- Apprentice Lawyer
Does entry in balance sheet of a company amount to acknowledgement for the purposes of Section 18 of Limitation Act, 1963 (“Limitation Act”)? The answer to the question, which seems so apparent in view of a catena of cases, both domestic and foreign, seems to have been turned on its head by a decision of National Company Law Appellate Tribunal (“NCLAT”) in its recent decision rendered in the case of V. Padmakumar v. Stressed Assets Stabilisation Fund (SASF) (“Padmakumar Decision”).
The majority decision, which was rendered by a 4:1 majority of an unprecedented five-member bench of NCLAT, ruled that entry in balance sheet/ annual return, which is required to be prepared to comply with statutory requirements, cannot be treated to be an acknowledgement under Section 18 of the Limitation Act. Notably, the majority decision had reiterated the decision of the two-member bench of NCLAT in the earlier case of Sh. G Eswara Rao v. Stressed Assets Stabilisation Fund, incidentally also written by Justice S J Mukhopadhaya, who had penned the majority judgment in the Padmakumar decision.
The purpose of this article is to examine whether an entry in balance sheet, which otherwise could qualify as acknowledgement for the purpose of the Limitation Act, could be disregarded as the same was done under statutory compulsion.
REVIEW OF JUDICIAL POSITION - INDIA
Our research suggests that, whilst there is a catena of cases,starting from the Rajah of Vizianagaram v. Official Liquidator, Vizianagaram Mining Company Limited, which support the treatment of entry in balance sheet as an acknowledgement, there are certain decisions which question the approach.
For instance, in one of the earliest cases, Kashinath Shankarappa v. The New Akot Cotton Ginning and Pressing Co. Ltd., which even predated Rajah of Vizianagaram (supra), the Nagpur High Court had observed as follows:
“18. …. The mere signing of a balance sheet by a director does not operate to save limitation because the director in drawing up a balance sheet does not do so with the intention of acknowledging liability but under a duty where he is bound to set out, among other things, the claims made on the company...”
Interestingly, there is no decision of the Supreme Court of India which has conclusively settled the issue. For instance, whilst the Supreme Court had the opportunity to decide the issue in the case of Kashinath Shankarappa v. The New Akot Cotton Ginning and Pressing Co. Ltd., the Court refused to pass any such observation noting that the balance sheet in question was not duly passed. The closest that the Supreme Court had come in acknowledging that balance sheet entry may qualify as acknowledgement was in the case of Mahabir Cold Storage v. CIT, Patna, where, without any analysis of any sort, the Court noted that entries in the books of accounts of the appellant would amount to an acknowledgement of the liability for the purpose of Section 18. Also notable is decision in A V Murthy v. B S Nagabasavanna., where Court noted that, without expressing any final opinion on the aspect, balance sheet may amount to acknowledgement.
However, in our view, an entry in balance sheet would qualify as an acknowledgement for the purpose of Section 18 of the Limitation Act, as:
(a) an entry in balance sheet amounts to admission of a jural relationship of debtor and creditor;
(b) such statement would not cease to be an acknowledgment in favour of the creditor, even though the same is not addressed to the creditor; and
(c) signature of the balance sheet by the directors, in compliance with the statutory provision, satisfies the test of having the acknowledgement signed by an agent of a person against whom the payment is claimed.
In any case, as the Padmakumar decision was premised on the fact that an acknowledgement would not qualify as such if made under statutory compulsion, for the purpose of the article, let us presume that entry in balance sheet qualifies as a valid acknowledgement for the purpose of Limitation Act. In turn, we would limit our analysis to whether such valid acknowledgement could be disregarded solely basis the fact, such acknowledgement was made to comply with statutory obligation.
ANALYSIS OF PADMAKUMAR DECISION – IF ACKNOWLEDGEMENT TO COMPLY WITH STATUTORY OBLIGATION IS NOT A VALID ACKNOWLEDGEMENT
In the Padmakumar decision, the NCLAT paved the way for disregarding any entry contained in the balance sheet of a company by holding the following:
“As the filing of Balance Sheet/ Annual Return being mandatory under Section 92(4) of the Companies Act, 2013, failing of which attracts penal action under Section 92(5) & (6), the Balance Sheet / Annual Return of the ‘Corporate Debtor’ cannot be treated to be an acknowledgement under Section 18 of the Limitation Act, 1963.”
As is apparent, the principal ground on which balance sheet has been disregarded as an acknowledgement is basis the fact, such preparation of balance sheet is to comply with statutory obligation and not on a voluntary basis. Let us examine then, whether an acknowledgement, which is otherwise valid, can be disregarded merely because such acknowledgement was made pursuant to statutory compulsion.
When we shift our focus to the Indian cases, we note that, in one of the first Indian cases dealing with this aspect, there was divergence of opinion between the two learned judges of the Bench. A more authoritative pronouncement was, however, rendered four years later by another division bench of Madras High Court in the case of Periavenkan Udaya Tevar v. Subramanian Chetti, where the Court observed as follows:
“2. … that a deposition given and signed by a witness in a suit is as much a writing contemplated by Section 19 as is a letter addressed by him to a third party. There is nothing in the language of the Section or in the policy on which it is founded to justify us in restricting its scope by excluding statements made in depositions or other proceedings before a Court of Justice. …...”
