiction/ recovery mechanism and since the I&B Code is not a complete Code, provisions of Limitation Act are attracted to proceedings under it before NCLT and NCLAT as far as applicable i.e. in regard to matters not specifically provided for in I&B Code.

The whole mechanism of triggering of Corporate Insolvency Resolution Process revolves around the concept of ‘debt’ and ‘default’.

There is no room for doubt that the date of default in regard to an application under Section 7 of I&B Code is the date of classification of the account of Corporate Debtor as NPA.

The date of default is extendable within the ambit of Section 18 of Limitation Act on the basis of an acknowledgement in writing made by the Corporate Debtor before the expiry of the limitation period.

Whether a reflection of debt in the Balance Sheet/ Annual Return of a Corporate Debtor would amount to acknowledgement under Section 18 of the Limitation Act?

“…the finding has been recorded by the five Member Bench in the context of a judgment or a decree passed for recovery of money by Civil Court/ Debt Recovery Tribunal which cannot shift forward the date of default for purposes of computing limitation for filing of an application under Section 7 of the I&B Code and the fact that filing of Balance Sheet/ Annual Report being mandatory under Section 92(4) of Companies Act, failing of which attracts penal action under Section 92(5) & (6).”

Tribunal also added to its observations that Referral Bench failed to draw a distinction between the ‘recovery proceedings’ and the ‘insolvency resolution process’.

I&B Code provides timelines for resolution of insolvency issues and proceedings thereunder cannot be equated with the ‘recovery proceedings’.

Hence, in view fo the above discussions, Bench opined that :

the order of reference which, in letter and spirit, is more akin to a judgment of an Appellate Court appreciating the findings and judgment in ‘V. Padmakumar’s Case’ is incompetent and deserves to be rejected.

Judicial Indiscipline

Tribunal went on to express that ‘Judicial indiscipline’ creates uncertainty and impairs public faith in the Rule of Law.

Crossing the red line by disregarding the binding precedent results in making the legal proposition uncertain. Such misadventure creates uncertainty as regards the settled position of law.

Cases referred by the Tribunal for the above-stated:

Central Board of Dawoodi Bohra Community v. State of Maharashtra, (2005) 2 SCC 673: It was held that a decision delivered by a Bench of larger strength is binding on any subsequent Bench of lesser or coequal strength.

A Bench of co-equal strength can only express an opinion doubting the correctness of the view taken by the earlier Bench of co-equal strength.

Keshav Mills Co. Ltd. v. CIT, (1965) 2 SCR 908: It was held that the nature of infirmity or error would be one of the factors in making a reference. Whether patent aspects of question remained unnoticed or was the attention of Court not drawn to any relevant and material statutory provision or was any previous decision of the Supreme Court not noticed would be the relevant factors.

In Supreme Court Advocates on Record Association v. Union of India, (2016) 5 SCC 1, it was held that the Court should not, except when it is demonstrated beyond all reasonable doubt that its previous ruling given after due deliberation and a full hearing was erroneous, revisit earlier decision so that the law remains certain.

In CCE v. Matador Foam, (2005) 2 SCC 59, the following was observed:

“….. These being judgments of coordinate benches were binding on the Tribunal. Judicial discipline required that the Tribunal follow those judgments. If the Tribunal felt that those judgments were not correct, it should have referred the case to a larger bench.”

Hence, in light of the above, Tribunal held that:

Following of the judicial precedent of a Bench of equal strength and of a Larger Bench as in the instant case, is a matter of judicial discipline.

While parting with the decision, Bench recorded that

It is not open to the Referral Bench to appreciate the judgment rendered by the earlier Bench as if sitting in appeal to hold that the view is erroneous. Escaping of attention of the earlier Bench as regards a binding judicial precedent or a patent error is of relevance but not an evaluation of earlier judgment as if sitting in appeal.

Referral Bench overlooked all legal considerations. Company Appeal (AT) (Insolvency) No. 385 of 2020 be listed for regular hearing on 11-01-2021.[Bishal Jaiswal v. Asset Reconstruction Company (India) Ltd., Reference made by Three Member Bench in Company Appeal (AT) (Insolvency) No. 385 of 2020, decided on 22-12-2020]