IBC | No Compulsion To Specify Names Of Creditors In Balance Sheet, General Entry Acknowledging Debt Sufficient To Initiate CIRP : Supreme Court
Observing that there's no compulsion for the companies to specify the names of every secured/unsecured creditor in their balance sheet, the Supreme Court dismissed the plea of a corporate debtor's suspended director against the initiation of Corporate Insolvency Resolution Process (“CIRP”). In other words, the bench comprising Justices PS Narasimha and Sandeep Mehta observed that when...
Observing that there's no compulsion for the companies to specify the names of every secured/unsecured creditor in their balance sheet, the Supreme Court dismissed the plea of a corporate debtor's suspended director against the initiation of Corporate Insolvency Resolution Process (“CIRP”).
In other words, the bench comprising Justices PS Narasimha and Sandeep Mehta observed that when debt entries exist in the corporate debtor's balance sheet, the debtor could not deny its liability merely on the ground that there were no specific entries of the particular creditor in their balance sheet regarding the debt owed to that creditor.
In this case, the balance sheet of the corporate debtor made a general entry acknowledging the debt owed to the financial creditor, but it doesn't mention how much debt is owed to which creditor. Moreover, the auditor of the corporate debtor's director appended a note to the balance sheet saying that the “company has made certain defaults in the repayment of term loans and interest.”
The Financial Creditor/Bank initiated CIRP against the corporate debtor upon filing a Section 7 application before the Adjudicating Authority which was resisted by the appellant contending that there was no clear and unequivocal acknowledgement of debt of the Corporate Debtor in the entries of the balance sheets.
Opposing the appellant's contention, it was argued by the Bank that the Balance Sheets of a company are prepared in the prescribed statutory format as per Section 129, read with Schedule III of the Companies Act 2013, which does not provide for giving specific names of each and every Secured and Unsecured creditor.
The contention of the Corporate Debtor that name of UCO Bank, the financial creditor, is not specifically mentioned in the in the balance sheet was rejected by NCLT by referring to the Explanation to Section 7(1) of the Code providing that the proceedings thereunder get triggered even in the case of a default by debtor in respect of any financial creditor other than the applicant.
Finding force in the Bank's contention and approving the findings of the NCLAT and NCLT, the judgment authored by Justice Narasimha observed as follows:
“Having considered the specific facts and circumstances of this case, the Adjudicating Authority as well as the NCLAT have concurrently held that the entries in the balance sheets amount to clear acknowledgment of debt. We agree with the findings. Further, Note 3.4 appended to said balance sheet entry dated 31.03.2017 mentions that “company has made certain defaults in the repayment of term loans and interest.” It further mentions of a continuing default. The entry also mentions long-term borrowings. The conclusions of NCLT and NCLAT that there is acknowledgment of debt are unimpeachable.”
“Following the principles as expounded in the case of Bishal Jaiswal (Supra), the Adjudicating Authority as well as the NCLAT have examined the case in detail and have come to the conclusion that the entry made in the balance sheet coupled with the note of the auditor of the appellant clearly amounts to acknowledgement of the liability. We see no reason whatsoever to take a different view of the matter. Their findings are fortified when we examine the matter from another perspective.”
In Asset Reconstruction Company (India) Limited v. Bishal Jaiswal (2021), the Supreme Court observed as follows:
“that there is a compulsion in law to prepare a balance sheet but no compulsion to make any particular admission, is correct in law as it would depend on the facts of each case as to whether an entry made in a balance sheet qua any particular creditor is unequivocal or has been entered into with caveats, which then has to be examined on a case by case basis to establish whether an acknowledgment of liability has, in fact, been made, thereby extending limitation under Section 18 of the Limitation Act.”
Accordingly, the appeal was dismissed.
Appearances:
Mr. Balbir Singh, Senior Advocate appeared for the appellant-Corporate Debtor's suspended Director.
Mr. Partha Sil, Advocate appeared for the respondent no.1-Bank.
Case Title: VIDYASAGAR PRASAD VERSUS UCO BANK & ANR.
Citation : 2024 LiveLaw (SC) 825