Acknowledgment Of Liabilities Through Balance Sheet For Initiating Proceeding Under IBC: Dilemma Resolved

Published date10 June 2021
Subject MatterFinance and Banking, Litigation, Mediation & Arbitration, Insolvency/Bankruptcy/Re-structuring, Debt Capital Markets, Financial Services, Insolvency/Bankruptcy, Trials & Appeals & Compensation
Law FirmAlpha Partners
AuthorMr Sumit Roy and Varun Pandey

A balance sheet is a financial statement that summarizes the company's accounts, prepared to specify the liabilities and assets. The financial statement of a company certifies the "true and fair value" of the state of affairs1. In recent past, there has been an unending saga regarding the entries on the balance sheet to be treated as an acknowledgement of debt/liability for the purposes of proceedings qua Section 18 of the Limitation Act, 1963 ("the Act") and especially for proceedings which are initiated against corporate debtors under Insolvency and Bankruptcy Code 2016 ("IBC"). The provisions of Section 18 Act provides that if a party acknowledges a debt/liability in writing prior to expiry of the limitation period, then a fresh period of limitation shall be computed from time such acknowledgment of debt/liability was made by the debtor.2

The applicability of the provisions of the Act in IBC proceedings had been a matter of discussion for quite some time. On 11.08.2017, Ld. National Company Law Appellate Tribunal ("NCLAT") in the Neelkanth3 judgment held that the provisions of the Act do not apply in the IBC proceedings. However, the Second Amendment to the IBC which was enacted on 17.08.2018, added Section 238A in the IBC. The Section 238A effectively made provisions of the Act including Section 18 applicable on proceedings initiated under IBC. Thus, the law was settled by the Indian Legislature that the provision of Section 18 of the Act shall apply to the proceedings initiated under IBC, however, the question whether the entries made in the balance sheet by the corporate debtor would extend the period of limitation in terms of Section 18 or not, was left unanswered and therefore, the judgment passed by Hon'ble Supreme Court of India in Asset Reconstruction Company (India) Ltd. v. Bishal Jaiswal & Another4 gains significance.

Acknowledgement of Liability

The principles pertaining to acknowledgement of liability was settled by Apex Court in LC Mills v. Aluminum Corporation of India Ltd.,5 whereby the Apex Court explained 'acknowledgement of liability' as a statement which need not explain the exact nature of the liability, however, it should establish a 'jural relationship' of that of a creditor and debtor with an intention that can be expressed or inferred from the circumstances considering the document of acknowledgement as a whole. The Supreme Court in Asset Reconstruction Company (India) Ltd. v. Bishal Jaiswal & Another,6 has now held that...

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