Interplay of IB Code with Law on Limitation – Putting to Rest Section 18 Dilemma – Part II

Recapitulation

In the previous column, we discussed the initial issues in the interplay of Insolvency and Bankruptcy Code, 2016 (IB Code) with the law on limitation and how they were resolved by the insertion of Section 238-A to the IB Code and the Supreme Court rulings in B.K. Educational Services^[1] and Vashdeo R. Bhojwani v. Abhyudaya Cooperative Bank Ltd.^[2]

We then discussed that currently there are three major issues that require a modicum of certainty, namely, whether the creditors can use the following provisions of the Limitation Act to extend/renew the period of limitation while seeking initiation of resolution process against a corporate debtor:

(i) Section 14 of the Limitation Act, 1963, which states “exclusion of time of proceeding bona fide in court without jurisdiction” is applicable.

(ii) Section 18 of the Limitation Act, 1963 which provides for the “effect of acknowledgment in writing”.

(iii) Section 19 of the Limitation Act, 1963 which stipulates the “effect of payment on account of debt or of interest on legacy”.

In the previous column, we had discussed that the recent ruling of the Supreme Court in Sesh Nath Singh v. Baidyabati Sheoraphuli Cooperative Bank Ltd.[3] does provide some respite as far as Section 14 of the Limitation Act is concerned and a creditor can use that provision to seek extension of limitation period. But there were still some lingering doubts on whether Section 14 could still come to the rescue of the creditors even when rightly pursuing remedy in another court or tribunal before coming to the National Company Law Tribunal (NCLT) in an application under Section 7 or Section 9 or Section10 of the IB Code.

Brief on Section 18 of the Limitation Act, 1963

Coming to issue (ii), Section 18 of the Limitation Act, 1963 provides:

Effect of acknowledgment in writing.—(1) Where, before the expiration of the prescribed period for a suit or application in respect of any property or right, an acknowledgment of liability in respect of such property or right has been made in writing signed by the party against whom such property or right is claimed, or by any person through whom he derives his title or liability, a fresh period of limitation shall be computed from the time when the acknowledgment was so signed.

(2) Where the writing containing the acknowledgment is undated, oral evidence may be given of the time when it was signed; but subject to the provisions of the Indian Evidence Act, 1872 (1 of 1872), oral evidence of its contents shall not be received.

Section 18 of the Limitation Act requires acknowledgment of liability to be made before the expiration of the prescribed period and to be in the form of, or in writing signed by the party against whom such right is claimed, in order to be effective to extend limitation.[4]

The fact that a debtor has acknowledged that there is debt is sufficient to restart the period of limitation.^[5] It is however essential that a person either making acknowledgment of liability or a person making the payment must make acknowledgment or payment by his own writing signed by him or in writing at least signed by him and such acknowledgment must be before the expiration of the existing period of limitation[6]. In other words, there must be a written acknowledgment containing an admission of a subsisting liability, and a mere admission of past liability is not sufficient to constitute such an “acknowledgment”.^[7]

Judicial Discourse on the Applicability of Section 18

The issue of Section 18 was explicitly a matter of issue in Babulal Vardharji. In Babulal Vardharji^[8], the appellant before the National Company Law Appellate Tribunal (NCLAT) argued that the default took place in July 2011 and the application under Section 7 being filed in March 2018 was barred by limitation. The respondent, in turn, contended that there is a continuous cause of action. The NCLAT noted the proceedings undertaken by the respondent creditor before the Debts Recovery Tribunal under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI Act) and the same were pending. The financial creditor also brought on record a letter dated 31-7-2018 issued by the appellant seeking a one-time settlement (OTS) with the creditor bank. Based on a culmination of these factors, the NCLAT found that the claim is not time barred as well.

