Rule-based Reasoning vs Analogical Reasoning [Part III of III]

In continuation of earlier parts (here and here), we now examine the application of technical matters in a meaningful manner to facilitate the administration of justice.

The Apex Court in Asset Reconstruction Company (India) Ltd. vs Tulip Star Hotels Limited & Ors. (ARCL), in a pervasive effort, cleared the confusion on an otherwise cluttered area regarding implementation of the law. The core issue that the Supreme Court took up was whether or not the Books of Accounts can be treated as an acknowledgement of liability in respect of debt(s) payable.

The Supreme Court patiently de-cluttered each and every aspect related to the issue of limitation and extension of limitation in initiating litigation while deciding an Appeal under Section 62 of the Insolvency and Bankruptcy Code 2016 (“IBC”). While doing so, the Supreme Court also went on to clear the air on the applicability of the Limitation Act and provisions relating to the condonation of delay in the context of the IBC. 

A brief synopsis of the crucial facts relating to the ARCL judgement are as follows:

The Supreme Court was to ascertain the correctness of the finding of NCLAT that the Financial Creditor had failed to bring any acknowledgement in writing by the CD or its authorised person acknowledging the liability in respect of the debt.

In doing so, the Supreme Court had to decide and choose between a hyper-technical approach of having a specific written acknowledgement from the CD or its authorised representative  versus applying the law more holistically in recognising the acknowledgement from the books of accounts maintained by the CD.

The Apex Court allowed the Appeals, and the impugned judgment and orders of the NCLAT were set aside. The Supreme Court concluded that the application under Section 7(2) of the IBC was filed on April 3, 2018, well within the extended limitation period as provided under Section 18 of the Limitation Act.

It is pertinent to mention the factual aspects which formed the basis of the Supreme Court’s view:

I. The CD was declared NPA on December 1, 2008.

II. The CD acknowledged its liability and proposed a settlement by a letter dated February 7, 2011, written well within three years.

III. On April 19, 2013, the CD paid ₹17,50,00,000/-. 

IV. Most importantly, the CD acknowledged liabilities in its financial statements from FY 2008-09 till FY 2016-17. 

In light of the above facts, the Supreme Court put forth the following ratio and judgement:

I. The Supreme Court concluded that NCLAT erred in law in holding that the Books of Account of a company could not be treated as an acknowledgement of liability in respect of debt payable to a financial creditor.

II. While referring to the objectives of the IBC, the Supreme Court observed that relegation of creditors to the remedy of coercive litigation/ multiple coercive litigations against the Corporate Debtors could be detrimental to the interests of the Corporate Debtor and its creditors alike as it could impede its commercial/ business activities, deplete its cash reserves, dissipate its assets (movable and immovable) and precipitate its commercial death, making litigation lengthy and commercially unviable, therefore, the provisions of the IBC and the Rules and Regulations framed thereunder are to be construed liberally, in a purposive manner to further the objects of enactment of the statute.

III. While relying heavily upon Section 18 of the Limitation Act, the Supreme Court observed that 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 a fresh period of limitation from the date on which the acknowledgement is signed.

IV. The court observed further that any such acknowledgement need not be accompanied by a promise to pay expressly or even by implication. However, the acknowledgement must be made before the relevant limitation period has expired. In other words, the Supreme Court clarified that it is not a new cause of action but an extension of an existing cause of action while it is still available. 

V. While relying upon its own judgment in Bishal Jaiswal, the Apex Court observed that it is well settled that entries in books of accounts and/or balance sheets of a Corporate Debtor would amount to an acknowledgement under Section 18 of the Limitation Act.  

VI. While adjudicating and interpreting the scope of Section 18 in a purposive manner, the Supreme Court observed that technical objections such as a writing containing the acknowledgement are dated, and even if the acknowledgement is accompanied by a refusal to pay, or if the same is addressed to a person other than a person entitled to the property or right; still, it can be considered and relied upon.  

VII. Therefore, even the time stipulation of 14 days in Section 7(4) of IBC is directory in nature and not mandatory. Moreover, since application under IBC is not mentioned in the Limitation Act, Article 137 of the Limitation Act, which mandates a 3-year limitation, will be applicable. This ratio leads to an irreversible conclusion that the Limitation Act is applicable. Therefore, the provisions relating to condonation of delay will also be applicable.

To sum up, both the Legislature and the Judiciary have to make a conscious call to ensure a time-bound and fast disposal of cases without losing on to other aspects like stamping of instruments, which is also an important source of revenue for the Exchequer. Therefore, a consistent and up-to-date approach is required to technical compliances, such as stamping instruments, acknowledgement of debts, etc. There should be a discussion and way out, such as issues like stamping of instruments should be relegated to a subsequent stage for compliance and further proceedings. 

In conclusion, while it is true that NN Global is the law today, the need of the hour is to adopt the doctrine of substance over form in dealing with modern-day legislation and resultant litigation. Because if we do not gear up to modern-day’s reality, we will have an ever-increasing pending caseload and dissatisfied litigants!  

Kapil Dev Sapra is the Founder & Managing Partner of Kapil Sapra & Associates. Vikas Dutta heads litigation practice in the Firm.