Law Web: Whether acknowledgement of liability in the balance sheet by a Company extends the period of limitation U/S 18 of limitation Act?

In Zest Systems Pvt. Ltd. v. Center for Vocational and

Entrepreneurship Studies, 2018 SCC OnLine Del 12116, the Delhi High Court held:

“5. In Shahi Exports Pvt. Ltd. v. CMD Buildtech Pvt. Ltd. (supra)

this court held as follows:—

“7. It is hardly necessary to cite authorities in support

of the well-established position that an entry made in

the company's balance sheet amounts to an

acknowledgement of the debt and has the effect of

extending the period of limitation under section 18 of

the Limitation Act, 1963. However, I may refer to only

one decision of the learned single judge of this Court

(Manmohan, J.) in Bhajan Singh Samra v. Wimpy

International Ltd., 185 (2011) DLT 428 for the simple

reason that it collects all the relevant authorities on the

issue, including some of the judgments cited before me

on behalf of the petitioners. This judgment entirely

supports the petitioners on this point.”{Para 31}

6. In view of the legal position spelt out in judgments noted

above, the acknowledgement of the debt in the balance sheet

extends the period of limitation. The acknowledgement is as on

31.3.2015. This suit is filed in 2017. The suit is clearly within

limitation. The present application is allowed.”

32. In Agni Aviation Consultants v. State of Telangana, 2020 SCC

OnLine TS 1462 : (2020) 5 ALD 561, the High Court of Telangana held:

“107. In several cases, various High Courts have held that an

acknowledgement of liability in the balance sheet by a

Company registered under the Companies Act, 1956 extends

the period of limitation though it is not addressed to the creditor

specifically. (Zest Systems Pvt. Ltd. v. Center for Vocational

and Entrepreneurship Studies, 2018 SCC OnLine Del 12116,

Bhajan Singh Samra v. Wimpy International Ltd., 2012 SCC

OnLine Del 2939, Vijay Kumar Machinery and Electrical Stores

v. Alaparthi Lakshmi Kanthamma, (1969) 74 ITR 224 (AP), and

Bengal Silk Mills Company, Raja of Vizianagram v. Official

Liquidator, Vizianagram Mining Company Limited, AIR 1952

Mad 1361).

108. Therefore it is not necessary that the acknowledgement of

liability must be contained in a document addressed to the

creditor i.e. the petitioners in the instant case.”

33. 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. We, therefore, set aside the majority judgment of the Full Bench of the NCLAT dated 12.03.2020.

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.323 OF 2021

ASSET RECONSTRUCTION COMPANY (INDIA) LIMITED

Vs BISHAL JAISWAL

Author: R.F. Nariman, J.

Dated:April 15, 2021.

Civil Appeal No.323 of 2021

1. In 2009, Corporate Power Ltd. [“the corporate debtor”] set up a

thermal power project in Jharkhand, and for so doing, availed of loan

facilities from various lenders, including the State Bank of India [“SBI”]. The

account of the corporate debtor was declared as a non-performing asset by

SBI on 31.07.2013. On 27.03.2015, SBI issued a loan-recall notice to the

corporate debtor in its capacity as the lenders’ agent. On 31.03.2015, some

of the original lenders of the corporate debtor, namely, India Infrastructure

Finance Company Limited, SBI, State Bank of Hyderabad, State Bank of

Bikaner and Jaipur, State Bank of Patiala, and State Bank of Travancore

assigned the debts owed to them by the corporate debtor to the appellant,

the Asset Reconstruction Company (India) Limited. On 20.06.2015, the

appellant issued a notice under Section 13(2) of the Securitisation and

Reconstruction of Financial Assets and Enforcement of Securities Interest

Act, 2002 [“SARFAESI Act”] on behalf of itself and other consortium

lenders to the corporate debtor. On 01.06.2016, the appellant took actual

physical possession of the project assets of the corporate debtor under the

SARFAESI Act. On 26.12.2018, the appellant filed an application under

Section 7 of the Insolvency and Bankruptcy Code, 2016 [“IBC”] before the

National Company Law Tribunal, Calcutta [“NCLT”] for a default amounting

to Rs.5997,80,02,973/- from the corporate debtor. As the relevant form

indicating the date of default did not indicate any such date, this was made

up by the appellant on 08.11.2019 by filing a supplementary affidavit before

the NCLT, specifically mentioning the date of default and annexing copies

of balance sheets of the corporate debtor, which, according to the

appellant, acknowledged periodically the debt that was due. On

19.02.2020, the Section 7 application was admitted by the NCLT, observing

that the balance sheets of the corporate debtor, wherein it acknowledged

its liability, were signed before the expiry of three years from the date of

default, and entries in such balance sheets being acknowledgements of the

debt due for the purposes of Section 18 of the Limitation Act, 1963

[“Limitation Act”], the Section 7 application is not barred by limitation. In

an appeal filed to the National Company Law Appellate Tribunal [“NCLAT”],

the corporate debtor relied upon 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) [“V.

Padmakumar”], in which a majority of four members [Justice (Retd.) A.I.S.

Cheema, Member (Judicial), dissenting] 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. After a preliminary hearing,

a three-Member Bench passed an order on 25.09.2020 doubting the

correctness of the majority judgment of the Full Bench and referred the

matter to the Acting Chairman of the NCLAT to constitute a Bench of

coordinate strength to reconsider the judgment in V. Padmakumar (supra).

2. A five-Member Bench of the NCLAT, vide the impugned judgment

dated 22.12.2020, refused to adjudicate the question referred, stating that

the reference to the Bench was itself incompetent.

3. Shri Ramji Srinivasan, learned Senior Advocate appearing on behalf

of the appellant, has assailed the impugned judgment, arguing that the

majority judgment of the Full Bench of the NCLAT in V. Padmakumar

(supra) was clearly per incuriam as it has not considered various binding

judgments of this Court and that the said judgment was wholly incorrect in

rejecting the reference out of hand at a preliminary stage. For this purpose,

he referred to a number of judgments of this Court in which it has been

made clear that vide Section 238A of the IBC, Section 18 of the Limitation

Act is applicable to a proceeding under Section 7 of the IBC. Also,

according to the learned Senior Advocate, the judgments of the High

Courts and the judgments of this Court have expressly held that entries

made in signed balance sheets of the corporate debtor would amount to

acknowledgements of liability and have, therefore, correctly been relied

upon by the NCLT on the facts of this case. He argued, relying upon certain

judgments, that the reference made to the five-Member Bench by the three-

Member Bench was perfectly in order and ought to have been answered on

merits. He also argued that the constitution of the five-Member Bench

which passed the impugned judgment was not in order as three out of the

five members of the said Bench were members who assented with the

majority opinion in V. Padmakumar (supra), the dissentient member not

being made part of the Bench so formed. This, according to him, was

contrary to the principles of natural justice. He also argued that the fact that

a balance sheet has to be filed under compulsion of law does not mean

that an acknowledgement of debt has also to be made under compulsion of

law, and for this purpose, he referred to two High Court judgments.

4. Refuting the aforesaid submissions, Shri Abhijeet Sinha, learned

Advocate appearing on behalf of the Respondents, argued that the

Explanation to Section 7, read with the definition of “default” contained in

Section 3(12) of the IBC, would preclude the application of Section 18 of

the Limitation Act inasmuch as a default in respect of a financial debt would

include a financial debt owed not only to the applicant-financial creditor, but

to all other financial creditors of the corporate debtor. He then referred to

the rationale for enacting Section 238A by referring to the Insolvency

Committee Report which introduced the aforesaid Section and strongly

relied upon the fact that in all these cases, recovery proceedings were

ongoing before the Debt Recovery Tribunal and/or the appellate authority

under the Recovery of Debts Due to Banks and Financial Institutions Act,

1993 [“Recovery of Debts Act”] and that, by not applying Section 18 of the

Limitation Act to the IBC, recoveries will not be thwarted. He also added

that the main plank of the submission of the appellant was that a huge sum

of Rs.12,000 crore would otherwise go down the drain if

acknowledgements in balance sheets were not to be looked at, and

stressed the fact that this would be relevant only in recovery proceedings

and not in proceedings before the IBC, which are not meant to be recovery

proceedings at all, as has been held in several judgments of this Court. He

then relied upon two High Court judgments, from the Andhra Pradesh High

Court and Gauhati High Court, to buttress his submission that via Section

18 of the Limitation Act, entries made in balance sheets do not amount to

acknowledgement of debt. He also stressed the fact that no date of default

has been mentioned in the original form that was submitted with the

Section 7 application, and that this would, therefore, be a non-curable

defect, on account of which the Section 7 application should have been

dismissed at the threshold. He then took us to various judgments of this

Court which made it clear that if a period of three years had elapsed from

the date of declaration of the account of a corporate debtor as a nonperforming

asset, the claim filed by a creditor is a dead claim which cannot

be resurrected having recourse to Section 18 of the Limitation Act. Finally,

he argued that the balance sheets in the present case did not amount to

acknowledgement of liability inasmuch as the auditor’s report, which must

be read along with the balance sheets, would make it clear that there was

no unequivocal acknowledgement of debt, but that caveats had been

entered by way of notes in the auditor’s report.

5. After hearing counsel for both sides, it is important to first advert to

the rationale for the enactment of Section 238A of the IBC, which was

enacted by way of the Insolvency and Bankruptcy Code (Second

Amendment) Act, 2018 w.e.f. 06.06.2018. Section 238A of IBC reads as

follows:

“238A. Limitation.—The provisions of the Limitation Act, 1963

(36 of 1963) shall, as far as may be, apply to the proceedings

or appeals before the Adjudicating Authority, the National

Company Law Appellate Tribunal, the Debt Recovery Tribunal

or the Debt Recovery Appellate Tribunal, as the case may be.”

6. In Jignesh Shah v. Union of India, (2019) 10 SCC 750, this Court

referred to the Report of the Insolvency Law Committee of March, 2018,

which led to the introduction of Section 238A, as follows:

“8. In para 7 of the said judgment [B.K. Educational Services

(P) Ltd. v. Parag Gupta and Associates, (2019) 11 SCC 633],

the Report of the Insolvency Law Committee of March 2018

was referred to as follows: ([B.K. Educational Services (P)

Ltd. v. Parag Gupta and Associates, (2019) 11 SCC 633], SCC

pp. 644-45, para 11)

“11. Having heard the learned counsel for both sides, it is

important to first set out the reason for the introduction of

Section 238-A into the Code. This is to be found in the

Report of the Insolvency Law Committee of March 2018,

as follows:

‘28. Application of Limitation Act, 1963

28.1. The question of applicability of the

Limitation Act, 1963 (“the Limitation Act”) to the

Code has been deliberated upon in several

judgments of NCLT and NCLAT. The existing

jurisprudence on this subject indicates that if a law

is a complete code, then an express or necessary

exclusion of the Limitation Act should be respected.

[Ravula Subba Rao v. CIT, AIR 1956 SC 604] In

light of the confusion in this regard, the Committee

deliberated on the issue and unanimously agreed

that the intent of the Code could not have been to

give a new lease of life to debts which are timebarred.

It is settled law that when a debt is barred

by time, the right to a remedy is time-barred.

[Punjab National Bank v. Surendra Prasad Sinha,

1993 Supp (1) SCC 499 : 1993 SCC (Cri) 149] This

requires being read with the definition of “debt” and

“claim” in the Code. Further, debts in winding-up

proceedings cannot be time-barred [Interactive

Media and Communication Solution (P) Ltd. v. GO

Airlines Ltd., 2013 SCC OnLine Del 445 : (2013)

199 DLT 267] , and there appears to be no rationale

to exclude the extension of this principle of law to

the Code.

