Balance sheet and acknowledgment of responsibility at IBC – debate far from settled

The applicability of Section 18 of the Limitation Act (Section 18), which provides that a new period of limitation is calculated from the time of acknowledgment of liability in writing before the expiration of the limitation period prescribed. In the context of the IBC, the question is whether such an acknowledgment of debt in the entries of a balance sheet would extend the limitation period for the purpose of filing a request to open a dispute resolution process. Business Insolvency (CIRP) under Section 7 of the IBC (Section 7 Application).

On this point, the National Company Law Appellate Tribunal (NCLAT) of V.Padmakumar v. Stabilization fund for stressed assets & Anr 2020 CSC Online NCLAT 417 (Padmakumar) ruled that the balance sheet entries do not constitute an IOU under Section 18. As explained in our previous Publish, Padmakumar deviated from the well-established position of the law on this issue.

Whereas Padmakumar has not been appealed to the Supreme Court of India (Supreme Court), Padmakumar was reviewed once again by the NCLAT in Bishal Jaiswal v. Asset Reconstruction Company (India) Limited and Anr (September 25, 2020, Company Appeal (AT) (Insolvency) No. 385 of 2020) (Bishal). In this case, the NCLAT remanded judgment in Padmakumar for reconsideration to a larger bench (Reference). In this Ergo, we will discuss the grounds on which the NCLAT made the referral.

FACTS OF THE CASE

In 2014, Corporate Power Limited (Corporate Debtor) had recourse to credit facilities with a consortium of lenders (Lenders) but defaulted on its payment obligations. Subsequently, the lenders issued loan recall notices in 2015 and subsequently assigned their credit facilities in favor of Asset Reconstruction Company (India) Limited (ARCIL). Subsequently, ARCIL filed a Section 7 application in 2018 before the Kolkata Bench of the Hon’ble National Company Law Tribunal (NCLT-Kolkata) for the commencement of a CIRP against the debtor company. At the stage of admitting the Section 7 claim before the NCLT-Kolkata, the debtor company challenged the admissibility of the Section 7 claim mainly on the grounds that the said claim was time-barred. The NCLT-Kolkata found that the debtor company had recognized the debt in its balance sheet in 2017, thereby renewing the calculation of the statute of limitations and therefore the Section 7 claim filed in 2018 was therefore within the limitation period (judgment of February 19, 2020 in CP (IB) No. 23/KB/2019). An appeal has been filed against the judgment of NCLT Kolkata before the NCLAT.

Corporate Debtor Submissions: The debtor company argued that although its accounts were declared non-performing assets (NPA) by the lenders in 2014, the Section 7 request was filed by ARCIL in 2018, after a delay of nearly five years. , and was therefore prescribed. Further, the debt records in its balance sheet could not be considered a written acknowledgment of debt under Section 18 in light of the NCLAT’s submissions in Padmakumar, since they had been made involuntarily and under the constraint of the law. It has also been argued that the Supreme Court of Babulal Vardharji Gurjar v. Veer Gurjar Aluminum Industries Private Limited (2020) SCC OnLine SC 647 had held that Article 18 is not applicable to cases of insolvency (babulal). Accordingly, the decision taken by the bench of 5 (five) members of the NCLAT in Padmakumar does not need to be reconsidered and binds the 3 (three) members of the bench in Bishal.

Arguments of ARCIL: ARCIL argued that it is a well-established legal position that entries in a balance sheet amount to an acknowledgment of debt for the purposes of Article 18. After the debtor company’s account has been classified as NPA by the lenders, the debtor company repeatedly admitted and acknowledged its debt on its balance sheet for the years ended March 31, 2015, March 31, 2016 and March 31, 2017, under which the statute of limitations resumed with each acknowledgment of debt. It has further been argued that the Supreme Court of babulal simply refused to grant the affected creditor the benefit of Article 18 in light of the unique facts and circumstances of the case and did not state a general principle that the provisions of Article 18 are not applicable at IBC.

NCLAT COMMENTS

The NCLAT observed that Padmakumar deserves to be reconsidered among others for the following reasons:

It is well established that balance sheet entries are IOUs within the meaning of Article 18. Accordingly, the majority opinion in Padmakumar has taken a position contrary to a well-established legal position without justifying them.

The reasoning used in Padmakumar to conclude that the compulsory filing of bankruptcy under section 92 of the Companies Act, 2013 (“CA 2013”) does not amount to an admission of liability had already been rejected in Bengal Silk Mills Co. v. Ismail Golam Hossain Ariff, AIR 1962 cal. 115. It has been observed that the balance sheet contains an admission of liability, and the officers of the company who make and sign the balance sheet intend to make such admission. Thus, balance sheets do not cease to be an acknowledgment of responsibility simply because these acknowledgments stem from a legal obligation.

Re babulal, the NCLAT noted the observations of the Supreme Court that the issue of limitation is essentially a question of mixed law and fact and where a party seeks the application of a particular extension or enlargement provision statute of limitations, the relevant facts are necessary to be pleaded and the required proof must be provided. The Supreme Court observed in babulal that the creditor pleaded no acknowledgment of debt by the borrower and, accordingly, refused to allow the affected creditor the benefit of Article 18. The NCLAT observed that the aforementioned observations of the Supreme Court cannot be interpreted as having stated a general principle that Article 18 is inapplicable to the IBC.

In addition to the above, the NCLAT has also established the guiding principle to be followed by a smaller bench of a court/tribunal (Smaller Bench) in referring judgment to a larger bench of such a court/tribunal (Larger Bench). Bench) for reconsideration. Ordinarily, the judgment of a larger bench binds the smaller bench. However, if the Restricted Panel concludes that the judgment rendered by the Extended Panel is so incorrect that under no circumstances can it be tracked, he should refer the case to a larger formation setting out the reasons for his disagreement with the opinion of the larger formation. Thus, the NCLAT has set a relatively high threshold for a smaller bank to seek a benchmark and deviate from the decision of a larger bank.

COMMENT

Considering that the majority opinion in Padmakumar deviated from a well-established legal position, the NCLAT in Bishal took cognizance of this deviation and observed that the dissenting opinion of Judge Cheema in Padmakumar is consistent with established case law in this area. It remains to be seen whether the formation constituted pursuant to the Reference follows Padmakumar. This can have significant effects on old defaults that were outstanding/in default for more than three years prior to the enactment of the IBC.

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