Unresolved riddle of the code and acknowledgement of debt

By Misha and Nikhil Mathur, Shardul Amarchand Mangaldas & Co
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The Insolvency and Bankruptcy Code, 2016 and its developing jurisprudence has been a hallmark of this pathbreaking legislation. However, one crucial cog in the wheel for the purposeful implementation and working of the code, which remains unresolved, is the applicability of section 18 of the Limitation Act, 1963, on the provisions of the code.

insolvency
Misha
Partner
Shardul Amarchand Mangaldas & Co

While the applicability of the Limitation Act to proceedings under the code now stands settled, on account of the various judicial pronouncements of the Supreme Court, as well as the introduction of section 238A within the framework of the code, an unanswered question remains as to whether acknowledgments in the balance sheet and other statutory filings, one time settlement (OTS) proposals, and balance confirmation letters from the corporate debtor would extend the period of limitation in terms of section 18 of the Limitation Act.

Position of conflict

The law regarding acknowledgements for application of section 18 of the Limitation Act to proceedings under the code remains far from certain. The National Company Law Appellate Tribunal (NCLAT), in Manesh Agarwal v Bank of India & Ors (a letter of acknowledgment of debt and an OTS proposal started a fresh period of limitation), Yogeshkumar Jashwantlal Thakkar v Indian Overseas Bank (debit confirmation letters amounted to an acknowledgment of debt, and thus extended the limitation period), and MM Ramachandran v South Indian Bank (an email and letter from the corporate debtor amounted to a valid acknowledgement), have recognised acknowledgments other than balance sheet acknowledgments as valid for the application of Section 18. The MM Ramachandran judgment was not interfered by the Supreme Court, but the challenges to the other two judgments are currently pending before the Supreme Court.

insolvency
Nikhil Mathur
Associate
Shardul Amarchand Mangaldas & Co

A bigger thorn in the eye remains as regards balance sheet acknowledgements, and various high courts and the Supreme Court, in a catena of judgments, have concluded that entries in the balance sheet shall be treated as an acknowledgment of debt for the purpose of the Limitation Act. However, the NCLAT, in V Padmakumar v Stressed Assets Stabilisation Fund, by a 4:1 majority, held that balance sheet acknowledgment being under the compulsion of law could not be treated as acknowledgement for the purposes of limitation.

Pertinently, the dissenting view in the Padmakumar judgment, while placing reliance on the existing jurisprudence of the various high courts and the Supreme Court, was of the view that the provisions of the Companies Act mandating filing of balance sheet cannot be treated as if they are coercive, and therefore acknowledgements in the balance sheet should be considered as valid acknowledgements.

The dissenting view also found favour by a three-judge bench of the NCLAT in Bishal Jaiswal v Asset Reconstruction Company, where the bench requested reconsideration of the Padmakumar judgment by placing reliance on the above-mentioned judgments of the Supreme Court and high courts (although the reference was strongly turned down vide judgment dated 22 December 2020, citing the same to be a misadventure that weakens the authority of law).

The NCLAT, in its 22 December 2020 judgment, also sought to place reliance on the Supreme Court’s judgment in Babulal Vardharji Gurjar v Veer Gurjar Aluminium Industries to turn down the reference, which inter alia held that section 18 of the Limitation Act had no role to play with respect to increasing the limitation period when it came to proceedings under the code, albeit specifically in the facts of the said case, where no pleadings to that effect existed.

Conclusion

The uncertainty requires resolution, as it is such comfort of extension of limitation upon acknowledgment that gives lenders the comfort to allow extension of time or restructuring in genuine cases, and non-availability of the comfort would force lenders to rush to court at the first instance of default.

Specifically, the law regarding non-admissibility of balance sheet acknowledgments as valid acknowledgement requires revisiting inter alia in view of: (1) incorrect consideration of the position of law that concludes balance sheet entries are an acknowledgment for the purpose of limitation (including by the Supreme Court in Mahavir Cold Storage v CIT); and (2) statutory mandate for preparation of balance sheet not being coercive, and there being no compulsion to make a particular admission, a balance sheet acknowledgement cannot be rendered to be an exception to section 18 of the Limitation Act. Similarly, the status of other voluntary acknowledgements such as OTS proposals, balance confirmation letters, etc., requires more clarity from the Supreme Court.

All eyes and hopes now remain on the Supreme Court and pending challenges to solve this acknowledgment riddle vis à vis the code.

Misha is a partner and Nikhil Mathur is an associate at Shardul Amarchand Mangaldas & Co. Siddhant Kant, a principal associate at the firm, also contributed to this article.

Shardul Amarchand Mangaldas & CoShardul Amarchand Mangaldas & Co
Amarchand Towers, 216
Okhla Industrial Estate, Phase III
New Delhi 110 020, India
Contact details:
T: +91 98 1859 8427
E: misha@amsshardul.com
E: siddhant.kant@amsshardul.com