28.2. Further, non-application of the law on

limitation creates the following problems: first, it reopens

the right of financial and operational creditors

holding time-barred debts under the Limitation Act

to file for CIRP, the trigger for which is default on a

debt above INR one lakh. The purpose of the law of

limitation is ‘to prevent disturbance or deprivation of

what may have been acquired in equity and justice

by long enjoyment or what may have been lost by a

party's own inaction, negligence or laches’

[Rajender Singh v. Santa Singh, (1973) 2 SCC 705].

Though the Code is not a debt recovery law, the

trigger being “default in payment of debt” renders

the exclusion of the law of limitation counterintuitive.

Second, it re-opens the right of claimants

(pursuant to issuance of a public notice) to file timebarred

claims with the IRP/RP, which may

potentially be a part of the resolution plan. Such a

resolution plan restructuring time-barred debts and

claims may not be in compliance with the existing

laws for the time being in force as per Section 30(4)

of the Code.

28.3. Given that the intent was not to package

the Code as a fresh opportunity for creditors and

claimants who did not exercise their remedy under

existing laws within the prescribed limitation period,

the Committee thought it fit to insert a specific

section applying the Limitation Act to the Code. The

relevant entry under the Limitation Act may be on a

case-to-case basis. It was further noted that the

Limitation Act may not apply to applications of

corporate applicants, as these are initiated by the

applicant for its own debts for the purpose of CIRP

and are not in the form of a creditor’s remedy.’”

(emphasis in original)

A perusal of the above would show that considering that the Limitation Act

applies only to courts, unless made statutorily applicable to tribunals, the

Committee was of the view that such Act should be made to apply to the

IBC as well, observing that though the IBC is not a debt recovery law, the

trigger being “default in payment of debt” would render the exclusion of the

law of limitation “counter-intuitive”. Thus, it was made clear that an

application to the IBC should not amount to resurrection of time-barred

debts which, in any other forum, would have been dismissed on the ground

of limitation.

7. From the above, it is clear that the principle of Section 9 of the

Limitation Act is to be strictly adhered to, namely, that when time begins to

run, it cannot be halted, except by a process known to law. One question

that arises before this Court is whether Section 18 of the Limitation Act,

which extends the period of limitation depending upon an

acknowledgement of debt made in writing and signed by the corporate

debtor, is also applicable under Section 238A, given the expression “as far

as may be” governing the applicability of the Limitation Act to the IBC.

8. The aforesaid question is no longer res integra as two recent

judgments of this Court have applied the provisions of Section 14 and

Section 18 of the Limitation Act to the IBC. Thus, in Sesh Nath Singh v.

Baidyabati Sheoraphuli Co-operative Bank Ltd., Civil Appeal No. 9198

of 2019 (decided on 22.03.2021), after setting out the issues that arose in

that case in paragraph 57, and after referring to Section 238A of IBC, held:

“66. Similarly under Section 18 of the Limitation Act, an

acknowledgement of present subsisting liability, made in writing

in respect of any right claimed by the opposite party and signed

by the party against whom the right is claimed, has the effect of

commencing of a fresh period of limitation, from the date on

which the acknowledgement is signed. However, the

acknowledgement must be made before the period of limitation

expires.

67. As observed above, Section 238A of the IBC makes the

provisions of the Limitation Act, as far as may be, applicable to

proceedings before the NCLT and the NCLAT. The IBC does

not exclude the application of Section 6 or 14 or 18 or any other

provision of the Limitation Act to proceedings under the IBC in

the NCLT/NCLAT. All the provisions of the Limitation Act are

applicable to proceedings in the NCLT/NCLAT, to the extent

feasible.

68. We see no reason why Section 14 or 18 of the Limitation

Act, 1963 should not apply to proceeding under Section 7 or

Section 9 of the IBC. Of course, Section 18 of the Limitation Act

is not attracted in this case, since the impugned order of the

NCLAT does not proceed on the basis of any

acknowledgement.”

9. Nearer home, in Laxmi Pat Surana v. Union Bank of India, Civil

Appeal No. 2734 of 2020, a judgment delivered on 26.03.2021, this Court,

after referring to various judgments of this Court, including the judgment in

Babulal Vardharji Gurjar v. Veer Gurjar Aluminium Industries (P) Ltd.,

(2020) 15 SCC 1 [“Babulal”], then held:

“35. The purport of such observation has been dealt with in the

case of Babulal Vardharji Gurjar (II) [Babulal Vardharji Gurjar

v. Veer Gurjar Aluminium Industries (P) Ltd., (2020) 15 SCC 1].

Suffice it to observe that this Court had not ruled out the

application of Section 18 of the Limitation Act to the

proceedings under the Code, if the fact situation of the case so

warrants. Considering that the purport of Section 238A of the

Code, as enacted, is clarificatory in nature and being a

procedural law had been given retrospective effect; which

included application of the provisions of the Limitation Act on

case-to-case basis. Indeed, the purport of amendment in the

Code was not to reopen or revive the time barred debts under

the Limitation Act. At the same time, accrual of fresh period of

limitation in terms of Section 18 of the Limitation Act is on its

own under that Act. It will not be a case of giving new lease to

time barred debts under the existing law (Limitation Act) as

such.

36. Notably, the provisions of Limitation Act have been made

applicable to the proceedings under the Code, as far as may be

applicable. For, Section 238A predicates that the provisions of

Limitation Act shall, as far as may be, apply to the proceedings

or appeals before the Adjudicating Authority, the NCLAT, the

DRT or the Debt Recovery Appellate Tribunal, as the case may

be. After enactment of Section 238A of the Code on

06.06.2018, validity whereof has been upheld by this Court, it is

not open to contend that the limitation for filing application

under Section 7 of the Code would be limited to Article 137 of

the Limitation Act and extension of prescribed period in certain

cases could be only under Section 5 of the Limitation Act. There

is no reason to exclude the effect of Section 18 of the Limitation

Act to the proceedings initiated under the Code. Section 18 of

the Limitation Act reads thus:

“18. Effect of acknowledgement in writing.–(1)

Where, before the expiration of the prescribed period

for a suit or application in respect of any property or

right, an acknowledgement of liability in respect of

such property or right has been made in writing signed

by the party against whom such property or right is

claimed, or by any person through whom he derives

his title or liability, a fresh period of limitation shall be

computed from the time when the acknowledgement

was so signed.

(2) Where the writing containing the acknowledgement

is undated, oral evidence may be given of the time

when it was signed; but subject to the provisions of the

Indian Evidence Act, 1872 (1 of 1872), oral evidence of

its contents shall not be received.

Explanation.–For the purposes of this section,–

(a) an acknowledgement may be sufficient though it

omits to specify the exact nature of the property or

right, or avers that the time for payment, delivery,

performance or enjoyment has not yet come or is

accompanied by a refusal to pay, deliver, perform

or permit to enjoy, or is coupled with a claim to set

off, or is addressed to a person other than a

person entitled to the property or right;

(b) the word “signed” means signed either personally

or by an agent duly authorised in this behalf; and

order shall not be deemed to be an application in

respect of any property or right.”

37. Ordinarily, upon declaration of the loan account/debt as

NPA that date can be reckoned as the date of default to enable

the financial creditor to initiate action under Section 7 of the

Code. However, Section 7 comes into play when the corporate

debtor commits “default”. Section 7, consciously uses the

expression “default” - not the date of notifying the loan account

of the corporate person as NPA. Further, the expression

“default” has been defined in Section 3(12) to mean nonpayment

of “debt” when whole or any part or instalment of the

amount of debt has become due and payable and is not paid by

the debtor or the corporate debtor, as the case may be. In

cases where the corporate person had offered guarantee in

respect of loan transaction, the right of the financial creditor to

initiate action against such entity being a corporate debtor

(corporate guarantor), would get triggered the moment the

principal borrower commits default due to non-payment of debt.

Thus, when the principal borrower and/or the (corporate)

guarantor admit and acknowledge their liability after declaration

of NPA but before the expiration of three years therefrom

including the fresh period of limitation due to (successive)

acknowledgements, it is not possible to extricate them from the

renewed limitation accruing due to the effect of Section 18 of

the Limitation Act. Section 18 of the Limitation Act gets attracted

the moment acknowledgement in writing signed by the party

against whom such right to initiate resolution process under

Section 7 of the Code enures. Section 18 of the Limitation Act

would come into play every time when the principal borrower

and/or the corporate guarantor (corporate debtor), as the case

may be, acknowledge their liability to pay the debt. Such

acknowledgement, however, must be before the expiration of

the prescribed period of limitation including the fresh period of

limitation due to acknowledgement of the debt, from time to

time, for institution of the proceedings under Section 7 of the

Code. Further, the acknowledgement must be of a liability in

respect of which the financial creditor can initiate action under

Section 7 of the Code.”

10. Given the aforesaid, it is not possible to accede to the arguments

made by Shri Sinha that Section 18 of the Limitation Act cannot be made

applicable by reason of the arguments put forth by him. As has been held in

Ambika Prasad Mishra v. State of U.P., (1980) 3 SCC 719, every

argumentative novelty does not undo a settled position of law. Krishna Iyer,

J., speaking for a Bench of five learned Judges, stated thus:

“5. … But, after listening to the Marathon erudition from eminent

counsel, a 13-Judge Bench of this Court upheld the vires of

Article 31-A in unequivocal terms. That decision binds, on the

simple score of stare decisis and the constitutional ground of

Article 141. Every new discovery or argumentative novelty

cannot undo or compel reconsideration of a binding precedent.

In this view, other submissions sparkling with creative ingenuity

and presented with high pressure advocacy, cannot persuade

us to reopen what was laid down for the guidance of the nation

as a solemn proposition by the epic Fundamental Rights case

[(1973) 4 SCC 225 : 1973 Supp SCR 1]. From Kameshwar

Singh [AIR 1952 SC 252 : 1952 SCR 889 : 1952 SCJ 354]

(1952) and Golak Nath [I.C. Golak Nath v. State of Punjab, AIR

1967 SC 1643 : (1967) 2 SCR 762 : (1967) 2 SCJ 486] (1967)

through Kesavananda [(1973) 4 SCC 225 : 1973 Supp SCR 1]

(1973) and Kanan Devan [Kanan Devan Hills Produce Co.

Ltd. v. State of Kerala, (1973) 1 SCR 356 : (1972) 2 SCC 218 :

AIR 1972 SC 2301] (1972) to Gwalior Rayons [State of Kerala

v. Gwalior Rayon Silk Mfg. (Wvg). Co. Ltd.(1973) 2 SCC 713 :

(1974) 1 SCR 671] (1976) and after Article 31-A has stood

judicial scrutiny although, as stated earlier, we do not base the

conclusion on Article 31-A. Even so, it is fundamental that the

nation’s Constitution is not kept in constant uncertainty by

judicial review every season because it paralyses, by perennial

suspense, all legislative and administrative action on vital

issues deterred by the brooding threat of forensic blow up. This,

if permitted, may well be a kind of judicial destabilisation of

State action too dangerous to be indulged in save where

national crisis of great moment to the life, liberty and safety of

this country and its millions are at stake, or the basic direction

of the nation itself is in peril of a shake-up. It is surely wrong to

prove Justice Roberts of the United States Supreme Court right

when he said: [Smith v. Allwright, 321 US 649, 669, 670 (1944)]

“The reason for my concern is that the instant decision,

overruling that announced about nine years ago, tends

to bring adjudications of this tribunal into the same

class as a restricted railroad ticket good for this day

and train only…. It is regrettable that in an era marked

by doubt and confusion, an era whose greatest need is

steadfastness of thought and purpose, this Court which

has been looked to as exhibiting consistency in

adjudication, and a steadiness which would hold the

balance even in the face of temporary ebbs and flows

of opinion, should now itself become the breeder of

fresh doubt and confusion in the public mind as to the

stability of our institutions.”

