Entries in the accounts books and/or balance sheets of the debtor company would be equivalent to U/s recognition. 18 Limitation Act: SC

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The Supreme Court overturned the National Company Law Appellate Tribunal’s ruling that a company’s books of account cannot be treated as an admission of liability for a debt owed to a financial creditor.

The bench of Judge Indira Banerjee and Judge JK Maheshwari observed thus- “It is well established that entries in the books of accounts and/or balance sheets of a corporate debtor would amount to recognition under Section 18 of the Limitation Act.”

The Court also held that a claim under Section 7 of the Insolvency and Bankruptcy Code 2016 would not be barred, on the grounds that it was filed beyond a period of three years from the date of declaration of the Company’s loan account. Debtor as NPA, provided that the debt has been recognized by the Debtor Company before the expiry of the limitation period, i.e. 3 years. The Court ruled that, in this case, the limitation period would be extended for a further period of three years.

The Court was ruling on an appeal filed by the appellant-Asset Reconstruction Company (India) Limited against the order of the NCLAT finding that the corporate insolvency resolution process initiated by it against the debtor company V. Hotels Limited was barred by prescription.

Senior Attorney Neeraj Kishan Kaul appeared for Asset Reconstruction Company (India) Limited while Senior Attorney Nakul Dewan appeared for the respondents.

In March 2002, a loan agreement was signed by and between a consortium of banks and the debtor company, whereby the consortium collectively sanctioned a loan in the amount of Rs.129,00,00,000/- to the company debtor.

Next year, the debtor company entered into an agreement with Abu Dhabi Commercial Bank (ADCB) whereby ADCB agreed to advance USD 29,000,000/- to the debtor company for repayment of the loan taken by the debtor company from the consortium.

It was reported that the debtor company repaid the amount paid by Bank of India to the debtor company under the said loan agreement from the funds paid to the debtor company by ADCB, between August and December 2003.

The amount of the Debtor Company was declared NPA on December 1, 2008.

The Supreme Court noted that by a letter dated February 7, 2011, written well within three years, the Debtor Company admitted liability and offered an amicable settlement. This was followed by several requests for extension of the payment deadline and revised regulations.

On April 6, 2013, the debtor company requested an extension of time to pay Rs.239,88,27,673 outstanding as of March 31, 2013. On April 19, 2013, the debtor company made payment of Rs.17,50,00,000/ – . On July 1, 2013, the Debtor Company acknowledged its liability, after the Appellant Financial Creditor terminated the settlement by invoking the default clause.

The Court further noted that the debtor company recognized its liabilities in its financial statements from 2008-09 to 2016-17. The IBC Section 7(2) application was filed on April 3, 2018, well within the extended statute of limitations.

In view of this, the Court thus held “…in our view, an application under Section 7 of the IBC would not be statute-barred, on the ground that it was filed beyond a period of three years from the date declaration of the debtor company’s loan account as an NPA, if there was an acknowledgment of debt by the debtor company before the expiry of the three-year limitation period, in which case the limitation period would be extended by one new period of three years.

Accordingly, the Court found that the challenged NCLAT order was not legally viable and therefore allowed the appeal.

Title of Case – Asset Reconstruction Company (India) Limited v. Tulip Star Hotels Limited & Ors.

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