However, when the matter in Babulal Vardharji went into appeal before the Supreme Court[9] the Supreme Court set aside the order of the NCLAT. The Supreme Court held that since the date of default is 8-7-2011, therefore, on account of the Limitation Act, the application under Section 7 is time barred. The Court also specifically discussed the reliance made by the NCLAT on the pendency of the application under Section 19 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 and the fact that corporate debtor had made a prayer for OTS in July 2018. The Supreme Court on these grounds stated that “noticeably, though the Appellate Tribunal has referred to [these factors] … [but the NCLAT] has not recorded any specific finding about the effect of these factors.”[10]

While the Court sought to answer if Section 18 of the Limitation Act is applicable, in the end, it seems to have confined its findings only to the facts of the case. It stated:

… even if it be assumed that the principles relating to acknowledgment as per Section 18 of the Limitation Act are applicable for extension of time for the purpose of the application under Section 7 of the Code, in our view, neither the said provision and principles come in operation in the present case nor do they enure to the benefit of Respondent 2 for the fundamental reason that in the application made before NCLT, Respondent. 2 specifically stated the date of default as “8-7-2011 being the date of NPA” . …

35.1. … [i]n other words, even if Section 18 of the Limitation Act and principles thereof were applicable, the same would not apply to the application under consideration in the present case, looking to the very averment regarding default therein and for want of any other averment in regard to acknowledgment.[11]

Therefore, it is submitted that the ruling in Babulal Vardharji[12] still left the issue of applicability of Section 18 of the Limitation Act unaddressed. The Supreme Court has overlooked (a) the acknowledgment of debt on account of the OTS offer; (b) the pending litigation before Debts Recovery Tribunal; and (c) the differentiation that NCLAT made between the limitation in filing the application vis-à-vis the time barred of the debt amount. The NCLAT applied Article 137 to the filing of an application under the IB Code to only hold that the application itself is not barred on account of the law of limitation. Regarding the bar on the debt amount itself, the NCLAT analysed that all the due attempts are being made to recover the debt amount before the appropriate forum (before the IB Code came to be enacted).

The Court had the opportune occasion to categorically put to rest any debate on the applicability of Section 18 of the Limitation Act to extend limitation for an application under Section 7 or Section 9 under the IB Code. However, the same was a missed opportunity.

The ruling in Babulal Vardharji[13] formed the basis of the NCLT ruling in Lampex Electronics Ltd. v. AMI Tech (India) (P) Ltd.[14] and a Calcutta High Court ruling in Gouri Shankar Chatterjee v. SBI[15] where relying on Babulal Vardharji[16], the courts held that Section 18 is inapplicable.

However, in a decision dated 26-3-2021, the Supreme Court in Laxmi Pat Surana v. Union Bank of India[17] seems to have put to rest this issue with respect to Section 18.

The corporate debtor – guarantor in this case argued that the date of default was in the year 2010 when the account of the principal borrower was declared non-performing asset. The respondent creditor – bank, in turn, submitted that on account of the time-to-time acknowledgments of debt given by the principal borrower and even the guarantor – corporate debtor, the last of which was given on 8-12-2018 means that the debt is not time barred.

The Court, firstly, addressed the purport of Babulal Vardharji[18] with respect to the issue of whether Section 18 of the Limitation Act applies to an application under the IB Code. It put to rest that in that ruling the Supreme Court had not ruled out the application of Section 18 of the Limitation Act to the proceedings under the IB Code, if the fact situation of the case so warrants.

Subsequently taking note of the provision of Section 238-A of the IB Code, the Court opined that once the provisions of Limitation Act have been made applicable to the proceedings under the IB Code, as far as such provisions may be applicable, there remains no reason to exclude the effect of Section 18 of the Limitation Act to the proceedings initiated under the IB Code.

Therefore, it was directed that a fresh period of limitation be computed from the date of acknowledgment of a debt by the principal borrower and/or the corporate guarantor, including in particular the last communication dated 8-12-2018. Resultantly, the application of the financial creditor under Section 7 of the IB Code was found to be within the limitation by granting the benefit of exclusion of time period under Section 18 of the Limitation Act.

The same also formed the basis for the Supreme Court ruling in Asset Reconstruction Co. (India) Ltd. v. Bishal Jaiswal,[19] where the Court set aside the 5- Judge ruling of the NCLAT in V. Padmakumar,[20] which had held that entries in balance sheets would not amount to an acknowledgment of debt for the purpose of extending limitation under Section 18 of the Limitation Act.

The Court relied on the observations in Sesh Nath Singh[21] and the categorical position laid down in Laxmi Pat[22] to firstly conclude that Section 18 of the Limitation Act applies to the proceedings under the IB Code. The Court also set aside the ruling of the Calcutta High Court in Gouri Shankar Chatterjee.[23]

Then, the Court went on to discuss that how entries in a balance sheet may amount to an acknowledgment for the purposes of Section 18 of the Limitation Act.