(emphasis supplied)

11. Section 18 of the Limitation Act reads as follows:

“18. Effect of acknowledgement in writing.—(1) Where,

before the expiration of the prescribed period for a suit or

application in respect of any property or right, an

acknowledgement of liability in respect of such property or right

has been made in writing signed by the party against whom

such property or right is claimed, or by any person through

whom he derives his title or liability, a fresh period of limitation

shall be computed from the time when the acknowledgement

was so signed.

(2) Where the writing containing the acknowledgement is

undated, oral evidence may be given of the time when it was

signed; but subject to the provisions of the Indian Evidence Act,

1872 (1 of 1872), oral evidence of its contents shall not be

received.

Explanation.—For the purposes of this section,—

(a) an acknowledgement may be sufficient though it omits to

specify the exact nature of the property or right, or avers

that the time for payment, delivery, performance or

enjoyment has not yet come or is accompanied by refusal

to pay, deliver, perform or permit to enjoy, or is coupled with

a claim to set off, or is addressed to a person other than a

person entitled to the property or right,

(b) the word “signed” means signed either personally or by an

agent duly authorised in this behalf, and

not be deemed to be an application in respect of any

property or right.”

12. In an illuminating discussion on the reach of Section 18 of the

Limitation Act, including the reach of the Explanation to the said Section,

this Court, in Khan Bahadur Shapoor Fredoom Mazda v. Durga Prasad,

(1962) 1 SCR 140 [“Shapoor Fredoom Mazda”], after referring to Section

19 of the Limitation Act, 1908, which corresponds to Section 18 of the 1963

Act, held:

“It is thus clear that acknowledgement as prescribed by Section

19 merely renews debt; it does not create a new right of action.

It is a mere acknowledgement of the liability in respect of the

right in question; it need not be accompanied by a promise to

pay either expressly or even by implication. The statement on

which a plea of acknowledgement is based must relate to a

present subsisting liability though the exact nature or the

specific character of the said liability may not be indicated in

words. Words used in the acknowledgement must, however,

indicate the existence of jural relationship between the parties

such as that of debtor and creditor, and it must appear that the

statement is made with the intention to admit such jural

relationship. Such intention can be inferred by implication from

the nature of the admission, and need not be expressed in

words. If the statement is fairly clear then the intention to admit

jural relationship may be implied from it. The admission in

question need not be express but must be made in

circumstances and in words from which the court can

reasonably infer that the person making the admission intended

to refer to a subsisting liability as at the date of the statement.

In construing words used in the statements made in writing on

which a plea of acknowledgement rests oral evidence has been

expressly excluded but surrounding circumstances can always

be considered. Stated generally courts lean in favour of a liberal

construction of such statements though it does not mean that

where no admission is made one should be inferred, or where a

statement was made clearly without intending to admit the

existence of jural relationship such intention could be fastened

on the maker of the statement by an involved or far-fetched

process of reasoning. Broadly stated that is the effect of the

relevant provisions contained in Section 19, and there is really

no substantial difference between the parties as to the true

legal position in this matter.”

(at pages 144-145)

13. The next question that this Court must address is as to whether an

entry made in a balance sheet of a corporate debtor would amount to an

acknowledgement of liability under Section 18 of the Limitation Act.

14. Several judgments of this Court have indicated 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. Thus, in Mahabir Cold Storage v. CIT, 1991 Supp (1) SCC

402, this Court held:

“12. The entries in the books of accounts of the appellant would

amount to an acknowledgement of the liability to M/s

Prayagchand Hanumanmal within the meaning of Section 18 of

the Limitation Act, 1963 and extend the period of limitation for

the discharge of the liability as debt. …”

15. Likewise, in a case concerning the dishonour of a cheque under

Section 138 of the Negotiable Instruments Act, 1881, this Court, in A.V.

Murthy v. B.S. Nagabasavanna, (2002) 2 SCC 642 [“A.V. Murthy”], held:

“5. … It is also pertinent to note that under sub-section (3) of

Section 25 of the Indian Contract Act, 1872, a promise, made in

writing and signed by the person to be charged therewith, or by

his agent generally or specially authorized in that behalf, to pay

wholly or in part a debt of which the creditor might have

enforced payment but for the law for the limitation of suits, is a

valid contract. Moreover, in the instant case, the appellant has

submitted before us that the respondent, in his balance sheet

prepared for every year subsequent to the loan advanced by

the appellant, had shown the amount as deposits from friends.

A copy of the balance sheet as on 31-3-1997 is also produced

before us. If the amount borrowed by the respondent is shown

in the balance sheet, it may amount to acknowledgement and

the creditor might have a fresh period of limitation from the date

on which the acknowledgement was made. However, we do not

express any final opinion on all these aspects, as these are

matters to be agitated before the Magistrate by way of defence

of the respondent.”

The judgment in A.V. Murthy (supra) was followed in S. Natarajan vs.

Sama Dharman, Crl. A. No. 1524 of 2014 (decided on 15.07.2014) as

follows:

“7. In this connection, we may usefully refer to a judgment of

this Court in A.V. Murthy v. B.S. Nagabasavanna [A.V. Murthy

v. B.S. Nagabasavanna, (2002) 2 SCC 642] where the accused

had alleged that the cheque issued by him in favour of the

complainant in respect of sum advanced to the accused by the

complainant four years ago was dishonoured by the bank for

the reasons “account closed”. The Magistrate had issued

summons to the accused. The Sessions Court quashed the

proceedings on the ground that the alleged debt was barred by

limitation at the time of issuance of cheque and, therefore, there

was no legally enforceable debt or liability against the accused

under the Explanation to Section 138 of the NI Act and,

therefore, the complaint was not maintainable. While dealing

with the challenge to this order, this Court observed that Under

Section 118 of the NI Act, there is a presumption that until the

contrary is proved, every negotiable instrument was drawn for

consideration. This Court further observed that Section 139 of

the NI Act specifically notes that it shall be presumed unless the

contrary is proved, that the holder of a cheque received the

cheque of the nature referred to in Section 138 of the NI Act for

discharge, in whole or in part, of any debt or other liability. This

Court further observed that under Sub-section (3) of Section 25

of the Contract Act, a promise, made in writing and signed by

the person to be charged therewith, or by his agent generally or

specially authorized in that behalf, to pay wholly or in part a

debt of which the creditor might have enforced payment but for

the law for the limitation of suits, is a valid contract. Referring to

the facts before it, this Court observed that the complainant

therein had submitted his balance sheet, prepared for every

year subsequent to the loan advanced by the complainant and

had shown the amount as deposits from friends. This Court

noticed that the relevant balance sheet is also produced in the

Court. This Court observed that if the amount borrowed by the

accused therein is shown in the balance sheet, it may amount

to acknowledgement and the creditor might have a fresh period

of limitation from the date on which the acknowledgement was

made. …”

16. An exhaustive judgment of the Calcutta High Court in Bengal Silk

Mills Co. v. Ismail Golam Hossain Ariff, 1961 SCC OnLine Cal 128 : AIR

1962 Cal 115 [“Bengal Silk Mills”] held that an acknowledgement of

liability that is made in a balance sheet can amount to an

acknowledgement of debt as follows:

“9. In support of the contention that the balance-sheets do not

amount to acknowledgements of liability, because they were

prepared under compulsion of law Mr. Banerji relies upon the

decision in Kashinath v. New Akot Ginning and Pressing Co.

Ltd., I.L.R. 1950 Nag. 562 at 568 : A.I.R. 1951 Nag. 255. It is

true that the balance-sheets were required to be made both by

the Indian Companies Act, 1913 as also by the articles of

association of the defendant company. There was a compulsion

upon the managing agents to prepare the documents but there

was no compulsion upon them to make any particular

admission. They faithfully discharged their duty and in doing so

they made honest admissions of the Company's liabilities.

Those admissions, though made in discharge of their duty, are

nevertheless conscious and voluntary admissions. A document

is not taken out of the purview of section 19 of the Indian

Limitation Act merely on the ground that it is made under

compulsion of law, see Venkata v. Partha Saradhi, 1892 I.L.R.

16 Mad. 220 at 222, Udaya Thevar v. Subrahmania Chetti,

(1896) 6 M.L.J. 266, 269, Good v. Jane Job, 120 E.R. 810 at

812. I am unable to agree with the reasoning of the Nagpur

decision that a balance-sheet does not save limitation because

it is drawn up under a duty to set out the claims made on the

company and not with the intention of acknowledging liability.

The balance-sheet contains admissions of liability; the agent of

the company who makes and signs it intends to make those

admissions. The admissions do not cease to be

acknowledgements of liability merely on the ground that they

were made in discharge of a statutory duty. I notice that in the

Nagpur case the balance-sheet had been signed by a director

and had not been passed either by the Board of Directors or by

the company at its annual general meeting and it seems that

the actual decision may be distinguished on the ground that the

balance-sheet was not made or signed by a duly authorized

agent of the company.

10. Mr. Banerji next contends that none of the balance-sheets

contains an admission of liability subsisting on the date of which

it is made. According to him the balance-sheet for the year

ended 30-11-1936 which was made on 1-6-1937 contains an

admission of past liability as on 30-11-1936 but not an

admission of liability existing on 1-6-1937. Mr. Banerji contends

that such an admission does not satisfy the test of an

acknowledgement under section 19 of the Indian Limitation Act.

His contention is supported by Jwala Prasad v. Jwala Bank Ltd.,

A.I.R. 1957 All. 143 at 145. In that case the Allahabad High

Court held that the balance-sheet did not contain any

acknowledgement of an existing liability and therefore could not

be treated as an acknowledgement under section 19. Mr.

Banerji also relied upon the decisions in Kandasami Reddi v.

Suppammal, I.L.R. 45 Mad. 443, Venkata v. Partha Saradhi,

I.L.R. 18 Mad. 220, Rustomji on Limitation, 6th Edition, pages

191–193 and the cases collected therein. Now it is well settled

that in order to satisfy the test of an acknowledgement under

section 19 the admission of liability must be an admission of

subsisting liability. In Kandasami Reddi v. Suppammal, I.L.R. 45

Mad. 443 at 445, Ayling J. said, “Liability can only signify

present liability at the time of acknowledgement and this is

clearly laid down in Venkata v. Parthasaradhi, (1893) 16 Mad.

