New Delhi, September 28: Appellate tribunal NCLAT may reconsider its own judgment passed by a five-member bench on the acceptability of debt entered in the balance sheet of a company for deciding the time frame for initiating insolvency proceedings.
The issue pertains to whether entries in the balance sheet can be treated as an acknowledgment of debt for the purpose of calculating the three-year period limitation in terms of applicability of Section 18 of the Limitation Act, 1963.
Limitation Act is also applicable for proceedings under the Insolvency and Bankruptcy Code (IBC).
In a rare instance, a three-member bench of the National Company Law Appellate Tribunal (NCLAT) last week said that the five-member bench’s judgment, which was passed in March this year was “contrary to settled law”, news agency PTI reported.
The three-member bench observed that “judgment in V Padmakumar’s case requires reconsideration” as a consistent view of the Supreme Court and High Courts of Allahabad, Calcutta, Delhi, Karnataka, Kerala, and Telangana is that the entries in the balance sheet of the company be treated as an acknowledgment of debt for the purpose of Section 18 of the Limitation Act.
“The majority view in V Padmakumar’s case is just contrary to settled law,” it said and directed the registrar to place the “attached reference along with V Padmakumar’s case before the Acting Chairperson for constituting appropriate bench”.
As per Section 18, a fresh period of limitation shall be computed from the time when the acknowledgment was signed before the expiration of the prescribed period.
It implies that an insolvency plea filed over defaults that occurred over three years prior to the date of filing of the application is barred under Section 137 of the IBC.
NCLAT’s three-member bench’s ruling came during the hearing of an insolvency petition moved by the promoter of Corporate Power Ltd that had defaulted on loans worth Rs 5,997 crore.
The National Company Law Tribunal (NCLT) admitted the petition for initiating insolvency proceedings but the same was challenged before the appellate tribunal.
Corporate Power’s promoters had contended before the three-member bench that plea under Section 7 of IBC was time-barred under the Limitation Act as the account was declared as NPA on February 28, 2014 while the plea was filed after more than four years of default in December 2018.
Section 7 of IBC allows a financial creditor to file for insolvency proceedings against a corporate debtor.
The company had also mentioned that the balance sheet produced by the financial creditor does not hold it any way liable as there is no categorical mention of the name of the financial creditor therein.
Moreover, the balance sheet cannot be considered as an acknowledgment under Section 18 of the Limitation Act as the issue was considered explicitly in the case of V Padmakumar, as per the submission by Corporate Power.
According to the financial creditor, the right to sue for the first time accrued after the account was classified as NPA on July 31, 2013.
Thereafter, Corporate Power has time and again admitted and unequivocally acknowledged its debt in the balance sheets for the financial years ended on March 31 in 2015, 2016, and 2017.
Hence, the right to sue stood extended in terms of Section 18 of the Limitation Act, as per the financial creditor.
Subsequently, NCLAT’s three-member bench said it was unable to be convinced with the argument of learned counsel for the corporate debtor that Section 18 of the Limitation Act was not applicable to the insolvency case.
“We are of the considered view with all great respect to the five members bench of this appellate tribunal that V Padmakumar’s judgment requires reconsideration,” the bench said, adding “we shall proceed further in this appeal, after receiving the answer of the reference”.
In March in the matter of V Padmakumar Vs Stressed Assets Stabilisation Fund, NCLAT’s five-member bench held that the balance sheet/ annual return of a corporate debtor cannot be treated to be an acknowledgment under Section 18 of the Limitation Act.
In a 4:1 majority ruling, the bench said that if the argument is accepted that the balance sheet/ annual return of a company amounts to acknowledgment under Section 18, then in such case, it is to be held that no limitation would be applicable because every year it is mandatory for the corporate debtor to file balance sheet/ annual return, which is not the law.
Corporate Power, which was into the power sector, had availed loans from a consortium of lenders but failed to make repayments.