Supreme Court Clarifies Critical Aspects Of The Insolvency And Bankruptcy Code (IBC) And Limitation Act.

While hearing the matter related to Insolvency and Bankruptcy Code (IBC) and the Limitation Act, 1963, the Supreme Court of India recently set aside orders passed by the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) and remnaded the matter back to the appropriate authority holding that Section 7 IBC application made by IL & FS Financial Services Limited was not time-barred.

This ruling of the Apex Court centers around whether a company's balance sheet entry would amount to valid acknowledgement of debt? and what is the proper implementation of the Supreme Court's COVID-19 related limitation extension orders?

Background: The case arose out of a term loan facility of Rs. 30 crores given by IL & FS Financial Services Limited (the appellant) to Adhunik Meghalaya Steels Private Limited (the respondent) in February 2015. The account of the respondent was classified as a Non-Performing Asset (NPA) on March 1, 2018, as it was unable to repay debts. Thereafter, the appellant made a Section 7 IBC application on January 15, 2024, for a default value of over Rs. 55 crores. Both NCLT and NCLAT had rejected this application, holding it was time-barred. The tribunals specifically pointed out that respondent's Financial Year (F.Y.) 2019-20 Balance Sheet did not specifically mention the financial creditor, and they invoked another provision of the Supreme Court's COVID-19 extension order, thereby feeling the limitation period would end by May 30, 2022.

The Supreme Court observed a number of important aspects of interplay between Limitation Act and IBC proceedings:

Acknowledgment in Balance Sheets:

The Apex Court upheld that transactions in a balance sheet of a company can very well amount to a valid acknowledgment of debt under Section 18 of the Limitation Act, 1963. Drawing inspiration from earlier precedents, the Court once again stated that such an acknowledgment only revives a pre-existing debt and does not give rise to a new right of action. What is necessary is that the statement expresses a relation jural (debtor and creditor) and is made with intent to acknowledge such relation, which may be implied by indication from the nature of the acknowledgment and the circumstances under which it was made. •

Not Naming the Creditor is Not Fatal:
Importantly, the Supreme Court held the respondent's contention that the F.Y. 2019-20 Balance Sheet did not specifically mention the name of the appellant. Based on its previous judgments, the Court observed that the failure to name a particular creditor in the balance sheet is not fatal to a claim of acknowledgment.

Contextual Interpretation:
The Court expressly highlighted the fact that in order to ascertain whether a document qualifies as an acknowledgment, it has to be interpreted in its overall tenor and context taking into account surrounding facts and earlier financial records. In the case at hand, the Supreme Court carefully scrutinized the F.Y. 2019-20 Balance Sheet along with the earlier financial records (F.Y. 2015-16, 2016-17, 2017-18).

Specific Findings of Acknowledgment:
The Court observed that the F.Y.2019-20 Balance Sheet, when placed on the backdrop of the previous years, evidently reflected a prevailing liability. Cash Flow Statement (under Indian Accounting Standards 7) attached to the statement of financial position reflected new borrowings cumulating over and above existing dues and most importantly, not a single amount of cash flow being used towards repayment of outstanding borrowings. This corroborated the finding that the debt continued to remain unpaid and was indirectly acknowledged. The "bare denial" in its return affidavit by the respondent was also pointed out, although the Court's conclusion was derived from the construction of the Balance Sheet in an all-inclusive manner. •

Application of COVID-19 Extension:
In respect of the limitation period, the Supreme Court explained that sub-Para 1 of Para 5 of its order dated January 10, 2022, applied. This implied that the whole period between March 15, 2020, and February 28, 2022, remained excluded for purposes of limitation. As the F.Y. 2019-20 Balance Sheet was dated August 12, 2020 (within the initial limitation period from the NPA date of March 1, 2018), it rightly extended the limitation. With the COVID-19 exclusion, the period of limitation, from the date of acknowledgment, was practically extended up to February 28, 2025.

Thus, the Court held that Section 7 application presented on January 15, 2024, was within the limitation and the Apex Court further held that sub-Para 5(III) of its order, which is applicable when limitation would have lapsed within the excluded period, was not applicable in the present case since the acknowledgment had already prolonged the time period. Consequently, the Supreme Court set aside the orders of the NCLAT and NCLT, allowed the appeal, and remitted the matter to the adjudicating authority to proceed with the Section 7 IBC application, treating it as having been filed within the permissible period of limitation.

Coram: Justice K.V. Viswanathan and Justice Manoj Misra.