INTRODUCTION:

This present note discusses the extent to which the Limitation Act, 1963 (hereinafter ‘the Limitation Act’), is applicable to the proceedings conducted under the Insolvency and Bankruptcy Code, 2016 (hereinafter ‘the IBC’). The note specifically focuses on the legal position as on date and the argument for permitting Section 18 and 19 of the Limitation Act to be applicable in determining the limitation period for accepting an application for initiation of the corporate insolvency resolution process either in terms of Section 7 or 9 of the IBC. The other relevant Sections will be dealt with in our subsequent note.

The IBC was introduced in order to regulate, harmonise, simplify and consolidate all the laws relating to reorganization, insolvency resolution of persons, whether corporate or natural. The IBC stipulated a fixed time line for all the activities, in order to ensure that the resolution process was quick and transparent.

Time is of the essence, and speedy resolution of Non-Performing Assets (‘NPAs’) and illiquid corporate persons is the need of the hour to contribute to the growth of the economy. In light of this, the restricted application of the Limitation Act by the Hon’ble National Company Law Appellate Tribunal (hereinafter ‘the Appellate Tribunal’) and the Hon’ble Supreme Court has become a significant limiting factor to entertain applications under Section 7 or 9 of the IBC by the Adjudicating Authority.

This has led to different approaches at the level of the National Company Law Tribunals and the Insolvency Professionals on treatment of the limitation period concerning the applications for initiation of corporate insolvency resolution process and claims received after the corporate insolvency resolution process has commenced.

After the initial uncertainty concerning the applicability of the Limitation Act on the proceedings conducted in terms of the IBC, one aspect was crystallised, that the Limitation Act, even before the insertion of Section 238A, had always been applicable to the IBC as this had been the intention of the legislature. Further, the Hon’ble Supreme Court in B. K. Educational Services Private Limited v Parag Gupta and Associates has laid down the law that the proceedings initiated under either Section 7 or 9 of the IBC would be considered an ‘application’ and, resultantly, for computing the period of limitation Article 137 of the Schedule to the Limitation Act would be applicable.

Section 238A of the IBC states as follows:

“238A. The provisions of the Limitation Act, 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.”

The Report of the Insolvency Law Committee (March, 2018) while introducing the aforesaid provision, states as follows:

“28.1 The question of applicability of the Limitation Act, 1963 (“Limitation Act”) to the Code has been deliberated upon in several judgments of the NCLT and the 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. 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 time-barred. It is settled law that when a debt is barred by time, the right to a remedy is time-barred.

…

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 supplied]

Scheme of the Limitation Act:

The object 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 party’s own inaction, negligence or laches. Given this, there are various equitable provisions contained in the Limitation Act which have been applied to proceedings under other laws, such as winding up proceedings under the Companies Act, 2013.

The Limitation Act is divided into Sections and the Schedule. Where the Schedule prescribes specific time limits for different types of suits, appeal and applications, the Articles in the Schedule have to be read in tandem with the provisions of the Limitation Act in order to compute the actual period of limitation This is in terms of Section 2(j) of the Limitation Act which specifically states that

“”period of limitation” means the period of limitation prescribed for any suit, appeal or application by the Schedule, and “prescribed period” means the period of limitation computed in accordance with the provisions of this Act”.

[Emphasis supplied]

Further, Section 3(1) ‘Bar of Limitation’ of the Limitation Act, which is the operative provision states as follows:

“Subject to the provisions contained in sections 4 to 24 (inclusive), every suit instituted, appeal preferred, and application made after the prescribed period shall be dismissed although limitation has not been set up as a defence.”

[Emphasis supplied]

Therefore, any suit, appeal or application which is sought to be made after the period prescribed in the Schedule to the Limitation Act for such suit, appeal or application, would not be permitted unless such action is contemplated and covered under the exceptions provided for under Sections 4 to 24 of the Limitation Act. Section 3(1) of the Limitation Act cannot operate on its own but is, in fact, subject to the provisions contained in Sections 4 to 24 of the Limitation Act.

Thereby, the plain reading of the provisions of the Limitation Act, on the issue of the applicability of the Limitation Act with regard to the application for initiation of corporate insolvency resolution proceeding in terms of either Section 7 or 9 of the IBC is concerned, Section 3(1) of the Limitation Act can only operate to impose a time limit after awarding due consideration to the provisions in Sections 4 to 24 of the Limitation Act, to the extent that the same is applicable to ‘applications’. For the sake of convenience and ease of reference, the details of the provisions contained in Sections 4 to 24, as are applicable to applications, are contained in the Annexure to this Note.

