Limitation Act is applicable to insolvency code, but more clarity is needed
Corporate debtors need to be aware of the implication of every entry in their balance sheet | Photo Credit: utah778
Several judicial pronouncements have stressed that the Insolvency and Bankruptcy Code (IBC) is not a debt recovery law. But the trigger, ‘default in payment of debt’, makes the exclusion of the law of limitation counter-intuitive to the settled position that when a debt is time-barred, so is the right to a remedy.
The Insolvency and Bankruptcy Law Committee has introduced a provision in the IBC that makes the Limitation Act applicable to the code. However, the extent of application has not been specified.
The Limitation Act provides for a time period within which a right can be enforced in a court of law. The Supreme Court has made the residuary provision in the Limitation Act applicable to the financial debts owed by the corporate debtor under IBC in Babulal Vardharji Gurjar vs Veer Gurjar Aluminium Industries, where the limitation period for initiation of corporate insolvency against a corporate debtor is three years from the date of default.
This limitation was also made amenable to the provision for extension of limitation based on the reasons for delay. The three-year period for recovering debts under Limitation Act can be extended if the debtor acknowledges the debt within that period. The limitation period stands extended for three more years from the date of such acknowledgement, as was held by the apex court in the case of Laxmi Pat Surana vs Union of India.
In recent years, instances such as acknowledgement of debts in letters and emails, one-time-settlement proposals have been considered for extension of limitation to file for insolvency. Courts have also held that entries in balance sheet would amount to an acknowledgement of debt; the limitation period to apply for insolvency is renewed by three years every time a corporate debtor makes an entry in its balance sheet of the debt owed to the financial creditor. The Supreme Court, in Asset Reconstruction Company (India) Limited vs Bishal Jaiswal, held that the liabilities shown in balance sheets amount to acknowledgement of debt. It reasoned that while there is a requirement in law to prepare a balance sheet every year, there is no requirement to make an admission of debt. Essentially, the facts and circumstances of each case determine whether an entry in a balance sheet related to a particular creditor is unequivocal or has been entered with caveats to extend the limitation. For instance, where there are notes annexed to the financial statements or caveats entered in the auditor’s report with respect to the acknowledgement made in books of accounts and balance sheets, it would not qualify as acknowledgement of debts enabling extension of limitation period.
By scrutinising entries in balance sheets and the notes annexed to them, the court has minimised the scope of adjudication over which entries amount to acknowledgement. This position of law also comes as a caution to corporate debtors, who need to be aware of the implication of each and every entry in their balance sheet.
(The writers are Partner and Associate, respectively, with Lakshmikumaran & Sridharan, a law firm)