The implication of this decision may be a matter of discussion since accounting rules, if conservative, may require recognition of claims even if the corporate debtor is contesting the same. Therefore, even when a dispute is under contest for a period of over 3 years, still the balance sheet of the company may show under the head of contingent liability of the notes in the balance sheet. Just to prevent any misinterpretation, the Court was cognizant of the same and even noted this circumstance and discussed as to when an entry in a balance sheet may not necessarily mean an acknowledgment of liability. The Court stated:

19. … this judgment holds that though the filing of a balance sheet is by compulsion of law, the acknowledgment of a debt is not necessarily so. In fact, it is not uncommon to have an entry in a balance sheet with notes annexed to or forming part of such balance sheet, or in the auditor’s report, which must be read along with the balance sheet, indicating that such entry would not amount to an acknowledgment of debt for reasons given in the said note.

***

32. … the statement of law contained in Bengal Silk Mills[24], that there is a compulsion in law to prepare a balance sheet but no compulsion to make any particular admission, is correct in law as it would depend on the facts of each case as to whether an entry made in a balance sheet qua any particular creditor is unequivocal or has been entered into with caveats, which then has to be examined on a case-by-case basis to establish whether an acknowledgment of liability has, in fact, been made, thereby extending limitation under Section 18 of the Limitation Act.[25]

With the rulings in Laxmi Pat[26] and Asset Reconstruction Co.[27], it is submitted that the issue of the application of Section 18 of the Limitation Act to the applications seeking initiation of resolution process under the IB Code is settled unequivocally and put to a categorical end.

Conclusion

The Supreme Court while reiterating the applicability of Section 18 of the Limitation Act to the applications seeking initiation of resolution process under the IB Code has set out the interpretative standards for future references. The missed opportunities of Babulal Vardharji[28] which was subsequently followed by the tribunals, and the High Courts now stand settled conclusively by the ruling in Laxmi Pat[29]. Similarly the erroneous determination by the NCLAT in V. Padmakumar[30] of the limitation issues concerning the acknowledgment of debt under Section 18 by virtue of entries in balance sheets of a company was equally enigmatic. While correcting this error, the Supreme Court reiterated the position settled in Laxmi Pat[31], putting a conclusive end to the issue of the application of Section 18 of the Limitation Act to the applications seeking initiation of resolution process under the IB Code.

† Akaant Kumar Mittal is an advocate at the Constitutional Courts, and National Company Law Tribunal, Delhi and Chandigarh. He is also a visiting lecturer at the NUJS, Kolkata and the author of the commentary Insolvency and Bankruptcy Code – Law and Practice.

The author gratefully acknowledges the research and assistance of Sh. Yash Borana, 4th Year, B.A.LLB. (Hons.), Student at National Law University, Nagpur, in writing this article.

^[1] B.K. Educational Services (P) Ltd. v. Parag Gupta and Associates, (2019) 11 SCC 633 : (2018) 5 SCC (Civ) 528.

^[2] (2019) 9 SCC 158 : (2019) 4 SCC (Civ) 308.

[3] 2021 SCC OnLine SC 244.

[4] Lakshmirattan Cotton Mills Co. Ltd. v. Aluminium Corpn. of India, (1971) 1 SCC 67 : AIR 1971 SC 1482; Laxmi Pat Surana v. Union Bank of India, 2021 SCC OnLine SC 267.

^[5] See also Shalini Publicity Creative (P) Ltd. v. Dena Bank, 2019 SCC OnLine NCLAT 91, para 7.

[6] Laxmi Pat Surana v. Union Bank of India, 2021 SCC OnLine SC 267, para 37.

^[7] Valliamma Champaka Pillai v. Sivathanu Pillai, (1979) 4 SCC 429.

^[8] Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries (P) Ltd., 2019 SCC OnLine NCLAT 295.

[9] Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries (P) Ltd., (2020) 15 SCC 1 : 2020 SCC OnLine SC 647.

[10] Ibid, para 12 (additions made]).

[11] Ibid, paras 35 and 35.1 (emphasis added).

[12] Ibid.

[13] Ibid.

[14] C.P. No. 1810/IBC/MB/2018.

[15] C.O. 1257 of 2020.

[16] (2020) 15 SCC 1 : 2020 SCC OnLine SC 647