Entries In Balance Sheet Do Not Amount To Acknowledgment Of Debt Under Sec 18 Limitation Act : NCLAT Declines Reference Against 'V Padmakumar' Decision

The five member-Bench has held that the reference is "incompetent" and it was "inappropriate" on the part of the Referral Bench to doubt the correctness of the five Member Bench Judgment, which admittedly has not been appealed against and occupies the field till date.

The Bench headed by Justice Bansi Lal Bhat, Acting Chairperson, noted that the impugned Judgment was passed in view of several authoritative pronouncements of the Apex Court, and,

"It was a matter of judicial discipline for the Referral Bench to follow the judgment of the five member Bench in 'V. Padmakumar's Case' as a binding precedent and not question the correctness of the Judgment by adopting the 'cut and paste' methodology in branding the five Member Bench Judgment in 'V. Padmakumar's Case' as 'so very incorrect'…," the bench also comprising of Justices Venugopal M and Anant Bijay Singh, Members (Judicial) and Kanthi Narahari and Shreesha Merla, Members (Technical) said.

Background

In September this year, a bench comprising Justice Jarat Kumar Jain, Member (Judicial), Justice Balvinder Singh, Member (Technical) and V.P Singh, Member (Technical), opined that the majority decision in V Padmakumar was rendered ignoring several precedents laid down by the Supreme Court and many High Courts.

This issue arose while considering an appeal filed by the corporate debtor against the order passed by the adjudicating authority admitting the insolvency petition filed by a consortium of lenders.

The corporate debtor contended that the application was filed beyond the period of 3 years limitation from the date of the accrual of the cause of action.

It was argued that the accounts were declared as Non-Performing Asset in February 2014 but the application under Section 7 of the Insolvecny and Bankruptcy Code was filed only in December 2018.

The adjudicating authority did not accept the contention that the application was time-barred, as the debt stood acknowledged by the entries in the books of accounts. Hence, the right to sue stood extended in terms of Section 18 (acknowledgment in writing).

Findings

The five-member Bench which was considering the reference noted that it was on the basis of the authoritative pronouncements and binding precedents of the Apex Court that the Bench in the V Padmakumar Case arrived at the conclusion that for purpose of computing the period of limitation under Section 7, the date of default is NPA.

It referred to the Supreme Court's decision in Babulal Vardharji Gurjar v. Veer Gurjar Aluminum Industries Ltd. & Anr., whereby it was observed that Section 18 of the Limitation Act, 1963 (acknowledgment in writing) would have no application to proceedings under I&B Code.

"Therefore, the issue raised as regards acknowledgement of liability by reflection in the Balance Sheet/ Annual Return would be irrelevant," the five-member Bench concluded.

It added, the date of default is extendable within the ambit of Section 18 of Limitation Act on the basis of an acknowledgement in writing made by the Corporate Debtor before the expiry of period of limitation.

The five-member Bench was also of the opinion that the Referral Bench had failed to draw a distinction between the 'recovery proceedings' and the 'insolvency resolution process'

Reliance was placed on Jignesh Shah & Anr. v. Union of India & Anr., whereby the Apex Court recognized the nature of remedy under Companies Act being distinct from recovery mechanism and observed that limitation cannot be impacted by an acknowledgement of liability under Section 18 of Limitation Act to keep debt alive for the purpose of winding up proceedings.

The Bench remarked that the above position equally holds good in so far as insolvency jurisdiction in concerned, unless a contrary view is taken by the Supreme Court.

"The insolvency resolution mechanism is based on 'debt' and 'default'. Adjudication of civil disputes and complex issues is impermissible within the ambit and scope of I&B Code. Stretching forward the concept of default beyond NPA, in the context of law declared by the Hon'ble Apex Court as it now stands, would be the forbidden province and the liability in regard to defaulted amount on the basis of classification of account of Corporate Debtor as NPA cannot be given a new lease of life when it is time barred," it said.

Further, the Bench clarified that NCLAT is not a Constitutional Court but a mere creation of a Statute viz. Companies Act, 2013. "Therefore, this Appellate Tribunal has to apply the law as embodied in the Statutes and as laid down by the Hon'ble Apex Court. This Appellate Tribunal only interprets and applies the law as it is."

Lastly, the Bench cited a plethora of judgments holding that a decision delivered by a Bench of Larger strength is binding on any subsequent Bench of lesser or co-equal strength and it cannot disagree or dissent from the view of law taken by the Bench of Larger quorum

Thus, deprecating the misadventure undertaken by the Referral Bench in this case, the Court said, "Judicial indiscipline creates uncertainty and impairs public faith in Rule of Law. Crossing the red line by disregarding the binding precedent results in making the legal proposition uncertain."

It added,

"We hope and trust that the Hon'ble Members of the Referral Bench would exhibit more serious attitude towards adherence of the binding judicial precedents and not venture to cross the red line."

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