220.” In Venkata v. Parthasaradhi, I.L.R. 16 Mad. 220 at 223

Muttasami Ayyar, J. said, “It is therefore necessary that upon a

reasonable construction of the language used by the debtor in

writing the relation of debtor and creditor must appear to be

distinctly admitted, that it must be admitted also to be a

subsisting jural relation, and then an intention to continue it until

it is lawfully determined must also be evident.” The section

requires a definite admission of liability in respect of the debt,

but even an admission that the debt existed at a previous date

may, having regard to the language used and the surrounding

circumstances, amount to an implied representation that the

debt is still subsisting (see Maniram Seth v. Seth Rupchand,

I.L.R. 33 Cal. 1047 P.C.). In my opinion the balance-sheets

satisfy the test of an acknowledgement under section 19. Each

of them contains an admission that balances have been struck

at the end of the previous year and that a definite sum has

been found to be the balance then due to the creditor. The

natural inference to be drawn from the balance-sheet is that the

closing balance due to the creditor at the end of the previous

year will be carried forward as the opening balance due to him

at the beginning of the next year. In each balance-sheet there is

thus an admission of a subsisting liability to continue the

relation of debtor and creditor and a definite representation of a

present intention to keep the liability alive until it is lawfully

determined by payment or otherwise. There is necessarily a

time lag between the date of the signing of the balance-sheet

and the end of the previous year. The balance-sheet contains

no admission of the amount due on the date of the signature,

that amount may be and often is different from the amount

shown as due at the end of the previous year, but that fact

alone does not take the document out of the purview of section

19. Take the case of a banker and its depositor. Suppose the

banker sends to the depositor a monthly statement of account

made for the month of February 1961 and signed on March 15,

1961. The statement gives the balance due on February 28,

1961. The amount due on March 15 may be quite different; the

banker might have been made payments for the customer,

nevertheless the statement amounts to a sufficient

acknowledgement under section 19. I am therefore unable to

agree with the decision in Jwala Prasad v. Jwala Bank

Ltd., A.I.R. 1957 All. 144.

11. To come under section 19 an acknowledgement of a debt

need not be made to the creditor nor need it amount to a

promise to pay the debt. In England it has been held that a

balance-sheet of a company stating the amount of its

indebtedness to the creditor is a sufficient acknowledgement in

respect of a specialty debt under section 5 of the Civil

Procedure Act, 1833 (3 and 4 Will — 4c. 42), see Re: Atlantic

and Pacific Fibre Importing and Manufacturing Co. Ltd., 1928

Ch. 836 under section 1 of Lord Tentenden’s Act, 1828 (9 Geo.

4, c. 14) read with section 13 of the Mercantile Law Amendment

Act, 1856 (19 and 20 Vict. c. 97), see Re: The Coliseum

(Burrow) Ltd., (1930) 2 Ch. 44 at 47 and under sections 23 and

24 of the Limitation Act, 1939 (c. 21), see Ledingham v.

Bermejo Estancia Co. Ltd., (1947) 1 A.E.R. 749 and Jones v.

Bellgrove Properties Ltd., (1949) 2 K.B. 700, on appeal from

(1949) 1 A.E.R. 498. Section 5 of the Civil Procedure Act, 1833

did not require that the acknowledgement should be given to

the claiming creditor and consequently a balance-sheet

containing an admission of indebtedness to the debenture

holders was a sufficient acknowledgement of liability in respect

of the debentures under that section, though it was sent only to

the debenture holders who happened to be the shareholders of

the company and not to the other debenture holders, see Re:

Atlantic and Pacific Fibre Importing and Manufacturing Co.

Ltd., (1928) 1 Ch. 836. Under Tentenden's Act, 1828 as also

under the Limitation Act, 1939 (c. 21) the acknowledgement

must be made to the creditor or his agent and if the balancesheet

is sent to a shareholder who is also a creditor the

requirements of those Acts were satisfied, see Re: The

Coliseum (Burrow) Ltd., (1930) 2 Ch. 44 at 47, Jones v.

Bellgrove Properties Ltd., (1949) 1 A.E.R. 498 at 504 affirmed

(1949) 2 K.B. 700. The decision in the last case has been

followed in India and it has been held that an admission of

indebtedness in a balance-sheet is a sufficient

acknowledgement under section 19 of the Indian Limitation Act,

see Raja of Vizianagram v. Official Liquidator, Vizianagram

Mining Co. Ltd., (1951) 2 M.L.J. 535 at 550-1 : A.I.R. 1952 Mad.

136 at 145, Lahore Enamelling and Stamping Co. Ltd. v. A.K.

Bhalla, A.I.R. 1958 Punjab 341 at 347, First National Bank Ltd.

v. The Mandi (State) Industries Ltd., (1957) 59 Punjab Law

Reports 589 and in an unreported decision of S.R. Das Gupta,

J. in matter No. 449 of 1955 Re: Vita Supplies Corporation Ltd.

decided on December 7, 1956.”

Importantly, this judgment holds that though the filing of a balance sheet is

by compulsion of law, the acknowledgement of a debt is not necessarily so.

In fact, it is not uncommon to have an entry in a balance sheet with notes

annexed to or forming part of such balance sheet, or in the auditor’s report,

which must be read along with the balance sheet, indicating that such entry

would not amount to an acknowledgement of debt for reasons given in the

said note.

17. Bengal Silk Mills (supra) also dealt with the judgment in Kashinath

Sankarappa v. New Akot Cotton Ginning & Pressing Co. Ltd., 1949

SCC OnLine MP 123 : AIR 1951 Nag 255 [“Kashinath”] by distinguishing

the said judgment on the ground that the balance sheet in that case was

not made or signed by a duly authorised agent of the company. Quite apart

from this, if the said judgment is perused, what becomes clear is that the

observation made in paragraph 20 is really an obiter observation, as the

High Court went on to hold in paragraph 26 that the balance sheets that

were produced were never proved in accordance with law, apart from being

validly rejected by the shareholders, as a result of which, such balance

sheets could not, therefore, operate as acknowledgements of liability under

Section 19 of the Limitation Act, 1908.

18. In an appeal to the Supreme Court in Kashinath Sankarappa Wani

v. New Akot Cotton Ginning and Pressing Co. Ltd., 1958 SCR 1331,

this Court referred to Section 3(b) of the Commercial Documents Evidence

Act (XXX of 1939) and then held that under the said Act, the balance sheet

of the respondent company for the year 1940-1941 should have been

admitted in evidence. This Court held that, unfortunately, the provisions of

the said Act had not been brought to the attention of the High

Court. However, having so held, this Court then went on to hold that on the

facts of that case, no presumption that the balance sheet was duly made

under Section 3(b) could be raised, as a result of which there could be no

acknowledgement of liability on the facts of that case.

19. Two other judgments – of the Andhra Pradesh High Court and the

Gauhati High Court – were also relied upon by the counsel for the

respondents. So far as the Andhra Pradesh High Court is concerned, in

Vijayalakshmi v. Hari Hara Ginning and Pressing, Nandigaon, OS A No.

40 of 1998 (decided on 03.03.1999), Liberhan, C.J. differed from a

Karnataka High Court judgment which stated that showing of an amount in

a balance sheet would amount to an acknowledgement under Section 18 of

the Limitation Act. This was done as follows:

“5. The learned Counsel for the appellant relied on a decision of

the Karnataka High Court in State Bank of India v. Hegde and

Golay Ltd., 1985 SCC OnLine Kar 428 : ILR 1987 Kar 2673,

wherein it is observed that showing of an amount in a balance

sheet amounts to an acknowledgement in terms of the Indian

Limitation Act. Consequently, the amount having been admitted

and the respondent having not paid the same, the petition

required admission as laid down by the said judgment that civil

suit as well as legal proceedings can continue simultaneously.

Without expressing our opinion on the law laid down in the said

judgment, though it cannot be categorically laid down that mere

showing a debt due in a balance-sheet would amount to

acknowledgement, we may observe that it is a well-established

law that for giving an acknowledgement, a person has to be

conscious of his act to the knowledge of the other person.

Merely showing a debt in a balance-sheet cannot, prima facie,

as presently advised, be termed to be an acknowledgement in

terms of the Indian Limitation Act. The acknowledgement as

envisaged by the Limitation Act categorically had to be with the

intention of accepting the debt with the object of extending the

limitation for recovery, which is not the case herein. Thus, we

do not find the case in hand to be covered by the law laid down

by the said judgment though we have our own doubts with

respect to correctness of the law laid down in the said

judgment.”

This judgment does not, in any manner, even purport to lay down the

law. That apart, the statement that an acknowledgement, as envisaged by

the Limitation Act, has to be with the intention of accepting the debt with the

object of extending the limitation for recovery is de hors Section 18 of the

Limitation Act and directly contrary to Shapoor Fredoom Mazda (supra)

which is, in fact, referred to in the very next paragraph of the aforesaid

judgment. Shapoor Fredoom Mazda (supra) had made it plain that all that

was necessary was that the acknowledgement establishes a jural

relationship of debtor and creditor, which undoubtedly was established on

the facts of that case. This judgment, therefore, cannot avail the

respondents.

20. Reliance was also placed on a judgment of the Gauhati High Court in

Ajit Chandra Bagchi v. Harishpur Tea Company (P.) Ltd., 1990 SCC

OnLine Gau 24 : AIR 1991 Gau 92. In particular, paragraphs 9 and 10 were

relied upon by learned counsel for the respondents. These paragraphs

state:

“9. I may now turn to the next submission of learned counsel for

the appellants - defendants that the plaintiff failed to prove that

the amounts in question were due from the defendants. The

contention of the counsel is that the plaintiff simply produced

before the court certain books of account and balance sheets.

No effort was made even to prove the individual entries in the

said books of account. The claim was sought to be established

by the plaintiff simply on the basis of the balance appearing in

the books of account of plaintiff itself as outstanding against the

Tea Estates of the defendants. It was submitted that the books

of account or the balance sheets showing the amount due from

the defendants are not sufficient without other evidence to

prove the debt. The learned counsel in this connection relied on

section 34 of the Evidence Act, which provides that even entries

in the books of account regularly kept in the course of business,

which are relevant, are alone not sufficient evidence to charge

any person with liability. Learned counsel also relied on the

Illustration given to the said section, which is as follows:

“A sues B for Rs. 1000, and shows entries in his

account-books showing B to be indebted to him to this

amount. The entries are relevant, but are not sufficient

without other evidence to prove the debt.”

On the basis of the aforesaid provision it was submitted that the

entries in the books of account showing the defendants to be

indebted to the plaintiff for certain amount might be relevant but

are not sufficient to prove the debt. In the instant case, the

learned counsel submitted, even the entries have not been

proved. What is sought to be proved is the balance appearing

in the accounts or in the balance sheet as due from the

defendants. Such a course is not permissible except in a case

of “accounts stated”. Admittedly, the present case is not one of

“accounts stated”.

10. I have carefully considered the submissions. I find that

neither the individual entries have been proved by the plaintiff

nor there is any material whatsoever other than the books of

account or the balance sheet to prove that the transactions in

question in fact took place. No decree can therefore, be

obtained by the plaintiff merely on the basis of certain entries in

the account books or the balance shown to be due at the end of

the year in such accounts or in the balance sheets. The

admitted position in the instant case is that no evidence has

been adduced by the plaintiff to prove the transactions which

had been categorically denied by the defendants in their written

statement. In that view of the matter even on facts it has to be

held that the plaintiffs failed to prove that the amount claimed in

the suit was due from the defendants. In view of the aforesaid

finding, I am of the opinion that the learned trial court was not

justified in decreeing the suit. The suit was barred by limitation

except in so far as it relates to recovery of a sum of Rs. 30/-.

Besides, the plaintiff also failed to prove the debt in accordance

with law. Under the circumstances, the suit should have been

dismissed.”

This judgment also does not take the case of the respondents any further

as, like the Nagpur High Court judgment in Kashinath (supra), the entries

in the books of accounts were not proved on the facts of that case.

