The Supreme Court upheld the validity of debt acknowledgements in financial statements, affirming the timeliness of insolvency proceedings under the Insolvency and Bankruptcy Code.
The Supreme Court Bench of Justice Pamidighantam Sri Narasimha and Justice Sandeep Mehta reviewed an appeal and affirmed the decisions of the NCLT and NCLAT, establishing that the Corporate Debtor's entries in its financial statements constituted valid acknowledgements of debt under Section 18 of the Limitation Act, thereby extending the limitation period for initiating Corporate Insolvency Resolution Process (CIRP) under Section 7 of the IBC and confirming that the proceedings were initiated within the valid timeframe.
The Supreme Court, in its judgment, addressed the issue of initiating a Corporate Insolvency Resolution Process (CIRP) under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC). The case arose when UCO Bank, along with a consortium of lenders, extended loan and credit facilities to the Corporate Debtor for financing its thermal power project under various agreements. After the Corporate Debtor defaulted on repayments, its account was classified as a Non-Performing Asset (NPA) on November 5, 2014. Although the lenders initiated recovery actions under the SARFAESI Act and before the Debts Recovery Tribunal (DRT), UCO Bank subsequently filed an application under Section 7 of the IBC to commence insolvency proceedings.
The Corporate Debtor opposed the application, arguing that the Section 7 petition was time-barred and was not signed by an authorized person. It also contended that there was no debt owed under the terms of the credit agreements. The National Company Law Tribunal (NCLT), however, dismissed these objections. It held that the General Manager of the Bank had the authority to sign the application on behalf of the financial creditor. Furthermore, after examining the loan agreements, sanction letters, and credit documentation, the NCLT determined that the Corporate Debtor had indeed defaulted on repayment, thereby establishing the existence of the debt.
The primary contention revolved around the issue of limitation. The NCLT ruled that the acknowledgement of debt in the Corporate Debtor’s financial statements for the year ending March 31, 2017, extended the limitation period in accordance with Section 18 of the Limitation Act, 1963. The tribunal relied on Section 238A of the IBC, which makes the Limitation Act applicable to insolvency proceedings, and concluded that the filing of the Section 7 application in 2019 was within the extended limitation period. The NCLT also clarified that the absence of UCO Bank’s specific mention in the balance sheet did not invalidate the acknowledgement, as an acknowledgement of any financial creditor's debt suffices under the Code.
On appeal, the National Company Law Appellate Tribunal (NCLAT) upheld the NCLT’s findings. It observed that financial statements prepared under the Companies Act, 2013, do not mandate the disclosure of specific creditor names. The NCLAT further noted that the Corporate Debtor had not denied its liability to UCO Bank and had proposed a one-time settlement in 2016, reinforcing the acknowledgement of debt. Relying on the Supreme Court’s precedent in Asset Reconstruction Company v. Bishal Jaiswal, REEDLAW 2021 SC 04535, the NCLAT confirmed that entries in financial statements constitute valid acknowledgements under Section 18 of the Limitation Act.
The Supreme Court affirmed the decisions of both the NCLT and NCLAT, holding that the entries in the Corporate Debtor’s balance sheets amounted to clear acknowledgements of debt, thereby extending the limitation period. It emphasized that the statutory framework of the IBC allows the application of the Limitation Act, and any acknowledgement of liability within the prescribed limitation period renews the creditor's right to initiate insolvency proceedings. The Court found no merit in the argument that the absence of UCO Bank’s name in the financial records invalidated the acknowledgement. Concluding that the proceedings were rightly initiated within the extended limitation, the Court dismissed the appeal.
Mr. Balbir Singh, Senior Advocate represented the Appellant.
Mr. Partha Sil, Advocate appeared for the Respondent No. 1/Bank.
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