WHETHER ENTRY IN BALANCE SHEET WILL LEAD TO AN ACKNOWLEDGMENT U/S 18 OF THE LIMITATION ACT 1963?

Introduction

Everything has an expiry date and so has the right to remedy. The Limitation Act 1963 is the watchdog which regulates that a party must not use the legal recourse method as an endless weapon to harass the other party. It prescribes a time limit upon which any person can knock the doors of the Court for the redressal of its grievances. However, there are certain provisions under the Limitation Act under which the limitation gets extended on certain act of the opposite party and wherein the life span gets extended to reach Courts. Similar is the provision in Section 18 of the Limitation Act. It says that before the expiration of the prescribed period of limitation, if an acknowledgment of liability has been made in writing by the other party, a fresh period of limitation shall be computed from the date when the acknowledgment was made. Recently, a five judges’ bench of the National Company Law Appellate Tribunal (NCLAT) has contradicted various other judgments of High Courts and some decisions of Supreme Court of India in a question of law that “whether entry in balance sheet by a company is an acknowledgement of debt and consequentially the limitation period will be extended?”

In this article, we will discuss about the scuffle in the Indian Judiciary and the current legal position.

What is Section 18 of the Limitation Act 1963?

Section 18 of the Limitation Act is reproduced for ready reference:

“18. Effect of acknowledgment in writing.—(1) Where, before the expiration of the prescribed period for a suit or application in respect of any property or right, an acknowledgment of liability in respect of such property or right has been made in writing signed by the party against whom such property or right is claimed, or by any person through whom he derives his title or liability, a fresh period of limitation shall be computed from the time when the acknowledgment was so signed.
(2) Where the writing containing the acknowledgment is undated, oral evidence may be given of the time when it was signed; but subject to the provisions of the Indian Evidence Act, 1872 (1 of 1872), oral evidence of its contents shall not be received.
Explanation.—For the purposes of this section,—
(a) an acknowledgment may be sufficient though it omits to specify the exact nature of the property or right, or avers that the time for payment, delivery, performance or enjoyment has not yet come or is accompanied by a refusal to pay, deliver, perform or permit to enjoy, or is coupled with a claim to set off, or is addressed to a person other than a person entitled to the property or right,
(b) the word “signed” means signed either personally or by an agent duly authorised in this behalf, and (c) an application for the execution of a decree or order shall not be deemed to be an application in respect of any property or right.”

It basically says that if there is an acknowledgement in writing by the party against whom any right is claimed, before the expiration of the prescribed period of limitation, then it will lead to a fresh cause of action, hence a fresh limitation cycle would start. But what comes under the ambit of “Acknowledgement in writing”?

Balance Sheet of a Company

A Balance Sheet is more or less a medical report of a Company. It lays down the financial condition of a company at a given date. Balance Sheet is the financial statement of a company which includes assets, liabilities, equity capital, total debt, etc. A company registered under the Companies Act, 2013 has to mandatory file balance sheet of each financial year[1]. Since, the article is more on admission of debt, it is specifically stated that a company also has to disclose the debt in the balance sheet[2].

Dispute on the Question of Law

The Five Judges Bench of NCLAT have recently held in V. Padmakumar versus Stressed Assets Stabilisation Fund[3], with a 4:1 majority, that an entry in a Balance Sheet of a company will not be an acknowledgement of debt in terms of section 18 of Limitation Act and hence no fresh cause of action will arrive, which has now contradicted many judgments of High Courts and few of Supreme Court which says the other way. Hence this Dispute.

This question has not come before NCLAT for the first time, but in Sh. G Eswara Rao v. Stressed Assets Stabilisation Fund, a division bench of the Appellate Tribunal authored by Hon’ble Mr. Justice S J Mukhopadhaya, who had also authored the majority judgment in the Padmakumar (supra) had held the same ratio. The rationale which led to this decision in G Eswara Rao (supra) are similar to Padmakumar (supra). HMJ Mukhopadhaya in both the judgments have held that filing of Balance Sheet/ Annual Return is mandatory under Section 92(4) of the Act, failing which penal action under Section 92(5) & (6) would be initiated, hence the Balance Sheet / Annual Return of a company cannot be treated to be an acknowledgement under Section 18 of the Limitation Act, 1963. He further opined that if the argument is accepted that the Balance Sheet / Annual Return of a company 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 a company to file Balance Sheet/ Annual Return.

However, this doesn’t go well with catena of judgments delivered by various High Courts in India and with Justice A.I.S. Cheema who had a dissent opinion on this question of law in Padmakumar decision (supra). Justice Cheema in his dissent judgment opined that the law requires preparation of Financial Statements[4] and Annual Returns[5] and filing of the same and whereas non-compliance of the same attracts action. There is no compulsion or force vis-a-vis the contents disclosing acknowledgement. The Director or the Company Secretary files the Balance Sheet as per their wisdom qua debt of the company, hence the same should come under the ambit of acknowledgement u/s 18 Limitation Act.

There are numerous decisions of the Delhi High Court as well as other High Courts of the Country, wherein it has been held that though the balance sheet is filed under statutory compulsion but it would amount to an admission of debt and consequentially, the limitation period will get extended.

