Applicability of Section 18 Limitation Act to proceedings under Insolvency & Bankruptcy Code

By EDITORIAL TEAM - INSOL India Posted On : March 15, 2021

The issue of application of Section 18 of the Limitation Act, 1963 has always remained a contentious issue when presented before courts since the resolution of the dispute is usually fact dependent.

Section 18 states that the initial date for the expiry of the period of limitation stands extended where a written and signed acknowledgement of liability has been issued by a party against whom a right or property is claimed i.e. a borrower or guarantor or security provider. In the context of the IBC, the relevant question is whether such an acknowledgement of debt in the entries of a balance sheet would extend the limitation period for filing an application under Section 7 seeking initiation of CIRP?

Is Balance Sheet an Acknowledgement of Liability under Section 18 IBC
On March 12th 2020, the National Company Law Appellate Tribunal (“NCLAT”) in its decision in V Padmakumar v Stressed Assets Stabilisation Fund (SASF) and Anr had held that the entries in the balance sheet / annual returns of a corporate debtor could not be treated as an acknowledgment of debt under Section 18 of the Limitation Act 1963.

The Impact of MM Ramachandran Judgment by Supreme Court and the Bishal Jaiswal Judgment by the NCLAT
In MM Ramachandran v South Indian Bank Ltd & Ors, the NCLAT had held that acknowledgment of debt by way of letters and E-Mails would also fall within acknowledgment of debt under Section 18 of the Limitation Act. The aforementioned view of the NCLAT was challenged before the Supreme Court wherein it was argued that Section 18 of the Limitation Act does not apply to proceedings under the Code at all. The Supreme Court did not find merit in this argument and upheld the applicability of Section 18 of the Limitation Act on the IBC and held that acknowledgement of debt by way of letters and E-Mails would fill within the purview of Section 18 of the Limitation Act.

%u200BThe NCLAT, in Bishal Jaiswal v Asset Reconstruction Company (India) Limited & Anr, held that the NCLAT’s earlier reasoning in the V Padmakumar case was faulty and deviated from the existing position of law in relation to entries in balance sheets constituting an acknowledgement of debt. In the Bishal Jaiswal case, the NCLAT held that entries in balance sheet would constitute an acknowledgement of debt and being a smaller bench as compared to the bench in the V Padmakumar case, referred the judgement of the NCLAT in V Padmakumar to a larger bench for review. The matter is still pending review before the NCLAT.