21. We must now examine the position under the Companies Act, 2013

[“Companies Act”] qua any compulsion of law for filing of balance sheets

and acknowledgements made therein. Section 2(40) of the Companies Act

defines financial statement as follows:

“2. Definitions.—In this Act, unless the context otherwise

requires,—

xxx xxx xxx

(40) “financial statement” in relation to a company, includes—

(i) a balance sheet as at the end of the financial

year;

(ii) a profit and loss account, or in the case of a

company carrying on any activity not for profit, an

income and expenditure account for the financial

year;

(iii) cash flow statement for the financial year;

(iv) a statement of changes in equity, if applicable;

and

(v) any explanatory note annexed to, or forming part

of, any document referred to in sub-clause (i) to

sub-clause (iv):

Provided that the financial statement, with respect to One

Person Company, small company and dormant company, may

not include the cash flow statement;

xxx xxx xxx”

Under Section 92, every company is to prepare an annual return containing

certain particulars as follows:

“92. Annual return.—(1) Every company shall prepare a return

(hereinafter referred to as the annual return) in the prescribed

form containing the particulars as they stood on the close of the

financial year regarding—

(a) its registered office, principal business activities,

particulars of its holding, subsidiary and associate

companies;

(b) its shares, debentures and other securities and

shareholding pattern;

(d) its members and debenture-holders along with

changes therein since the close of the previous

financial year;

(e) its promoters, directors, key managerial personnel

along with changes therein since the close of the

previous financial year;

(f) meetings of members or a class thereof, Board and

its various committees along with attendance

details;

(g) remuneration of directors and key managerial

personnel;

(h) penalty or punishment imposed on the company, its

directors or officers and details of compounding of

offences and appeals made against such penalty or

punishment;

(i) matters relating to certification of compliances,

disclosures as may be prescribed;

(j) details, as may be prescribed, in respect of shares

held by or on behalf of the Foreign Institutional

Investors; and

(k) such other matters as may be prescribed,

and signed by a director and the company secretary, or where

there is no company secretary, by a company secretary in

practice:

Provided that in relation to One Person Company and small

company, the annual return shall be signed by the company

secretary, or where there is no company secretary, by the

director of the company:

Provided further that the Central Government may prescribe

abridged form of annual return for “One Person Company, small

company and such other class or classes of companies as may

be prescribed.

(2) The annual return, filed by a listed company or, by a

company having such paid up capital or turnover as may be

prescribed, shall be certified by a company secretary in practice

in the prescribed form, stating that the annual return discloses

the facts correctly and adequately and that the company has

complied with all the provisions of this Act.

(3) Every company shall place a copy of the annual return on

the website of the company, if any, and the web-link of such

annual return shall be disclosed in the Board's report.

(4) Every company shall file with the Registrar a copy of the

annual return, within sixty days from the date on which the

annual general meeting is held or where no annual general

meeting is held in any year within sixty days from the date on

which the annual general meeting should have been held

together with the statement specifying the reasons for not

holding the annual general meeting, with such fees or additional

fees as may be prescribed.

(5) If any company fails to file its annual return under subsection

(4), before the expiry of the period specified therein,

such company and its every officer who is in default shall be

liable to a penalty of ten thousand rupees and in case of

continuing failure, with a further penalty of one hundred rupees

for each day after the first during which such failure continues,

subject to a maximum of two lakh rupees in case of a company

and fifty thousand rupees in case of an officer who is in default.

(6) If a company secretary in practice certifies the annual return

otherwise than in conformity with the requirements of this

section or the rules made thereunder, he shall be liable to a

penalty of two lakh rupees.”

Vide Section 128, every company shall prepare and keep at its registered

office, books of accounts and financial statements for every financial year,

as follows:

“128. Books of account, etc., to be kept by company.—(1)

Every company shall prepare and keep at its registered office

books of account and other relevant books and papers and

financial statement for every financial year which give a true

and fair view of the state of the affairs of the company, including

that of its branch office or offices, if any, and explain the

transactions effected both at the registered office and its

branches and such books shall be kept on accrual basis and

according to the double entry system of accounting:

Provided that all or any of the books of account aforesaid

and other relevant papers may be kept at such other place in

India as the Board of Directors may decide and where such a

decision is taken, the company shall, within seven days thereof,

file with the Registrar a notice in writing giving the full address

of that other place:

Provided further that the company may keep such books of

account or other relevant papers in electronic mode in such

manner as may be prescribed.

xxx xxx xxx”

Section 129, which is of importance, refers directly to financial statements

and states as follows:

“129. Financial statement.—(1) The financial statements shall

give a true and fair view of the state of affairs of the company or

companies, comply with the accounting standards notified

under Section 133 and shall be in the form or forms as may be

provided for different class or classes of companies in Schedule

III:

Provided that the items contained in such financial

statements shall be in accordance with the accounting

standards:

Provided further that nothing contained in this sub-section

shall apply to any insurance or banking company or any

company engaged in the generation or supply of electricity, or

to any other class of company for which a form of financial

statement has been specified in or under the Act governing

such class of company:

Provided also that the financial statements shall not be

treated as not disclosing a true and fair view of the state of

affairs of the company, merely by reason of the fact that they do

not disclose—

(a) in the case of an insurance company, any matters

which are not required to be disclosed by the

Insurance Act, 1938 (4 of 1938), or the Insurance

Regulatory and Development Authority Act, 1999

(41 of 1999);

(b) in the case of a banking company, any matters

which are not required to be disclosed by the

Banking Regulation Act, 1949 (10 of 1949);

or supply of electricity, any matters which are not

required to be disclosed by the Electricity Act, 2003

(36 of 2003);

(d) in the case of a company governed by any other law

for the time being in force, any matters which are

not required to be disclosed by that law.

(2) At every annual general meeting of a company, the Board of

Directors of the company shall lay before such meeting

financial statements for the financial year.

xxx xxx xxx

(5) Without prejudice to sub-section (1), where the financial

statements of a company do not comply with the accounting

standards referred to in sub-section (1), the company shall

disclose in its financial statements, the deviation from the

accounting standards, the reasons for such deviation and the

financial effects, if any, arising out of such deviation.

xxx xxx xxx

(7) If a company contravenes the provisions of this section, the

managing director, the whole-time director in charge of finance,

the Chief Financial Officer or any other person charged by the

Board with the duty of complying with the requirements of this

section and in the absence of any of the officers mentioned

above, all the directors shall be punishable with imprisonment

for a term which may extend to one year or with fine which shall

not be less than fifty thousand rupees but which may extend to

five lakh rupees, or with both.

Explanation.—For the purposes of this section, except where

the context otherwise requires, any reference to the financial

statement shall include any notes annexed to or forming part of

such financial statement, giving information required to be given

and allowed to be given in the form of such notes under this

Act.”

Likewise, under Section 134, financial statements are to be approved by

the Board of Directors before they are signed, and the auditor’s report, as

well as a report by the Board of Directors, is to be attached to each

financial statement as follows:

“134. Financial statement, Board’s report, etc.—(1) The

financial statement, including consolidated financial statement,

if any, shall be approved by the Board of Directors before they

are signed on behalf of the Board by the chairperson of the

company where he is authorised by the Board or by two

directors out of which one shall be managing director, if any,

and the Chief Executive Officer, the Chief Financial Officer and

the company secretary of the company, wherever they are

appointed, or in the case of One Person Company, only by one

director, for submission to the auditor for his report thereon.

(2) The auditors’ report shall be attached to every financial

statement.

(3) There shall be attached to statements laid before a

company in general meeting, a report by its Board of Directors,

which shall include—

xxx xxx xxx

(f) explanations or comments by the Board on every

qualification, reservation or adverse remark or

disclaimer made—

(i) by the auditor in his report; and

(ii) by the company secretary in practice in his

secretarial audit report;

(g) particulars of loans, guarantees or investments

under Section 186;

xxx xxx xxx

Provided that where disclosures referred to in this subsection

have been included in the financial statements, such

disclosures shall be referred to instead of being repeated in the

Board’s report:

xxx xxx xxx

(4) The report of the Board of Directors to be attached to the

financial statement under this section shall, in case of a One

Person Company, mean a report containing explanations or

comments by the Board on every qualification, reservation or

adverse remark or disclaimer made by the auditor in his report.

xxx xxx xxx

(7) A signed copy of every financial statement, including

consolidated financial statement, if any, shall be issued,

circulated or published along with a copy each of—

(a) any notes annexed to or forming part of such

financial statement;

(b) the auditor’s report; and

(8) If a company is in default in complying with the provisions of

this section, the company shall be liable to a penalty of three

lakh rupees and every officer of the company who is in default

shall be liable to a penalty of fifty thousand rupees.”

Under Section 137, copies of financial statements are then to be filed with

the Registrar of Companies as follows:

“137. Copy of financial statement to be filed with Registrar.

—(1) A copy of the financial statements, including consolidated

financial statement, if any, along with all the documents which

are required to be or attached to such financial statements

under this Act, duly adopted at the annual general meeting of

the company, shall be filed with the Registrar within thirty days

of the date of annual general meeting in such manner, with

such fees or additional fees as may be prescribed:

Provided that where the financial statements under subsection

(1) are not adopted at annual general meeting or

adjourned annual general meeting, such unadopted financial

statements along with the required documents under subsection

(1) shall be filed with the Registrar within thirty days of

the date of annual general meeting and the Registrar shall take

them in his records as provisional till the financial statements

are filed with him after their adoption in the adjourned annual

general meeting for that purpose:

Provided further that financial statements adopted in the

adjourned annual general meeting shall be filed with the

Registrar within thirty days of the date of such adjourned annual

general meeting with such fees or such additional fees as may

be prescribed:

Provided also that a One Person Company shall file a copy

of the financial statements duly adopted by its member, along

with all the documents which are required to be attached to

such financial statements, within one hundred eighty days from

the closure of the financial year:

Provided also that a company shall, along with its financial

statements to be filed with the Registrar, attach the accounts of

its subsidiary or subsidiaries which have been incorporated

outside India and which have not established their place of

business in India.

Provided also that in the case of a subsidiary which has

been incorporated outside India (herein referred to as “foreign

subsidiary”), which is not required to get its financial statement

audited under any law of the country of its incorporation and

which does not get such financial statement audited, the

requirements of the fourth proviso shall be met if the holding

Indian company files such unaudited financial statement along

with a declaration to this effect and where such financial

statement is in a language other than English, along with a

translated copy of the financial statement in English.

(2) Where the annual general meeting of a company for any

year has not been held, the financial statements along with the

documents required to be attached under sub-section (1), duly

signed along with the statement of facts and reasons for not

holding the annual general meeting shall be filed with the

Registrar within thirty days of the last date before which the

annual general meeting should have been held and in such

manner, with such fees or additional fees as may be prescribed.

(3) If a company fails to file the copy of the financial statements

under sub-section (1) or sub-section (2), as the case may be,

before the expiry of the period specified therein, the company

shall be liable to a penalty of ten thousand rupees and in case

of continuing failure, with a further penalty of one hundred

rupees for each day during which such failure continues,

subject to a maximum of two lakh rupees, and the managing

director and the Chief Financial Officer of the company, if any,

and, in the absence of the managing director and the Chief

Financial Officer, any other director who is charged by the

Board with the responsibility of complying with the provisions of

this section, and, in the absence of any such director, all the

directors of the company, shall be shall be liable to a penalty

of ten thousand rupees and in case of continuing failure, with a

further penalty of one hundred rupees for each day after the

first during which such failure continues, subject to a maximum

of fifty thousand rupees.”