In Bengal Silk Mills Co. vs Ismail Golam Hossain Ariff[6], the Hon’ble Calcutta High Court, has opined in the year 1962 itself that entries in balance sheets are sufficient to term it as an acknowledgment. Reproduction of the relevant portion would be germane to understand the ratio:

“It is true that the balance-sheets were required to be made both by the Indian Companies Act, 1913 as also by the articles of association of the defendant company. There was a compulsion upon the managing agents to prepare the documents but there was no compulsion upon them to make any particular admission. They faithfully discharged their duty and in doing so they made honest admissions of the Company's liabilities. Those admissions, though made in discharge of their duty, are nevertheless conscious and voluntary admissions. A document is not taken out of the purview of section 19 of the Indian Limitation Act merely on the ground that it is made under compulsion of law.”

The Hon’ble Calcutta High Court in Bengal Silk (supra) also referred a decision of English Court[7], wherein it has been held that a balance-sheet of a company stating the amount of its indebtedness to the creditor is a sufficient acknowledgement in respect of a specialty debt under section 5 of the Civil Procedure Act, 1833 (3 and 4 Will — 4c. 42).

The Hon’ble High Court of Delhi in Bhajan Singh Samra vs M/S. Wimpy International Ltd.[8] held that a time barred debt cannot be the basis of a winding up petition but admission of a debt either in a balance sheet or in the form of a letter duly signed by a party would amount to an acknowledgement, extending the period of limitation.

The Hon’ble Delhi High Court in Shahi Exports Pvt Ltd & Another vs Cmd Buildtech Pvt Ltd.[9], has took one step forward and opined that this question of law doesn’t even require to cite authorities as it is well- established position 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. There are plethora of judgments which followed the same line as aforementioned[10].

Further, Hon’ble Supreme Court of India, in A.V. Murthy Vs. B.S. Nagabasavann[11], while deciding the right to institute complaint under section 138 of Negotiable Instrument Act 1881, if the legally enforceable debt is four years old, opined that “if the amount borrowed by the respondent is shown in the balance sheet, it may amount to acknowledgement and the creditor might have a fresh period of limitation from the date on which the acknowledgement was made.”

Also, the Hon’ble Supreme Court in Mahabir Cold Storage vs Commissioner Of Income Tax, Patna[12], held the following:

“The entries in the books of accounts of the appellant would amount to an acknowledgement of the liability to M/s. Prayagchand Hanumanmal 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.”

However, some decisions also say that merely an entry in Balance sheet will not qualify as an acknowledgment. In Re: Pandam Tea Co. Ltd. vs Unknown[13], the Hon’ble Calcutta High Court opined that in order to validate the balance sheet as an acknowledgement, it must be duly passed by the shareholders at the appropriate meeting and in order to do so it must be accompanied by a report, if any made by the Directors.

What does the law stand vis-a-vis Acknowledgment of Debt qua Entry in Balance Sheet?

After referring the above-mentioned decisions of the Supreme Court and High Courts, it is quite evident that the law is settled qua this question of law and is bereft of any doubt. It lefts no doubt in the settled position that a debtor if makes entry of liability in its Balance sheet, it would amount to acknowledgement under section 18 of the Limitation Act 1963 which will give rise to a fresh cause of action.

With due respect, NCLAT has grossly erred in Padmakumar (supra), have passed an opinion which is per incuriam at the very instant ignoring settled judicial precedents of Supreme Court and High Courts. Also, this decision of NCLAT may left various benches of NCLT in a hush-hush manner. Benches of NCLT might not decide whether to follow the precedent of NCLAT or a well-established law of High Courts and as well as of the Supreme Court of India. From the author’s perspective, NCLT may choose to follow decision of Supreme Court and discarding this prima facie per incuriam judgment of the NCLAT by invoking the Doctrine of Stare Decisis[14]. Further, it also can’t be ignored that High Courts have Writ & supervisory jurisdiction over the Tribunals across its judicial territory[15]. It is also appropriate to mention NCLAT in a Judgment dated 11.06.2019[16], directed the NCLT (Principal Bench) to decide the case on merit in accordance with law uninfluenced by any order except the decision of NCLAT and the Hon’ble Supreme Court.

The Hon’ble Supreme Court of India must intervene and settle the long pending dispute with regard to judgments of High Court binding upon Tribunals, especially Appellate Tribunals. Also, we must not forget, that in recent times, many major decisions of the NCLAT qua IBC have been over-turned by the Supreme Court.

Note: This article was authored for Ipleaders, can be visited by clicking here.

[1] Section 92 of the Companies Act 2013 [2] Clause (c) of sub-section (1) of Section 92 of the Companies Act 2013 [3] Company Appeal (AT) (Insolvency) No.57 of 2020 [4] Section 129 of the Companies Act 2013 [5] Section 92 of the Companies Act 2013 [6] AIR 1962 Cal 115 [7] Re: Atlantic and Pacific Fibre Importing and Manufacturing Co. Ltd., (8) 1928 Ch. 836 [8] 2011 (185) DLT 428 [9] 2013 (202) DLT 735 [10] Zest Systems Pvt. Ltd. versus Center for Vocational and Entrepreneurship studies & Anr. [2018 SCC OnLine Del 12116]; Sheetal Fabrics versus Coir Cushions Ltd. [120 (2005) DLT 693] [11] (2002) 2 SCC 642 [12] 1990 SCR Supl. (3) 469 [13] AIR 1974 Cal 170 [14] Article 141 of the Constitution of India. [15] Article 226 & 227 of the Constitution of India. [16] Committee of Creditors of Bhushan Power and Steel Limited Through State Bank of India versus Mr. Mahendra Kumar Khandelwal, Resolution Professional of Bhushan Power and Steel Limited. [Company Appeal (AT) (Insolvency) No. 562 of 2019]