As per the law laid down by the Hon’ble Supreme Court in B. K. Educational v Parag Gupta and Associates, the initiation of corporate insolvency proceedings under Section 7 or 9 of the IBC is a very specific application and, given that no other Article in the Schedule to the Limitation Act governs this specific type of application, the same would attract the limit as mentioned in the residual Article 137 of Division III in the Schedule.

Therefore, as an application, the initiation of the corporate insolvency resolution proceedings would be time barred if the same is sought to be brought after a period of 3 years from the date of default, i.e. non-payment of debt, when the same is due and payable.

The Tribunal and Court, when applying the Limitation Act, have had to automatically apply Section 3(1) to the proceedings under the IBC. Without the automatic application of Section 3(1) of the Limitation Act, no suit, appeal or application can be denied for the reason of being time-barred. Therefore, where the Section 3(1) of the Limitation Act automatically applies, the same must be applied after having taken into consideration all the provisions to which Section 3(1) is subject.

It is trite that the where the operative provision is subject to various other clauses, all those other clauses should first be satisfied as being not applicable and only then can the Tribunal or Court decide that the operative provision has been triggered in any specific set of circumstances. As per the law laid down by the Hon’ble Supreme Court, “…the expression “subject to” conveys the idea of a provision yielding place to another provision or other provisions to which it is made subject….” therefore, essentially making Section 3(1) yield its place to the terms contained in Section 4 to 24 of the Limitation Act.

It is settled law that during the interpretation of statutes, where possible the literal interpretation should be afforded. Especially where such literal interpretation does not lead to absurdity. The Supreme Court has stated as follows:

“The interpretative function of the Court is to discover the true legislative intent. It is trite that in interpreting a statute the Court must, if the words are clear, plain, unambiguous and reasonably susceptible to only one meaning, give to the words that meaning, irrespective of the consequences. Those words must be expounded in their natural and ordinary sense. When a language is plain and unambiguous and admits of only one meaning no question of construction of statute arises, for the Act speaks for itself.”

In light of the law above, Section 238A of the IBC and following the ruling of the Hon’ble Supreme Court in B. K. Educational, it may be clearly seen that the provision inserted by the Insolvency and Bankruptcy (Second Amendment) Act, 2018, does not in any manner restrict the applicability of Section 18 and 19 of the Limitation Act, especially where Section 18 clearly contains the term ‘application’ and Section 19 of the Limitation Act is not specified so as to rule out its applicability to applications.

In light of the clear language of Section 238A of the IBC as well as the plain language of Section 3(1) of the Limitation Act present to guide the Tribunals and Courts on modus and extent of the application of the Limitation Act, it would greatly curtail the ambit and scope of the IBC, should all the provisions of the Limitation Act, especially the beneficial provisions, held to not be applicable to the proceedings undertaken in terms of the IBC. Such an interpretation would lead to ambiguity and inconsistency in application of the Limitation Act on the proceedings conducted under the IBC and, much more gravely, in limiting the objects sought to be achieved by the IBC, as enumerated below by the Hon’ble Supreme Court.

“It can thus be seen that the primary focus of the legislation is to ensure revival and continuation of the corporate debtor by protecting the corporate debtor from its own management and from a corporate death by liquidation. The Code is thus a beneficial legislation which puts the corporate debtor back on its feet, not being a mere recovery legislation for creditors.”

Given that the IBC is a beneficial legislation, it becomes all the more important that the beneficial provisions of the Limitation Act, which are specifically enshrined in Sections 4 to 24 of the Limitation and to which Section 3(1), the operative provision, has been explicitly stated to be subject to, are made applicable to the proceedings undertaken in terms of the IBC; whether the same be an application to initiate the corporate insolvency resolution process under Section 7 or 9 of the IBC or otherwise.

Application of Section 18 and 19 of the Limitation Act:

On the basis of the foregoing discussion, it is settled that the Limitation Act as a whole is applicable to the proceedings conducted in terms of the IBC; specifically the provisions contained in Sections 4 to 24 of the Limitation Act to which the operation of Section 3(1) of the Limitation Act is subject to.

Within this, the present discussion will focus on the applicability of Section 18 and 19 of the Limitation Act to the proceedings conducted under the IBC. Both provisions have been reproduced hereinbelow for the sake of convenience and ease of reference:

Section 18:

• “Where, before the expiration of the prescribed period for a suit or application in respect of any property or right, an acknowledgment 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 acknowledgment was so signed.

• Where the writing containing the acknowledgment 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 acknowledgment 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

(c) an application for the execution of a decree or order shall not be deemed to be an application in respect of any property or right.”