22. A perusal of the aforesaid Sections 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.

23. The judgment in Bengal Silk Mills (supra) has been referred to with

approval in various other judgments. Thus, in South Asia Industries (P)

Ltd. v. General Krishna Shamsher Jung Bahadur Rana, 1972 SCC

OnLine Del 185 : ILR (1972) 2 Del 712, the Delhi High Court held:

“46. Shri Rameshwar Dial argued that statements in the

balance-sheet of a company cannot amount to

acknowledgement of liability because the balance-sheet is

made under compulsion of the provisions in the Companies Act.

There is no force in this argument. In the first place, section 18

of the Limitation Act, 1963, requires only that the

acknowledgement of liability must have been made in writing,

but it does not prescribe that the writing should be in any

particular kind of document. So, the fact that the writing is

contained in a balance-sheet is immaterial. In the second place,

it is true that section 131 of the Companies Act, 1913 (section

210 of the Companies Act, 1956) makes it compulsory that an

annual balance sheet should be prepared and placed before

the Company by the Directors, and section 132 (section 211 of

the Companies Act, 1956) requires that the balance-sheet

should contain a summary, inter alia, of the current liabilities of

the company. But, as pointed out by Bachawat J. in Bengal Silk

Mills v. Ismail Golam Hossain Ariff, A.I.R. 1962 Calcutta 115

although there was statutory compulsion to prepare the annual

balance-sheet, there was no compulsion to make any particular

admission, and a document is not taken out of the purview of

section 18 of the Indian Limitation Act, 1963 (section 19 of the

Indian Limitation Act, 1908) merely on the ground that it is

prepared under compulsion of law or in discharge of statutory

duty. Reference may also be made to the decisions in Raja of

Vizianagram v. Vizianagram Mining Co. Ltd., A.I.R. 1952

Madras 136, Jones v. Bellgrove Properties Ltd., (1949) 1 All

E.R. 498; and Lahore Enamelling and Stamping Co. v. A.K.

Bhalla, A.I.R. 1958 Punjab 341, in which statements in balancesheets

of companies were held to amount to

acknowledgements of liability of the companies.

47. Shri Rameshwar Dial referred to the decision of the Privy

Council in Consolidated Agencies Ltd. v. Bertram Ltd., (1964) 3

All. E.R. 282. We shall advert to this decision presently when

we deal with another argument of Shri Rameshwar Dial, and it

is sufficient to state so far as the argument under consideration

is concerned that even in this decision of the Privy Council it

has been recognised that balance-sheets could in certain

circumstances amount to acknowledgements of liability. It

cannot, therefore, be said as a general proposition of law that

statements in balance-sheets of a company cannot operate at

all as acknowledgements of liability as contended by Shri

Rameshwar Dial.

48. The learned counsel next argued that the words used in the

entry in the balance-sheet in the present case did not amount to

any acknowledgement of liability. We do not think so. The

words used in the entry apparently show that in explaining its

current liabilities and the provisions made for the same, it was

stated that there was a sum of Rs. 7,87,150.42 held in shareholders'

suspense account for payment to the share-holders of

the Indian National Airways Limited (in voluntary liquidation —

since dissolved). The words used clearly acknowledge the

liability. The learned single Judge also took the same view as

regards the words used in the balance-sheet. In Lahore

Enamelling and Stamping Co. Ltd. v. A.K. Bhalla, Tek Chand J.

held that “debts due to creditors not mentioned by name but

included in the item relating to “Loans (unsecured)” or as due to

“Sundry Creditors” mentioned in the balance-sheet amount to

an “acknowledgement” of liability for the purposes of section 19

of the Indian Limitation Act, 1908. There was thus no force in

the argument of the learned counsel.

xxx xxx xxx

51. The next argument was that the balance-sheet was no

doubt signed by two Directors, but they did not sign as duly

authorised agents of the transferee company as required by

explanation (b) to section 18 of the Limitation Act. There is no

substance in this argument. The Companies Act, 1956, came

into force in 1956. Section 210 of the Act requires the Board of

Directors to lay a balance-sheet before the company at the

Annual General Meeting. Section 211 prescribes the form and

contents of a balance-sheet. The form of balance-sheet is given

in Part 1 of Schedule VI to the Act, and according to it the

current liabilities and provisions have to be set out in the

balance-sheet. Section 215(i)(ii) requires that the balance-sheet

should be signed on behalf of the Board of Directors, inter alia,

by the Secretary of the Company and by not less than two

Directors of the company. Section 215(3) provides that a

balance-sheet shall be approved by the Board of Directors

before it is signed on behalf of the Board of Directors in

accordance with section 215(i)(ii) and before it is submitted to

the Auditors for their report thereon. Thus, the statement of

current liabilities and provisions in the balance-sheet has to be

approved by the Board of Directors before it is signed by the

Secretary and two Directors on behalf of the Board. In other

words, the balance-sheet is signed by the Secretary and two

Directors at the instance and on the approval of the Board of

Directors of the company. After the balance-sheet is audited,

section 216 requires that the Auditors' report should be

attached to the balance-sheet, and section 217 requires the

Board of Directors also to make a report. The balance-sheet

together with the Auditors report and the Board's report are then

required to be placed before the company at the annual general

meeting for adoption of the balance-sheet. After the balancesheet

has been so laid before the company at the annual

general meeting, section 220 requires that three copies of the

balance-sheet should be filed with the Registrar. In the present

case, the balance-sheet (Schedule D to Annexure J) was

signed by the Secretary and two Directors, and Annexure J

contains the Auditors’ report and the Board’s report. It was

stated in the judgment of the learned single Judge that the

balance-sheet was adopted by the company and the same was

not disputed before us. It is thus quite clear that the balancesheet

was signed by duly authorised agents of the company.”

24. The judgment of Sabyasachi Mukharji, J. (as His Lordship then was),

sitting singly in the Calcutta High Court, has, in Pandam Tea Co. Ltd., In

re, 1973 SCC OnLine Cal 93 : AIR 1974 Cal 170, held as follows:

“4. Now the question is whether the statements, which are

contained in the profits and loss accounts and the assets and

liabilities side indicating the liability of the petitioning creditor

along with the statement of the Directors made to the

shareholders as Directors’ report should be read together and if

so whether reading these two statements together these

amount to an acknowledgement as contemplated under Section

18 of the Limitation Act, 1963, or Section 19 of the Limitation

Act, 1908. In my opinion, both these statements have to be

read together. The balance-sheet is meant to be presented and

passed by the shareholders and is generally accompanied by

the Directors’ report to the shareholders. Therefore in

understanding the balance-sheets and in explaining the

statements in the balance-sheets, the balance-sheets together

with the Directors’ report must be taken together to find out the

true meaning and purport of the statements. Counsel appearing

for petitioning creditor contended that under the statute the

balance-sheet was a separate document and as such if there

was unequivocal acknowledgement on the balance-sheet the

statement of the Directors’ report should not be taken into

consideration. It is true the balance-sheet is a statutory

document and perhaps is a separate document but the

balance-sheet not confirmed or passed by the shareholders

cannot be accepted as correct. Therefore, in order to validate

the balance-sheet, it must be duly passed by the shareholders

at the appropriate meeting and in order to do so it must be

accompanied by a report, if any, made by the Directors.

Therefore, even though the balance-sheet may be a separate

document these two documents in the facts and circumstances

of the case should be read together and should be construed

together. It was held by the Supreme Court in the case of L.C.

Mills v. Aluminium Corpn. of India Ltd., (1971) 1 SCC 67 : AIR

1971 SC 1482, that it was clear that the statement on which the

plea of acknowledgement was founded should relate to a

subsisting liability as the section required and it should be made

before the expiration of the period prescribed under the Act. It

need not, however, amount to a promise to pay for an

acknowledgement did not create a new right of action but

merely extended the period of limitation. The statement need

not indicate the exact nature or the specific character of the

liability. The words used in the statement in question must,

however, relate to a present subsisting liability and indicate the

existence of a jural relationship between the parties such as, for

instance, that of a debtor and a creditor and the intention to

admit such jural relationship. Such an intention need not,

however, be in express terms and could be inferred by

implication from the nature of the admission and the

surrounding circumstances. Generally speaking, a liberal

construction of the statement in question should be given. That

of course did not mean that where a statement was made

without intending to admit the existence of jural relationship,

such intention should be fastened on the person making the

statement by an involved and far-fetched reasoning. In order to

find out the intention of the document by which

acknowledgement was to be construed the document as a

whole must be read and the intention of the parties must be

found out from the total effect of the document read as a whole.

…”

25. In Hegde & Golay Limited v. State Bank of India, 1985 SCC

OnLine Kar 428 : ILR 1987 Kar 2673, the Karnataka High Court held as

follows:

“43. Re. Point (e). The acknowledgement of liability contained in

the balance-sheet of a company furnishes a fresh starting point

of limitation. It is not necessary, as the law stands in India, that

the acknowledgement should be addressed and communicated

to the creditor.

We are in respectful agreement with the view taken by the

Learned Company Judge on the point. The position of law that

an acknowledgement of debts in the balance-sheets of a

Company does furnish fresh starting point of limitation is too

well settled to need any elaborate discussion (See: Jones v.

Bellgrove Properties Ltd. [1949 (1) All ER 498], In Re:

Campania de Electricidad [1980 Ch D 146], Babulal

Rukmanand v. Official Liquidator [AIR 1968 Rajasthan 214] and

Bengal Silk Mills Co. v. Ismail Golam Hossain Ariff [AIR 1962

Calcutta 115]). We see no substance in this contention either.”

26. In Bhajan Singh Samra v. M/s. Wimpy International Ltd., 2011

SCC OnLine Del 4888 : (2011) 185 DLT 428, the Delhi High Court held:

“13. Having heard the parties, this Court is of the opinion that

the petitioning-creditor has to satisfy the Court that the debt on

which the petition is based was due and payable on the date of

the petition. Certainly a time barred debt cannot be the basis of

a winding up petition. However, admission of a debt either in a

balance sheet or in the form of a letter duly signed by the

respondent, would amount to an acknowledgement, extending

the period of limitation. Section 18(1) of the Limitation Act, 1963

incorporates the said principle. Section 18(1) of the Limitation

Act, 1963 reads as under:

“18. Effect of acknowledgement in writing.

(1) Where, before the expiration of the prescribed

period for a suit or application in respect of any

property or right, an acknowledgement of liability in

respect of such property or right has been made in

writing signed by the party against whom such property

or right is claimed, or by any person through whom he

derives his title or liability, a fresh period of limitation

shall be computed from the time when the

acknowledgement was so signed.

xxx xxx xxx”

14. The Allahabad High Court in the case of Fortis Financial

Services Ltd. v. KHSL Industries Ltd., (1999) 95 Company

Cases 622 (All) held that an acknowledgement by an Assistant

Vice-President of the debtor company was sufficient for

computing a fresh period of limitation from the date of such

acknowledgement.

15. The Calcutta High Court in the case of Bengal Silk Mills

Co. v. Ismail Golam Hossain Ariff, AIR 1962 Cal. 115 held that

in an appeal arising from a money decree against a company,

even statement of a liability in the balance-sheet of the

company amounted to admission/acknowledgement of a debt

giving rise to a fresh period of limitation, notwithstanding the

fact that the balance-sheet was prepared under ‘compulsions of

statute and of the articles of association of the company’.

