Entries In Balance Sheet Of Corporate Debtor Can Be Treated As Acknowledgment Of Liability Of Debt Payable To Financial Creditor

Cause Title : Asset Reconstruction Company (India) Limited vs Tulip Star Hotels Limited & Ors., Civil Appeal Nos. 84-85 Of 2020, The Supreme Court Of India

Date of Judgment/Order : August 01, 2022

Corum : Indira Banerjee J., J. K. Maheshwari J.

Citied: Innoventive Industries Ltd. v. ICICI Bank and Anr., Supreme Court

Background

The Respondent (corporate debtor) took loan from a consortium of bankers. The account turned NPA and a settlement was arrived at between the parties on 7th February 2011 which was modified/changed on 28th February 2011, 29th September 2011. Subsequently several extensions were requested by the Corporate Debtor and accepted by the Appellant. Ultimately, on 17th June 2013, the Appellant revoked the settlement and in terms of the default obligations under the Settlement Agreement, the rate of interest under the Deed of Variation was revised to 22%. By its letter dated 1st July 2013, the Corporate Debtor acknowledged its obligation to repay the aggregate assigned debt inclusive of interest. 

Subsequently, an application under Section 7 of IBC was filed by the Appellant and IRP was appointed. Corporate Debtor's objection on limitation was rejected by the NCLT. Finally, the Corporate Debtor as well as the Shareholders of the CD appealed before NCLAT which was allowed and subsequently, the Appellant approached Supreme Court.

One of the objections filed by the CD was that the Application of the Appellant was hopelessly barred by limitation, the same having been filed about eight/nine years after the account of the Corporate Debtor was declared NPA on 01.12.2008. Even assuming the Corporate Debtor had acknowledged liability, the last letter of acknowledgment was written in April 2013. The period of limitation still expired in April 2016.

The Appellant argued that the Corporate Debtor had acknowledged its liabilities towards the Appellant in its Financial Statements from 2008-09 to 2016-17.

The NCLAT had observed that Books of Account cannot be treated as an acknowledgement of liability in respect of debt payable.

Judgment

Disagreeing with the NCLAT, the SC observed that in Financial Statement for 2014-15, it is stated that ‘indebtness’ is to be read with Note No.5 in the notes of Accounts while in the Notes of Accounts, the Respondent No.3 has clearly stated that pursuant to the Orders of this Court, the parties entered into a Settlement which was unilaterally revoked by the Appellant on 17.06.2013 and thus the Respondent No.3 had been legally advised that the interest for the loans cannot be 22% as stated in the revoked settlement but 12.85% and that the rate of interest will be subject to the decision of the DRT, Mumbai. In the Financial Statement for 2015-16, similar disputes are raised in the notes and in the Financial Statement for 2016-17.

The balance-sheet acknowledged the continuance of the jural relationship of debtor and creditor between the Appellant and the Corporate Debtor and the existence of financial liability of the Corporate Debtor to the Appellant. The application of the Appellant under Section 7 of the IBC was filed on 3.4.2018, well within three years from 14.5.2015, being the date on which the balance- sheet was signed. Similarly, the balance-sheet for the following financial year signed on 29.8.2016 also acknowledged the existence of jural relationship of debtor and creditor between the Appellant and the Corporate Debtor and the existence of financial liability of the Corporate Debtor to the Appellant. 

In Innoventive Industries Ltd. v. ICICI Bank and Anr., the Adjudicating Authority, considering an application under Section 7 of the IBC, is only required to see if there is the existence of a debt and default. Any dispute with regard to the quantum of debt is immaterial.