Balance Sheets Entries Can Amount To Acknowledgement Of Debt U/s 18 Limitation Act: Supreme Court Sets Aside NCLAT Full Bench Ruling

The Supreme Court has held that entries in balance sheets can amount to acknowledgement of debt for the purpose of extending limitation under Section 18 of the Limitation Act.

A bench headed by Justice RF Nariman set aside a judgment of Full Bench of National Company Law Appellate Tribunal in the case V Padmakumar v Stressed Assets Stabilization Fund which held otherwise. 

Issues

The issue raised before the Apex Court bench in appeal was whether an entry made in a balance sheet of a corporate debtor would amount to an acknowledgement of liability under Section 18 of the Limitation Act.? Yet another issue was whether Section 18 of the Limitation Act, which extends the period of limitation depending upon an acknowledgement of debt made in writing and signed by the corporate debtor, is also applicable under Section 238A, given the expression "as far as may be" governing the applicability of the Limitation Act to the IBC? (Second issue, the bench observed that it is settled that Section 18 is applicable)

To answer the first issue, the bench, also comprising Justices BR Gavai and Hrishikesh Roy referred to various decisions which have held that an entry made in the books of accounts, including the balance sheet, can amount to an acknowledgement of liability within the meaning of Section 18 of the Limitation Act. [ Mahabir Cold Storage v. CIT, 1991 Supp (1) SCC 402; A.V. Murthy v. B.S. Nagabasavanna, (2002) 2 SCC 642; S. Natarajan vs. Sama Dharman, Crl. A. No. 1524 of 2014].

Particularly referring to an old Calcutta High Court decision in Bengal Silk Mills Co. v. Ismail Golam Hossain Ariff, 1961 SCC OnLine Cal 128 : AIR 1962 Cal 115, the bench observed:

"Importantly, this judgment holds that 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."

Referring to various provisions of Companies Act qua filing of Balance Sheets, the bench observed thus:

A perusal of the aforesaid Sections would show that there is no doubt that the filing of a balance sheet in accordance with the provisions of the Companies Act is mandatory, any transgression of the same being punishable by law. However, what is of importance is that notes that are annexed to or forming part of such financial statements are expressly recognised by Section 134(7). Equally, the auditor's report may also enter caveats with regard to acknowledgements made in the books of accounts including the balance sheet. A perusal of the aforesaid would show that the statement of law contained in Bengal Silk Mills (supra), 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 acknowledgement of liability has, in fact, been made, thereby extending limitation under Section 18 of the Limitation Act.

Taking note of these judgments, the bench observed that the majority decision of the Full Bench in V. Padmakumar (supra) is contrary to the aforesaid catena of judgments.

"The minority judgment of Justice (Retd.) A.I.S. Cheema, Member (Judicial), after considering most of these judgments, has reached the correct conclusion. We, therefore, set aside the majority judgment of the Full Bench of the NCLAT dated 12.03.2020. The NCLAT, in the impugned judgment dated 22.12.2020, has, without reconsidering the majority decision of the Full Bench in V. Padmakumar (supra), rubber-stamped the same. We, therefore, set aside the aforesaid impugned judgment also.", the court added.

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