16. In Vijaya Kumar Machinery & Electrical Stores v. Alaparthi

Lakshmikanthamma, (1969) 74 ITR 224 (AP), the Andhra

Pradesh High Court after following Bengal Silk Mills Co.

(supra), Raja of Vizianagram v. Official Liquidator, Vizianagram

Mining Company Limited, AIR 1952 Mad. 1361, Lahore

Enamelling and Stamping Co. Ltd. v. A.K. Bhalla, AIR 1958

Punj. 341 and Jones v. Bellgrove Properties Ltd., (1949) 2

All.ER 198 held, “What emerges from a consideration of the

above decision is that the date of signing the balance-sheet by

the second defendant started a fresh period of limitation”.

17. Consequently, in the present case, the acknowledgement of

the petitioner's loan of Rs. 50,000/- by Chartered Accountant of

respondent-company vide letters dated 23rd February, 2002 and

21st November, 2002, as well as in the respondent-company's

balance sheets for the years ended 31st March, 2004,

31st March, 2005 and 31st March, 2006 not only extends the

period of limitation but also constitutes fresh cause of action for

filing a winding up petition. Accordingly, the present winding up

petition is within limitation.”

27. In CIT-III v. Shri Vardhman Overseas Ltd., 2011 SCC OnLine Del

5599 : (2012) 343 ITR 408, the Delhi High Court held:

“17. In the case before us, as rightly pointed out by the Tribunal,

the assessee has not transferred the said amount from the

creditors' account to its profit and loss account. The liability was

shown in the balance sheet as on 31st March, 2002. The

assessee being a limited company, this amounted to

acknowledging the debts in favour of the creditors. Section 18

of the Limitation Act, 1963 provides for effect of

acknowledgement in writing. It says where before the expiration

of the prescribed period for a suit in respect of any property or

right, an acknowledgement of liability in respect of such

property or right has been made in writing signed by the party

against whom such property or right is claimed, a fresh period

of limitation shall commence from the time when the

acknowledgement was so signed. In an early case, in England,

in Jones v. Bellgrove Properties, (1949) 2KB 700, it was held

that a statement in a balance sheet of a company presented to

a creditor-share holder of the company and duly signed by the

directors constitutes an acknowledgement of the debt.

In Mahabir Cold Storage v. CIT (1991) 188 ITR 91 : 1991 Supp

(1) SCC 402, the Supreme Court held:

“The entries in the books of accounts of the appellant

would amount to an acknowledgement of the liability to

Messrs. Prayagchand Hanumanmal within the

meaning of Section 18 of the Limitation Act, 1963, and

extend the period of limitation for the discharge of the

liability as debt.”

In several judgments of this Court, this legal position has been

accepted. In Daya Chand Uttam Prakash Jain v. Santosh Devi

Sharma 67 (1997) DLT 13, S.N. Kapoor J. applied the principle

in a case where the primary question was whether a suit under

Order 37 CPC could be filed on the basis of an

acknowledgement. In Larsen & Toubro Ltd. v. Commercial

Electric Works 67 (1997) DLT 387 a Single Judge of this Court

observed that it is well settled that a balance sheet of a

company, where the defendants had shown a particular amount

as due to the plaintiff, would constitute an acknowledgement

within the meaning of Section 18 of the Limitation Act. In Rishi

Pal Gupta v. S.J. Knitting & Finishing Mills Pvt. Ltd. 73 (1998)

DLT 593, the same view was taken. The last two decisions

were cited by Geeta Mittal, J. in S.C. Gupta v. Allied Beverages

Company Pvt. Ltd. (decided on 30/4/2007) and it was held that

the acknowledgement made by a company in its balance sheet

has the effect of extending the period of limitation for the

purposes of Section 18 of the Limitation Act. In Ambika Mills

Ltd. Ahmedabad v. CIT Gujarat (1964) 54 ITR 167, it was

further held that a debt shown in a balance sheet of a company

amounts to an acknowledgement for the purpose of Section 19

of the Limitation Act and in order to be so, the balance sheet in

which such acknowledgement is made need not be addressed

to the creditors. In light of these authorities, it must be held that

in the present case, the disclosure by the assessee company in

its balance sheet as on 31st March, 2002 of the accounts of the

sundry creditors’ amounts to an acknowledgement of the debts

in their favour for the purposes of Section 18 of the Limitation

Act. The assessee’s liability to the creditors, thus, subsisted and

did not cease nor was it remitted by the creditors. The liability

was enforceable in a court of law.”

28. In Shahi Exports Pvt. Ltd. v. CMD Buildtech Pvt. Ltd., 2013 SCC

OnLine Del 2535 : (2013) 202 DLT 735, the Delhi High Court held:

“7. It is hardly necessary to cite authorities in support of the

well-established position that an entry made in the company’s

balance sheet amounts to an acknowledgement of the debt and

has the effect of extending the period of limitation under section

18 of the Limitation Act, 1963. However, I may refer to only one

decision of the learned single judge of this Court (Manmohan,

J.) in Bhajan Singh Samra v. Wimpy International Ltd. 185

(2011) DLT 428 for the simple reason that it collects all the

relevant authorities on the issue, including some of the

judgments cited before me on behalf of the petitioners. This

judgment entirely supports the petitioners on this point.”

29. In N.S. Atwal v. Jindal Steel and Power Ltd., 2013 SCC OnLine Del

3902, the Delhi High Court held:

“11. This Court in ESPN Software India (P) Ltd. v. Modi

Entertainment Network Ltd., [2012] 173 Comp Cas 465 (Delhi),

noted that:

“17. Admission in balance-sheet is per-se an

admission of liability…

xxx xxx xxx

19. This entry clearly states that an amount of Rs.

8,00,04,000/- is due and payable by the respondent in

accordance with the terms of the contract. This

document has been signed by the directors of the

company and its Company Secretary on 31.10.2002.”

Similarly, in Bhajan Singh Samra v. Wimpy International Ltd.,

[2012] 173 Comp Cas 455 (Delhi), the Court noted:

“13. Having heard the parties, this Court is of the

opinion that the petitioning-creditor has to satisfy the

Court that the debt on which the petition is based was

due and payable on the date of the petition. Certainly a

time barred debt cannot be the basis of a winding up

petition. However, admission of a debt either in a

balance sheet or in the form of a letter duly signed by

the respondent, would amount to an acknowledgement

…”

Similar findings have also been recorded by the Calcutta High

Court in Bengal Silk Mills Co. v. Ismail Golam Hossain Ariff, AIR

1962 Cal 115, paragraph 12, and Raja of Vizianagram v. The

Official Liquidator, Vizianagram Mining Company Limited,

Vizagapatam, AIR 1952 Mad 136. Indeed, the entry admits

such liability towards JSPL for the amount claimed, and no

explanation that may be provided, or circumstance surrounding

the entry, can alter the fact of that liability. Thus, while this

admission establishes liability, the fact is traced to the exchange

of letters mentioned above, thus bringing the case within Order

XXXVII CPC.”

30. In M/s. Al-Ameen Limited v. K.P. Sethumadhavan, 2017 SCC

OnLine Ker 11337 : (2017) 4 KLJ 80, the Kerala High Court held:

“7. The inclusion of a debt in a balance sheet duly prepared and

authenticated would amount to admission of a liability and

therefore satisfies the requirement of law for a valid

acknowledgement under Section 18 of the Act. We may

recapitulate the words of Mr. Justice P. Subramonian Poti in

Krishnan Assari v. Akilakerala Viswakarma Maha Sabha [1980

KLT 515 (DB)] and the following is the extract:

“10. How far the balance sheets could be acted upon

in deciding the claim of the appellant is the next

question. The appellant relies on the balance sheets

as acknowledgement of liability contemplated in S. 18

of the Limitation Act, 1963. Under S. 18 an

acknowledgement of liability signed by the party

against whom the right is claimed gives rise to a fresh

period of limitation. Under Explanation (b) to the

Section the word ‘signed’ means signed either

personally or by an agent duly authorised. A company

being a corporate body acts through its

representatives, the Managing Director and the Board

of Directors. Under S. 210 of the Companies Act it is

the statutory duty of the Board of Directors to lay

before the Company at every annual general body

meeting a balance sheet and a profit and loss account

for the preceding financial year. S. 211 directs that the

form and contents of the balance sheet should be as

set out in Part I of Schedule VI. The said form

stipulates for the details of the loans and advances and

also of sundry creditors. The balance sheet should be

approved by the Board of Directors, and thereafter

authenticated by the Manager or the Secretary if any

and not less than two directors one of whom should be

the Managing Director. (See S. 215). The Act also

provides for supply of copies of the balance sheet to

the members before the company in general meeting.

Going by the above provisions, a balance sheet is the

statement of assets and liabilities of the company as at

the end of the financial year, approved by the Board of

Directors and authenticated in the manner provided by

law. The persons who authenticate the document do

so in their capacity as agents of the company. The

inclusion of a debt in a balance sheet duly prepared

and authenticated would amount to admission of a

liability and therefore satisfies the requirements of law

for a valid acknowledgement under S. 18 of the

Limitation Act, even though the directors by

authenticating the balance sheet merely discharge a

statutory duty and may not have intended to make an

acknowledgement.”

31. In Zest Systems Pvt. Ltd. v. Center for Vocational and

Entrepreneurship Studies, 2018 SCC OnLine Del 12116, the Delhi High Court held:

“5. In Shahi Exports Pvt. Ltd. v. CMD Buildtech Pvt. Ltd. (supra)

this court held as follows:—

“7. It is hardly necessary to cite authorities in support

of the well-established position that an entry made in

the company's balance sheet amounts to an

acknowledgement of the debt and has the effect of

extending the period of limitation under section 18 of

the Limitation Act, 1963. However, I may refer to only

one decision of the learned single judge of this Court

(Manmohan, J.) in Bhajan Singh Samra v. Wimpy

International Ltd., 185 (2011) DLT 428 for the simple

reason that it collects all the relevant authorities on the

issue, including some of the judgments cited before me

on behalf of the petitioners. This judgment entirely

supports the petitioners on this point.”

6. In view of the legal position spelt out in judgments noted

above, the acknowledgement of the debt in the balance sheet

extends the period of limitation. The acknowledgement is as on

31.3.2015. This suit is filed in 2017. The suit is clearly within

limitation. The present application is allowed.”

32. In Agni Aviation Consultants v. State of Telangana, 2020 SCC

OnLine TS 1462 : (2020) 5 ALD 561, the High Court of Telangana held:

“107. In several cases, various High Courts have held that an

acknowledgement of liability in the balance sheet by a

Company registered under the Companies Act, 1956 extends

the period of limitation though it is not addressed to the creditor

specifically. (Zest Systems Pvt. Ltd. v. Center for Vocational

and Entrepreneurship Studies, 2018 SCC OnLine Del 12116,

Bhajan Singh Samra v. Wimpy International Ltd., 2012 SCC

OnLine Del 2939, Vijay Kumar Machinery and Electrical Stores

v. Alaparthi Lakshmi Kanthamma, (1969) 74 ITR 224 (AP), and

Bengal Silk Mills Company, Raja of Vizianagram v. Official

Liquidator, Vizianagram Mining Company Limited, AIR 1952

Mad 1361).

108. Therefore it is not necessary that the acknowledgement of

liability must be contained in a document addressed to the

creditor i.e. the petitioners in the instant case.”

34. The NCLAT, in the impugned judgment dated 22.12.2020, has,

without reconsidering the majority decision of the Full Bench in V.

