Corporate Debtor’s Balance Sheet Entries Amount to Acknowledgement Of Debt: Supreme Courts Reiterates

The Hon’ble Supreme Court of India, in the case of Vidyasagar Prasad v UCO Bank has reiterated the position that the entries in the balance sheets of a company, coupled with the note of the auditor, amounts to clear acknowledgment of debt. The Hon’ble Supreme Court also noted that a one-time settlement proposal made by the debtor to the creditor also amounts to acknowledgement of debt for the purpose of extension of limitation period under section 18 of the Limitation Act, 1963 (Limitation Act).

 

The Hon’ble Supreme Court of India has reiterated the earlier principles in the Bishal Jaiswal matters (Asset Reconstruction Company (India) Ltd. v Bishal Jaiswal, (2021) 6 SCC 366). The Court addressed significant questions of law pertaining to acknowledgment of debt by way of entry in a balance sheet and proposal of a one-time settlement (OTS) for the purpose of extension of limitation period under section 18 of the Limitation Act, 1963 in the matter.

 

The present case involved challenge to a decision of the Hon’ble National Company Law Appellate Tribunal (NCLAT), by way of which it had dismissed an appeal filed by the Appellant / suspended director of the corporate debtor, against the admission of a section 7 application by the Hon’ble National Company Law Tribunal (NCL).

 

The Hon’ble Court held that the entries in the balance sheets amount to clear acknowledgment of debt. It further expounded that the entry made in the balance sheet coupled with the note of the auditor clearly amounts to acknowledgement of the liability. The Hon’ble Court also acknowledged that the OTS proposal constitutes acknowledgment of debt since it relates to present and subsisting liability and indicates existence of a jural relationship between the parties.

 

Pertinently, the suspended director, inter alia, contented that the section 7 application filed by the financial creditor before the NCLT was time-barred and that the financial creditor could not have taken the benefit of Section 18 of the Limitation Act to extend the limitation period, there being no clear and unequivocal acknowledgement of debt of the corporate debtor in the entries of the balance sheets. It was also contended that without specific details on the debt owed, these entries cannot aid the financial creditor to avail the benefit of the limitation period under Section 18 of the Limitation Act. Moreover, even if the said entries are considered acknowledgments of debt, they fail to mention the financial creditor’s name specifically.

 

On the other hand, the Respondent, while citing several judgments of the Hon’ble Supreme Court, contended that the entries made in a balance sheet and the OTS proposal amount to clear acknowledgement of debt.

 

Notably, this judgment reaffirms the applicability of the provisions of the Limitation Act, including Section 18 thereof, to the matters under the Insolvency and Bankruptcy Code, 2016. In our view, this is significant for the creditors because acknowledgments in financial statements canextend the limitation periods, giving them more time to initiate the Corporate Insolvency Resolution Process (CIRP) of their debtors.  The Court also emphasized that OTS proposals are considered acknowledgments, which bolsters the creditors’ ability to argue for extended limitation based on the debtors’ communications.

 

Additionally, the judgment also provides guidance on balancing statutory requirements with the practical realities of corporate debt, thereby supporting creditors’ rights to seek resolution within extended limitation periods based on documented acknowledgments by debtors.