Evidentiary Value of Acknowledgement of Debt in Books of Accounts

INTRODUCTION

The National Company Law Appellate Tribunal (NCLAT) had recently constituted a 5-judge bench in the case of V Padmakumar v. Stressed Assets Stabilization Fund (SASF) & Anr. This is one of the rarest of cases in which the NCLAT had constituted a 5- judge bench.

The bench had to deal with one of the interesting issues in which it had to decide whether there is an acknowledgement of ‘debt’ by the ‘Corporate Debtor’, if there is an entry for the same in the balance sheet of the ‘Corporate Debtor’? The NCLAT in its ruling, passed a majority decision by 4:1, that the reflection of a debt in balance sheet does not tantamount to acknowledgement of debt.

In this article, we shall be analyzing whether the NCLAT was right in reasoning that the books of accounts can never be considered as an evidence of acknowledgement of debt by the ‘Corporate Debtor’ just because its filing is mandatory under section 92 of the Companies Act, 1956. Further, we shall also be analyzing whether the acknowledgment of ‘debt’ in books of account every year, extends the limitation period?

FACTS

In this case, M/s. Stressed Assets Stabilization Fund (SASF), who was the Financial Creditor, filed an application under section 7 of the Insolvency and Bankruptcy Code(IBC) for initiating Corporate Insolvency Resolution Process (CIRP) against M/s. Uthara Fashion Knitwear Limited, which is the Corporate Debtor. The Adjudicating Authority by an order admitted the application for CIRP. The Corporate Debtor had previously requested the Industrial Development Bank of India (IDBI) for financial assistance of Rs.6 crores, which was granted by way of Term Loan Agreement to the Corporate Debtor. But the account of the Corporate Debtor was declared as Non-Performing Asset in 2002. In the following year, Industrial Development Bank of India(IDBI) initiated Debt Recovery proceedings against the Corporate Debtor under Section 19 of the Recovery of Debts Due to Banks and Financial Institutions Act 1993 (RRDDBFI).The decree was passed in 2009, and a Recovery Certificate was issued, which was accounted for and recorded in the Balance Sheet of the Corporate Debtor as on 31st March, 2012.

The Corporate Debtor contended that the application under Section 7 filed in the year 2019 was barred by limitation. Corporate Debtor relied upon the case of B.K. Educational Services Private Limited v. Parag Gupta and Associates, which stated that “Article 137 of the Limitation Act, 1963 will be applicable to application under Sections 7, 9 or 10 of the ‘I&B Code’ since the date of inception of the Code (commencement of the Code i.e. 1st December, 2016).” But it is to be noted that the section 238A of the IBC which deals with ‘proceedings’ or ‘appeals’ before the Adjudicating Authority, the National Company Law Appellate Tribunal, the Debt Recovery Tribunal or the Debt Recovery Appellate Tribunal did not cover application under Sections 7, 9 or 10 of IBC.

The NCLAT further relied upon the case of Vashdeo R. Bhojwani v. Abhyudaya Co-operative Bank Limited and Anr., wherein it was observed that “It is thus clear that since the Limitation Act is applicable to applications filed under Sections 7 and 9 of the Code from the inception of the Code, Article 137 of the Limitation Act gets attracted. “The right to sue”, therefore, accrues when a default occurs. If the default has occurred over three years prior to the date of filing of the application, the application would be barred under Article 137 of the Limitation Act, save and except in those cases where, in the facts of the case, Section 5 of the Limitation Act may be applied to condone the delay in filing such application. Following this judgment, it is clear that when the recovery certificate dated 24-12-2001 was issued, this certificate injured effectively and completely the appellant’s rights as a result of which limitation would have begun ticking.”

The NCLAT further relied on section 18 of the Limitation Act, 1963, which states that for filing a suit or application in respect of any property or right, it is necessary that an acknowledgment of liability in respect of such property or right has to be given in writing, which has to be signed by the party against whom such right is being claimed.

The NCLAT observed that the SASF has failed to produce any document or any acknowledgement in writing from the ‘Corporate Debtor’ with respect to the debt. Hence, the books of Account could not be treated as acknowledgement of liability.