Padmakumar (supra), rubber-stamped the same. We, therefore, set aside the aforesaid impugned judgment also.

35. On the facts of this case, the NCLT, by its judgment dated

19.02.2020, recorded that the default in this case had been admitted by the

corporate debtor, and that the signed balance sheet of the corporate debtor

for the year 2016-2017 was not disputed by the corporate debtor. As a

result, the NCLT held that the Section 7 application was not barred by

limitation, and therefore, admitted the same. We have already set aside the

majority judgment of the Full Bench of the NCLAT dated 12.03.2020, and

the impugned judgment of the NCLAT dated 22.12.2020 in paragraphs 33

and 34. This appeal is, therefore, allowed, and the matter is remanded to

the NCLAT to be decided in accordance with the law laid down in our

judgment.

Civil Appeal No.3 of 2021

1. This appeal raises a direct challenge to the majority judgment of the

Full Bench of the NCLAT dated 12.03.2020. Suffice it to say that Shri

Shyam Divan, learned Senior Advocate appearing on behalf of the

appellant-financial creditor, relied upon this Court’s judgment in Vashdeo

R. Bhojwani v. Abhyudaya Coop. Bank Ltd., (2019) 9 SCC 158, to argue

that limitation starts running from the date a recovery certificate has been

obtained pursuant to proceedings before the Debts Recovery Tribunal

under the Recovery of Debts Act. On facts, he argued that such a

certificate was issued on 31.08.2009 after which, there were several letters

written by the corporate debtor, M/s Uttara Fashion Knitwear Ltd.,

acknowledging liability to pay loans that had been availed by it. He pointed

out that whereas the NCLT had, by an order dated 21.11.2019, admitted

the appellant’s application under Section 7 of the IBC; the NCLAT

had, vide the impugned judgment, set aside the NCLT order on the ground

that an entry in a balance sheet cannot amount to an acknowledgement of

liability for the purpose of Section 18 of the Limitation Act. As a matter of

fact, he argued, in the alternative, that even if dues were stated to be

recoverable on and from the loan-recall notice dated 31.10.2002, there

were balance sheets right from 2002 up till 2010, followed by various letters

from the corporate debtor, which would show a consistent course of

acknowledgement of liability, thereby extending limitation until the Section 7

application was filed by the appellant on 24.06.2019. He, therefore, argued

that the present appeal be remanded to the NCLAT for decision on the

point of limitation.

2. Shri Jayesh Dolia, learned advocate appearing on behalf of the

respondents, argued that since service was not effected on the

respondents, nobody was present before the NCLT when it passed an ex

parte order admitting the Section 7 application. In any event, he argued,

that on the facts of this case, time began to run at least in 2002, and an

application filed in 2019 obviously cannot be said to be within limitation, as

the three-year period under Article 137 of the Limitation Act has long

expired.

3. We have already set aside the Full Bench judgment dated

12.03.2020 in Civil Appeal No.323 of 2021. Given the argument of Shri

Dolia that service was not properly effected upon the respondents, it would

be in the fitness of things to send the matter back to the NCLT for a de

novo hearing. Parties are allowed to amend their pleadings, if

necessary. The Civil Appeal is allowed in the aforesaid terms.

Civil Appeal No.3765 of 2020

1. In this appeal, Shri Mukul Rohatgi, learned Senior Advocate

appearing on behalf of the appellant, assails a judgment dated 14.10.2020

passed by the NCLAT. On the facts of this case, he candidly admits that

despite the fact that an application under Section 7 of the IBC was filed on

23.07.2018, and amended once, no plea qua any acknowledgement of

liability was made. The NCLT, by an order dated 14.12.2018, held that

despite the fact that the corporate debtor’s account was declared to be a

non-performing asset from 2010 onwards, since, according to the NCLT,

there was a continuing cause of action in the facts of this case, the Section

7 application was admitted. In an appeal filed by the suspended Managing

Director of the corporate debtor to the NCLAT, by an order dated

26.09.2019, the NCLAT held that the relevant date from which limitation

must be determined is 01.12.2016, i.e. the date on which the IBC came into

force, and therefore, dismissed the appeal. This Court, by its order dated

21.10.2019, set aside the order of the NCLAT and remanded the matter to

the NCLAT to re-examine the question of limitation, having regard to the

judgments in B.K. Educational Services (P) Ltd. v. Parag Gupta &

Associates, (2019) 11 SCC 633 and Sagar Sharma v. Phoenix Arc (P)

Ltd., (2019) 10 SCC 353.

2. The NCLAT, by the impugned order dated 14.10.2020, found that the

appellant had classified the corporate debtor’s account as a non-performing

asset on 28.05.2014. However, the said date was changed to 31.01.2010

after an attempt to restructure the corporate debtor’s account failed. The

three other banks forming part of the consortium of lenders, viz., Punjab

National Bank, Corporation Bank, and UCO Bank, had also classified the

account of the corporate debtor as a non-performing asset on 30.06.2014,

31.12.2014, and 31.12.2014, respectively. Even if the date of default was

taken to be the last of these dates, i.e. 31.12.2014, the NCLAT held that the

three-year period under Article 137 of the Limitation Act had expired on

30.12.2017, and that since the amended application under Section 7 of the

IBC had been filed only on 23.07.2018, it was barred by limitation. The

NCLAT, therefore, allowed the appeal.

3. Shri Rohatgi pointed out that in the written submissions filed by the

appellant on 21.09.2020, after judgment was reserved by the NCLAT on

17.09.2020, it was pointed out that the corporate debtor had acknowledged

its liability in its balance sheet for the year 2014-2015, and that 31.01.2010

could not be taken to be the date of default for the reasons given in the

written submissions. These written submissions were not taken into

account when the NCLAT delivered the impugned judgment.

4. Shri C.A. Sundaram, learned Senior Advocate appearing on behalf of

the respondents, has countered each of these submissions. According to

him, written submissions can never be a substitute for pleadings, and if

pleadings are deficient, there ends the matter. Admittedly, on facts, there

has never been a pleading before either the NCLT or the NCLAT that an

acknowledgement of liability contained in any of the balance sheets

extended limitation. He also argued that, on merits, if the auditor’s report

were to be seen, there is no acknowledgement of liability, as any so-called

acknowledgement has, in fact, been qualified by notes made by the

auditor. This being the case, no opportunity should now be given to the

appellant to go back to the NCLAT, the appellant having already amended

its pleadings once, and this Court having already remanded the matter to

NCLAT, which, on the second round, decided the appeal in favour of the

respondents.

5. Shri Rohatgi countered this by presenting an application before us to

amend the pleadings, stating that this can be allowed even at this stage, as

per the judgments of this Court.

6. There can be no doubt whatsoever that the appellant has been

completely remiss and deficient in pleading acknowledgement of liability on

the facts of this case. However, given the staggering amount allegedly due

from the respondents, we afford one further opportunity to the appellant to

amend its pleadings so as to incorporate what is stated in the written

submissions filed by it before the NCLAT, subject to costs of Rs.1,00,000/-

to be paid by the appellant to the respondents within a period of four weeks

from today.

7. We, therefore, allow the appeal, set aside the judgment of the NCLAT

dated 14.10.2020, and restore the appeal to the file to be decided in light of

our judgment in Civil Appeal No. 323 of 2021.

8. Interim order passed by this Court on 16.12.2020 stands vacated.

Civil Appeal No.3228 of 2020

1. In this appeal, the judgment of the NCLAT dated 07.02.2020 is

assailed, in which the NCLAT has held that entries made in balance sheets

of the corporate debtor for the years ending 2014-2015, 2015-2016, and

2016-2017 cannot amount to acknowledgements of liability, as a result of

which the NCLT order admitting the appellant’s application under Section 7

of the IBC was set aside.

2. Suffice it to say that the basis of the Section 7 application in this case

was a DRT decree dated 17.08.2018, pursuant to which a recovery

certificate dated 19.06.2019 was issued. The Section 7 application averred

that the date of the DRT decree furnished the cause of action and, thus,

was the starting point of limitation in this case.

3. Shri Sidhartha Barua, learned counsel appearing on behalf of the

appellant, has argued that this appeal deserves to be allowed and the

matter sent back to the NCLAT to be decided in accordance with our

judgment delivered in Civil Appeal No.323 of 2021.

4. Shri Saurabh Kirpal, learned Senior Advocate appearing on behalf of

the respondents, has argued that no pleading qua acknowledgement of

liability was made before either the NCLT or the NCLAT. Instead, the only

pleading that was made was that the date of default was the date on which

the DRT decree was passed, which is wholly incorrect in law. The Section 7

application being hopelessly time barred, no opportunity should now be

given to the appellant to renege on this pleading.

5. As decided by us in Civil Appeal No.323 of 2021, we give one more

opportunity to the appellant in this case to amend its pleading on payment

of costs of Rs.1,00,000/- to the respondents within four weeks from

today. The NCLAT judgment dated 07.02.2020 is set aside and the matter

is remanded to the NCLAT to decide the matter afresh in accordance with

the law laid down in Civil Appeal No.323 of 2021.

Civil Appeal arising out of SLP (Civil) No.1168 of 2021

1. Leave granted.

2. This appeal is against the judgment dated 15.10.2020 of the Calcutta

High Court which set aside two orders of the NCLT – (i) order dated

19.08.2019 whereby the NCLT admitted the appellant’s application under

Section 7 of the IBC, and (ii) order dated 20.02.2020, whereby the NCLT

ordered liquidation of the corporate debtor.

3. Shri Sanjay Kapur, learned counsel appearing on behalf of the

appellant, assailed the judgment of the Calcutta High Court, and argued

that an efficacious alternative remedy was available to the respondent

before the NCLAT, as a result of which the High Court ought not to have

interfered with the judgment of the NCLT. On the other hand, Shri Poddar,

learned counsel appearing on behalf of the respondent, has sought to

support the judgment of the High Court with reference to Kamlesh Babu v.

Lajpat Rai Sharma, (2008) 12 SCC 577, and paragraph 23 in particular,

stating that a jurisdictional point was raised as to limitation, as a result of

which the Calcutta High Court took up a petition filed under Article 227 of

the Constitution of India and correctly set aside the orders of the NCLT.

4. There can be no doubt that the NCLT had, in its order dated

19.08.2019, stated that Article 63(a) of the Limitation Act would apply

instead of Article 137, contrary to what has been held by us in several

judgments. It cannot, therefore, be said that the Calcutta High Court

wrongly exercised jurisdiction in setting aside this finding. However, the

High Court then went on to refer to certain balance sheets that had been

produced, thereby extending limitation under Section 18 of the Limitation

Act, but held that given the judgment in Babulal (supra), such balance

sheets could not extend limitation.

5. Given the judgment delivered in Civil Appeal No.323 of 2021, the

impugned judgment in this appeal also deserves to be set aside. The

appeal is, therefore, allowed. If the respondent wishes to file an appeal

before the NCLAT against the orders of the NCLT dated 19.08.2019 and

20.02.2020, it may do so within a period of four weeks from the date of this

judgment. The appeal will thereafter be decided on its merits, keeping in

view the statement of the law laid down in Civil Appeal No.323 of 2021.

………………….......................J.

[ ROHINTON FALI NARIMAN ]

………………….......................J.

[ B.R. GAVAI ]

………………….......................J.

[ HRISHIKESH ROY ]

New Delhi;

April 15, 2021.

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Monday 19 April 2021

Whether acknowledgement of liability in the balance sheet by a Company extends the period of limitation U/S 18 of limitation Act?

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