Balance Sheet entries are acknowledgment of debt - Supreme Court overturns NCLAT order

In ASSET RECONSTRUCTION COMPANY (INDIA) LIMITED vs BISHAL JAISWAL & ANR., the NCLAT relying on the Full Bench judgment of the NCLAT in V. Padmakumar v. Stressed Assets Stabilisation Fund, Company Appeal (AT) (Insolvency) No. 57 of 2020 (decided on 12.03.2020), rejected the NCLT order of admitting an application by Financial Creditor under Section 7 of IBC based on enteries made in the balance sheet.

The NCLAT in the V. Padmakumar order had held that entries in balance sheets would not amount to acknowledgement of debt for the purpose of extending limitation under Section 18 of the Limitation Act.

On appeal, the Supreme Court referred to a plethora of judgments Mahabir Cold Storage v. CIT, 1991 Supp (1) SCC 402, A.V. Murthy v. B.S. Nagabasavanna, (2002) 2 SCC 642, S. Natarajan vs. Sama Dharman, Crl. A. No. 1524 of 2014, Bengal Silk Mills Co. v. Ismail Golam Hossain Ariff, 1961 SCC OnLine Cal 128 : AIR 1962 Cal 115 where it has been held that that an entry made in the books of accounts, including the balance sheet, can amount to an acknowledgement of liability within the meaning of Section 18 of the Limitation Act. Further, a perusal of the various Sections of the Companies Act would show that there is no doubt that the filing of a balance sheet in accordance with the provisions of the Companies Act is mandatory, any transgression of the same being punishable by law. However, what is of importance is that notes that are annexed to or forming part of such financial statements are expressly recognised by Section 134(7). Equally, the auditor’s report may also enter caveats with regard to acknowledgements made in the books of accounts including the balance sheet. A perusal of the aforesaid would show that the statement of law contained in Bengal Silk Mills (supra), 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 acknowledgement of liability has, in fact, been made, thereby extending limitation under Section 18 of the Limitation Act.

Setting aside the majority judgment of the Full Bench of the NCLAT dated 12.03.2020., the Supreme Court held that it is, therefore, clear that the majority decision of the Full Bench in V. Padmakumar (supra) is contrary to the aforesaid catena of judgments. The minority judgment of Justice (Retd.) A.I.S. Cheema, Member (Judicial), after considering most of these judgments, has reached the correct conclusion.