In the specific context of the balance sheet, we have noted earlier the decision of Nagpur High Court in the case of Kashinath Shankarappa (supra), where the Court refused to admit that balance sheet entry could qualify as acknowledgement as the balance sheet is drawn up under a duty. The aforesaid decision was considered and not followed by the division bench of Calcutta High Court in the case of Bengal Silk Mills Co. v. Ismail Golam Hossain Ariff. The relevant observation is contained in the following provision:
“10....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…The balance-sheet contains admissions of liability; the agents of the company who makes and signs it intends to make those admissions. The admissions do not, cease to be acknowledgments of liability merely on the ground that they were made in discharge of a statutory duty.”
The aforesaid decision was followed, amongst other decisions, in Takan Ram v. Narain Das, to hold that it makes no difference whether a person acknowledges his status voluntarily or he does so when he is required under any law in a certain contingency to describe his status.
We do however note a recent decision of Kerala High Court in the case of Kesavan Namboodiri v. B S Radhakrishnan, where it was held that an admission pursuant to statutory compulsion cannot be brought under the purview of Section 18 of Limitation Act. Interestingly, the decision, which pertained to mortgagor-mortgagee relationship, did not cite a single authority in support of the proposition.
Notably, neither did NCLAT, in the Padmakumar decision, cite any decision in favour of the proposition it canvassed, nor did it consider any of the decisions cited in the previous paragraphs to distinguish the judgments, which have now stood ground over for more than a century.
If one undertakes a review of the decisions of NCLAT, which have been reversed by Supreme Court, a recurring theme across majority of such overturned decisions would be the aspect of limitation. It was the Supreme Court, which had to come to the rescue by clarifying that limitation would not get saved by initiation of suit for recovery; the date of enforcement of IBC has no bearing on limitation, nor does it revive a time-barred claim; a Section 7 application being in the nature of application, an application basis secured mortgage money cannot be filed within twelve years from when the money becomes due. Interestingly, NCLAT has, every single time till now, achieved to come up with a new line of thinking to attract Supreme Court’s attention. The Padmakumar decision has all the ingredients to summon Supreme Court’s attention to clarify the law and settle the debate once and for all. The only question is when.
The authors are Arka Majumdar (Partner) and Ayushi Jain (Associate) at Argus Partners.
 Company Appeal (AT) (Insolvency) No. 57 of 2020, decision dated March 12, 2020 (NCLAT)].
 Company Appeal (AT) (Insolvency) No. 1097 of 2019, decision dated February 7, 2020 (NCLAT)].
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Zest Systems Pvt Ltd. v. Center for Vocational and Entrepreneurship Studies [CS (COMM) 513/2017, decision dated on September 19, 2018].
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Kerala Al-Ameen Limited v. K. P. Sethumadhavan [A.S.No.444 of 2002, decision dated August 18, 2017].
 AIR 1952 Mad 136 (Madras).
 AIR 1951 Nag 255 (Nagpur).
 AIR 1958 SC 437 (Supreme Court).
 Mahabir Cold Storage v. CIT, Patna [Civil Appeal No. 469 (NT) of 1976, decision dated December 7, 1990 (Supreme Court).
 Criminal Appeal No. 206 of 2002, decided on February 8, 2002 (Supreme Court).
 See, Bengal Silk Mills Co. v. Ismail Golam Hossain Ariff AIR 1962 Cal 115 (Calcutta) and Dainik Finance and Chit Fund Co. P. Ltd. v. Agricultural Industries  60 Comp Cas 180 (Punjab & Haryana)
 See, Explanation (a) to Section 18 of Limitation Act. Also, see Lahore Enamelling And Stamping v. A.K. Bhalla AIR 1958 P&H 341 (Punjab & Haryana). Followed in Swarna Paper Cutting Works v. Indian Express (Madurai) Private Limited, Madras 1999 (3) CTC 167 (Madras)
 Krishnan Assari v. Akilakerala Viswakarma Maha Sabha [1980 KLT 515 (Kerala)]
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 Periavenkan Udaya Tevar v. Subramanian Chetti (1897) ILR 20 Mad 239 (Madras).
 Kashinath Shankarappa v. The New Akot Cotton Ginning and Pressing Co. Ltd. AIR 1951 Nag 255 (Nagpur).
 Bengal Silk Mills Co. v. Ismail Golam Hossain Ariff AIR 1962 Cal 115 (Calcutta).
 Takan Ram v. Narain Das AIR 1972 P&H 477 (Punjab & Haryana).
 Kesavan Namboodiri v. B S Radhakrishnan RSA. No. 17 of 2007, decided on December 4, 2018 (Kerala).
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 Sagar Sharma v. Phoenix Arc Private Limited [Civil Appeal No. 7673 of 2019, decided on September 30, 2019 (Supreme Court).
 Gaurav Hargovindbhai Dave v. ARCIL [Civil Appeal No. 4952 of 2019, decided on September 18, 2019 (Supreme Court)].