Balance Sheet Acknowledgment Valid for IBC Limitation: SC

Introduction

In a pivotal judgment that strengthens the jurisprudence on limitation under the Insolvency and Bankruptcy Code, 2016 (IBC), the Supreme Court in Vidyasagar Prasad v. UCO Bank & Anr. (2024 INSC 810) has reaffirmed the legal validity of balance sheet entries and one-time settlement (OTS) proposals as acknowledgments of debt under Section 18 of the Limitation Act. This decision reaffirms that such acknowledgments can effectively extend the limitation period for initiating proceedings under Section 7 of the IBC.

1. Factual Background and Procedural History

Vidyasagar Prasad, the suspended director of the corporate debtor, challenged the initiation of the Corporate Insolvency Resolution Process (CIRP) by UCO Bank. The company had availed loan and credit facilities from UCO Bank and a consortium of lenders through agreements executed between 2010 and 2012 for the establishment of a thermal power plant.

Upon default in repayments, the corporate debtor’s account was classified as a Non-Performing Asset (NPA) on 5 November 2014. The bank initiated recovery proceedings under the SARFAESI Act and before the Debt Recovery Tribunal (DRT).

On 13 February 2019, UCO Bank filed an application under Section 7 of the IBC before the NCLT Kolkata Bench. The application was admitted. The director challenged the initiation on the grounds that the application was barred by limitation and was not supported by clear acknowledgment of debt.

Both the NCLT and NCLAT upheld the application’s admissibility. The matter reached the Supreme Court.

2. Identification of Legal Issues

The Supreme Court was called upon to decide:

1. Whether the entries in the balance sheets and auditor’s notes of the corporate debtor constitute acknowledgment of debt under Section 18 of the Limitation Act, 1963.
2. Whether an OTS proposal letter by the corporate debtor can independently constitute such acknowledgment.
3. Whether the limitation period for initiating CIRP under Section 7 of the IBC can be extended based on such acknowledgments, even if the original default occurred more than three years earlier.

3. Arguments of the Parties

Appellant (Suspended Director):

• Contended that the entries in the balance sheets for FY 2017 and FY 2019 did not explicitly name UCO Bank and hence could not qualify as acknowledgment of debt.
• Argued that general financial disclosures without reference to a specific creditor do not suffice under Section 18 of the Limitation Act.
• Asserted that the limitation period expired three years after the NPA classification in 2014, making the Section 7 application time-barred.

Respondents (UCO Bank):

• Submitted that the balance sheets were statutory documents filed under the Companies Act and contained clear references to outstanding borrowings.
• Argued that an OTS proposal dated 7 June 2016 further evidenced acknowledgment of liability and extended the limitation period.
• Cited precedent including Asset Reconstruction Company (India) Ltd. v. Bishal Jaiswal, Dena Bank v. C. Shivakumar Reddy, and Laxmi Pat Surana v. Union Bank of India to support their position.

4. Court’s Analysis and Reasoning

a. Applicability of Section 18 of Limitation Act to IBC

The Court reaffirmed that Section 238A of the IBC makes the Limitation Act applicable to IBC proceedings. Thus, acknowledgment of debt under Section 18 can extend the limitation period for initiating CIRP under Section 7.

“Section 18 of the Limitation Act would come into play every time when the corporate debtor acknowledges their liability to pay the debt…”

The Court relied heavily on its earlier decisions in Dena Bank and Laxmi Pat Surana which clarified that acknowledgment must be made before the expiration of the original limitation period and can renew the limitation cycle.

b. Balance Sheets as Acknowledgment

The Court found that:

• Balance sheets prepared in accordance with Section 129 and Schedule III of the Companies Act are presumed to reflect actual liabilities.
• Specific naming of creditors is not mandatory under the Companies Act or for acknowledgment under Section 18.
• Notes to accounts and auditor’s remarks are integral to such acknowledgment and must be interpreted contextually.

The Court followed the standard laid down in Bishal Jaiswal (2021), where it was held that balance sheets can constitute valid acknowledgment, depending on facts and context.

“A liberal construction of the statement in question should be given… the words used… must relate to a present subsisting liability.”

c. One Time Settlement (OTS) Letter

The appellant’s letter dated 7 June 2016 proposing a one-time settlement to UCO Bank was deemed an unequivocal acknowledgment of debt.

Relying on Lakshmirattan Cotton Mills and Dena Bank, the Court held that:

• An OTS proposal reveals a jural relationship of debtor and creditor.
• Such communications extend the limitation period if made before the expiry of the initial three years from default.

5. Final Conclusion and Holding

The Supreme Court dismissed the appeal and upheld the admission of the Section 7 application, reiterating that:

• Balance sheet entries and OTS proposals constitute valid acknowledgment of debt under Section 18.
• The limitation period was correctly extended due to these acknowledgments.
• The Section 7 application filed on 13 February 2019 was within the extended limitation period.

The judgment offers authoritative clarification on how and when entries in corporate financial records and settlement proposals can restart limitation under IBC.

FAQs:

1. Can a company’s balance sheet extend limitation under IBC?

Yes. Balance sheet entries that acknowledge outstanding liabilities can extend the limitation period under Section 18 of the Limitation Act when initiating IBC proceedings.

2. Does an OTS proposal count as acknowledgment of debt under IBC?

Yes. A One Time Settlement (OTS) letter reflects acknowledgment of a subsisting liability and can restart the limitation period if made before the expiry of the original limitation.

3. What is the limitation period for filing a Section 7 IBC application?

The standard limitation period is three years from the date of default. However, it can be extended through acknowledgment of debt under Section 18 or condonation under Section 5 of the Limitation Act.

4. Is naming the creditor necessary in balance sheets for acknowledgment?

No. It is not mandatory to name the creditor. As long as the entries refer to the liability and indicate a debtor-creditor relationship, they qualify as acknowledgment under the law.

5. Can a company deny liability if it proposes a One Time Settlement?

No. Proposing a settlement acknowledges the existence of a debt. Courts consider such proposals as valid acknowledgments under Section 18 of the Limitation Act.

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