WHETHER ENTRY IN BALANCE SHEET IS ACKNOWLEDGMENT OF DEBT?
WHETHER LIMITATION ACT, 1963 APPLIES TO IBC? | YES, by virtue of Section 238A IBC |
WHETHER SECTION 18 APPLIES TO IBC? | YES, by virtue of Section 238A IBC r/w Sesh Nath Judgment of Apex Court |
WHETHER FILLING OF BALANCE SHEET IS MANDATORY IN LAW? | YES, by virtue of Section 2(40) r/w Section 92, 128 129, 134, & 137 of companies act, 2013 |
WHETHER ENTRY IN BALANCE SHEET IS ACKNOWLEDGMENT OF DEBT? | YES, but it will be a question of fact depends on reading of auditor report, balance sheet, annexures to report would show if there is acknowledgment in unequivocal terms |
FACTS
The Corporate debtor undertook a
thermal power project in year 2009 where it has taken various credit facilities
from various banks including SBI. It has defaulted in payments and banks sent
loan recall notice but failed & account declared as NPA. Thereafter major
banks assigned their debts to an Assets reconstruction company which filed
Section 13(2) SARFESI Notice and took possession of assets of Corporate debtor
and thereafter filed Section 7 IBC Petition before NCLT and same was admitted
by it holding that entries in balance sheet of Corporate debtor was
acknowledgment of debt under Section 18 of Limitation act, 1963
But NCLAT in appeal 3 member bench holding that there require
some corrections in Judgment of 5 member bench of V Padmakumar (4:1) but
Chairperson of NCLAT refused to refer it to larger bench holding that 3 bench
was incompetent to refer the matter to larger bench. Hence, matter came to Apex Court
Contentions of appellant
1. Judgment
of V Padmakumar was per incurriam because it had not considered the Judgments
of apex court
2. By
virtue of Section 238A IBC, Section 18 of Limitation applicable to IBC
3. Mere
because it is mandatory to file balance sheet doesn’t mean it is mandatory to
disclose liability in balance sheet because content of balance sheet depends on
company
Contentions of Respondents
1. Entries
in balance sheet as Acknowledgment of debt applies only to recovery proceedings
and IBC is not recovery proceedings
2. In
original form, the date of default was not mentioned by financial creditor and
he mentioned it only through supplementary affidavit so petition should have
dismissed because it is non-curable defect
3. By
reading auditor report along-with balance sheet, there was no unequivocal
acknowledgment of debt because caveat entered by way of notes in auditor report
Court Observations
On IBC Section 238A
& Limitation act, 1963
1.
Section 238A of the IBC was added by way of IBC,
2018 2nd amendment
2.
In
Jignesh Shah v. Union of India, (2019) 10 SCC 750
Considering that
the Limitation Act applies only to courts, unless made statutorily applicable
to tribunals, the Committee was of the view that such Act should be made to
apply to the IBC as well, observing that though the IBC is not a debt recovery
law, the trigger being “default in payment of debt” would render the exclusion
of the law of limitation “counter-intuitive”. Thus, it was made clear that an application
to the IBC should not amount to resurrection of time-barred debts which, in any
other forum, would have been dismissed on the ground of limitation.
3. In
Sesh Nath Singh v. Baidyabati Sheoraphuli Co-operative Bank Ltd., Civil Appeal No. 9198 of 2019 (decided on 22.03.2021)
Section 238A of the IBC makes the provisions
of the Limitation Act, as far as may be, applicable to proceedings before the
NCLT and the NCLAT. The IBC does not exclude the application of Section 6 or 14
or 18 or any other provision of the Limitation Act to proceedings under the IBC
in the NCLT/NCLAT. All the provisions of the Limitation Act are applicable to
proceedings in the NCLT/NCLAT, to the extent feasible.
We see no reason why Section 14 or 18 of the
Limitation Act, 1963 should not apply to proceeding under Section 7 or Section
9 of the IBC
4. In Laxmi Pat Surana v. Union Bank of
India, Civil Appeal No. 2734 of 2020, a judgment delivered on 26.03.2021
Section 238A of
the Code, as enacted, is clarificatory in nature and being a procedural law had
been given retrospective effect; which included application of the provisions
of the Limitation Act on case-to-case basis. Indeed, the purport of amendment
in the Code was not to reopen or revive the time barred debts under the
Limitation Act. At the same time, accrual of fresh period of limitation in
terms of Section 18 of the Limitation Act is on its own under that Act
On balance sheet & acknowledgment of debt
1.
In Mahabir Cold Storage v. CIT, 1991 Supp (1) SCC 402
The entry made
in the books of accounts, including the balance sheet, can amount to an acknowledgement
of liability within the meaning of Section 18
2. In
A.V. Murthy v. B.S. Nagabasavanna,
(2002) 2 SCC 642
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 31-3-1997 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
3. In
Calcutta High Court in Bengal Silk Mills Co. v. Ismail Golam Hossain Ariff,
1961 SCC OnLine Cal 128
Though the filing of a balance sheet is by
compulsion of law, the acknowledgement 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 acknowledgement of debt for reasons given in the said note.
On Companies act, 2013
1.
Section
2(40) of the Companies Act defines financial statement which includes;
(i)
a balance sheet as
at the end of the financial year
(ii)
a profit
and loss account, or in the case of a company carrying on any activity not for
profit, an income and expenditure account for the financial year
(iii)
cash flow statement for the financial year;
(iv)
a
statement of changes in equity, if applicable; and
(v)
(v) any
explanatory note annexed to, or forming part of, any document referred to in
sub-clause (i) to sub-clause (iv):
Provided that the financial statement, with
respect to One Person Company, small company and dormant company, may not include
the cash flow statement
2.
Under
Section 92, every company is to prepare an annual return containing certain
particulars
3.
As
Section 128, every company shall prepare and keep at its registered office,
books of accounts and financial statements for every financial year
4.
As per
Section 129 states that financial statement shall give true and fair view of
state of affairs of company and also comply with accounting standards
5.
As per Section
134, financial statements are to be approved by the Board of Directors before
they are signed, and the auditor’s report, as well as a report by the Board of
Directors, is to be attached to each financial statement
6.
As per Section
137, copies of financial statements are then to be filed with the Registrar of
Companies
7.
Hence no
doubt filling of balance sheet is mandatory in law and perusal of Section 134
shows that notes attached to balance sheet/ auditor report also form part of
balance sheet
Conclusion
1.
Majority Judgment in V Padmakumar is
incorrect because it has not considered the Judgments of apex court and
minority view was correct in law
2.
But
since Corporate debtor never contend in pleading that balance sheet entry is
acknowledge of debt so this judgment of no use but court with cost of R.S
1,00,000/- allowed corporate debtor to plead before NCLAT in its WS that there
is acknowledgement of debt in balance sheet
3.
Whether
entry in balance there is acknowledgment in debt is a question of fact depends
on facts of the case and pleading
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