In the other aspect of the Judgement, the NCLAT went into the analysis of when the acknowledgement of debt should be given. The NCLAT relied upon the decision of Sampuran Singh and Ors. v. Niranjan Kaur and Ors., wherein it was held that “the acknowledgment, if any, has to be prior to the expiration of the prescribed period for filing the suit. In the present case, the account was declared NPA since 1st December, 2008 and therefore, the suit was filed. Thereafter, any document or acknowledgment, even after the completion of the period of limitation i.e. December, 2011 cannot be relied upon. For the said reason, we hold that the application under Section 7 is barred by limitation, the accounts of the ‘Corporate Debtor’ having declared NPA on 1st December, 2008.” Further, the court relied upon the judgement of Sh. G Eswara Rao v. Stressed Assets Stabilization Fund, wherein it was held that “As the filing of Balance Sheet/ Annual Return being mandatory under Section 92(4), failing of which attracts penal action under Section 92(5) & (6), the Balance Sheet / Annual Return of the ‘Corporate Debtor’ cannot be treated to be an acknowledgement under Section 18 of the Limitation Act, 1963. If the argument is accepted that the Balance Sheet / Annual Return of the ‘Corporate Debtor’ amounts to acknowledgement under Section 18 of the Limitation Act, 1963 then in such case, it is to be held that no limitation would be applicable because every year, it is mandatory for the ‘Corporate Debtor’ to file Balance Sheet/ Annual Return, which is not the law.” Thus, due to the exhaustion of limitation period the NCLAT could not accept the books of accounts as evidence for acknowledgement.

ANALYSIS

After reading the judgement, it is felt that what needs to be analyzed is the relation of acknowledgement of debt in books of account and the applicability of the limitation Act. Further, an understanding was required about the jurisprudence of the acknowledgement of debt in India.

There were several judgements which have discussed on the evidentiary value of acknowledgement of debt in books of accounts. In the case of In Re Padam Tea case, the Hon’ble Calcutta High Court stated that the balance sheet must be read along with the director report to ensure that the debt that is being acknowledged in the balance sheet has passed a proper procedure. In the case of L.C. Mills v. Aluminium Corporation of India Ltd, a liberal interpretation was given to the question of acknowledgement of debt and limitation act by the Hon’ble Supreme Court that “In order to find out the intention of the document by which acknowledgement was to be construed the document as a whole must be read and the intention of the parties must be found out from the total effect of the document read as a whole." This has also been stated in the case of Ambika Mills v CIT, in which it was held that “ The liability of the assessee company, in these circumstances, therefore to pay the unpaid and unclaimed wages cannot be said to be barred by limitation on account of the yearly acknowledgment thereof in the balance-sheets and obviously, therefore, those amounts could not be said to have been fictionally stamped with the character of profits and gains as all along they retained the character of liabilities owing to the annual acknowledgments made by the assessee company.” These cases indicate that even though the publishing of books of accounts is a statutory requirement under section 92 of the Income tax Act, it does have an evidentiary value in the court of law to determine the acknowledgement of debt. Thus, it is felt that the NCLAT has wrongly interpreted that indication of liability in books of accounts cannot be considered as an acknowledgement of debt.

It is also important to analyze the acknowledgement of debt and its relation with the Limitation Act. Earlier in the case of Kashinath Sankarappa Wani Vs. New Akot Cotton Ginning &; Pressing Co., Ltd., the Hon’ble Supreme Court held that “while dealing with Resolution of Board of Directors and while considering Balance Sheet with regard to question of limitation, Hon’ble Supreme Court examined the Resolution and also the Balance Sheet and in the context of the facts of that matter came to a conclusion that the Resolution or the Balance Sheet did not help the Appellant. It is not that it was held that for the purpose of limitation, Balance Sheet cannot be considered at all.” But later, the opinion regarding the same started changing. In the case of Ambika Mills, it has been stated that indication of liability, every year in the books of accounts, gives rise to a new limitation period. Similarly, in the case of Bengal Silk Mills Co. v Ismail Golam Hossain Ariff , it was held that indication of liability in the balance sheet and the ratification of the same by the board of directors in the annual general meeting, leads to refreshment of the limitation period , on the condition that balance sheet must have been prepared under ‘compulsion of statutes’. In the case of Shahi Exports Pvt Ltd. v CMD Builtech Pvt Ltd it was stated that “ an entry made in the company's balance sheet amounts to an acknowledgement of the debt and has the effect of extending the period of limitation under section 18 of the Limitation Act, 1963.”Even the Hon’ble Supreme Court in the case of Mahabir Cold Storage v CIT , held that “The entries in the books of accounts of the appellant would amount to an acknowledgement of the liability within the meaning of Section 18 of the Limitation Act, 1963, and extend the period of limitation for the discharge of the liability as debt.” Hence, by observations in these judgements it can be concluded that acknowledgment of ‘debt’ in books of account every year, extends the limitation period.

CONCLUSION

By looking at the precedents set by the courts, it has been an accepted practice that acknowledgement of debt in the books of accounts, is an implied acknowledgement on the part of the Corporate debtor to acknowledge debt. Further, several cases have been highlighted in which the books of accounts have also been considered as valid evidence if it has been passed after following the proper process. Hence, it is felt that NCLAT judgement shall be challenged in the Supreme Court and is likely to be overruled.