[Emphasis supplied]

The above provision is clearly applicable to an ‘application’ and where the application under either Section 7 or 9 of the IBC is an ‘application’ to which the Limitation Act is applicable, this provision would also be operative in determining the period of limitation for filing of such an application. The Hon’ble Supreme Court while interpreting Section 18 of the Limitation Act, stated as follows:

“20. Section 18 of the Limitation Act, 1963 deals with effect of acknowledgment in writing. Sub-section (1) thereof provides that where, before the expiration of the prescribed period for a suit or application in respect of any right, an acknowledgment of liability in respect of such right has been made in writing signed by the party against whom such right is claimed, a fresh period of limitation shall be computed from the time when the acknowledgment was so signed. The explanation to the section provides that an acknowledgment may be sufficient though it omits to specify the exact nature of the right or avers that the time for payment has not yet come or is accompanied by a refusal to pay, or is coupled with a claim to set off, or is addressed to a person other than a person entitled to the right.

21. It is now well settled that a writing to be an acknowledgment of liability must involve an admission of a subsisting jural relationship between the parties and a conscious affirmation of an intention of continuing such relationship in regard to an existing liability. The admission need not be in regard to any precise amount nor by expressed words. If a defendant writes to the plaintiff requesting him to send his claim for verification and payment, it amounts to an acknowledgment. But if the defendant merely says, without admitting liability, it would like to examine the claim or the accounts, it may not amount to acknowledgment. In other words, a writing, to be treated as an acknowledgment of liability should consciously admit his liability to pay or admit his intention to pay the debt….”

Section 19:

“Where payment on account of a debt or of interest on a legacy is made before the expiration of the prescribed period by the person liable to pay the debt or legacy or by his agent duly authorised in this behalf, a fresh period of limitation shall be computed from the time when the payment was made:

Provided that, save in the case of payment of interest made before the 1st day of January,1928, an acknowledgment of the payment appears in the handwriting of, or in a writing signed by, the person making the payment.

Explanation.–For the purposes of this section,–

(a) where mortgaged land is in the possession of the mortgagee, the receipt of the rent or produce of such land shall be deemed to be a payment;

(b) “debt” does not include money payable under a decree or order of a court.”

For the purposes of understanding the scope and applicability of Section 19 of the Limitation Act, the Hon’ble Supreme Court in Shapoor Freedom Mazda v Durga Prosad Chamaria has stated that “acknowledgement as prescribed by Section 19 [of the Limitation Act] merely renews debt; it does not create any new right. 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 either by implication. The statement of which the plea of acknowledgement is based must relate to the present subsisting liability, though the exact nature of the specific character of the said liability may not be indicated in words.”

Currently the law as proclaimed by a three-member Bench of the Hon’ble Supreme Court in the case of M. M. Ramachandran v South Indian Bank Ltd & Ors. where they upheld the decision of the National Company Law Appellate Tribunal, holding that the provision of Section 18 of the Limitation Act would be germane to an application to initiate corporate insolvency resolution proceeding under Section 7 of the IBC.

The National Company Law Tribunal had, in this case where there was an acknowledgement of debt by the debtor through an email, held that the debt owed to the applicant Bank was established and was not time-barred in terms of the operation of Section 18 of the Limitation Act and that therefore, the application for initiation of the corporate insolvency resolution proceedings was allowed.

Key decisions of the Hon’ble Supreme Court and the Hon’ble Appellate Tribunal:

Now, in light of this, the following key decisions of the Hon’ble Supreme Court and the Hon’ble Appellate Tribunal are discussed in chronological order in order to ascertain whether such judgements are in line with the current position, and therefore, good in law, or, are not aligned with the latest decision of the Hon’ble Supreme Court and, therefore, cannot be considered authoritative on the matter.

Kindly note that only those judgements having a bearing on the issue of applicability of Section 18 and 19 of the Limitation Act on the application for initiation of corporate insolvency resolution process have been considered hereinbelow:

1. Amtech Electronics (India) Limited v Ecolibrium Energy Private Limited (July, 2019):

The division Bench of the Hon’ble National Company Law Appellate Tribunal held as follows:

“10. Therefore, in light of the law stated above, we note that the Petitioner has filed the instant Petition on 07.01.2019 which is more than 3 (Three) years from the date of default. Further, the Petitioner has neither prayed for condonation of delay under Section 5 of the Limitation Act, 1963 nor satisfied this Tribunal that the Petitioner had sufficient cause for not making the application within such period.”

Therefore, this judgement only envisages the extension of the limitation period in terms of Section 5 of the Limitation Act, and not otherwise. As per this judgement, other provisions, to which Section 3(1) of the Limitation Act, is subject, have not been considered to determine the admissibility of an application under Section 7 or 9 of the IBC.

1. Jignesh Shah and Ors. v Union of India (UOI) and Ors. (September, 2019):

In this judgement by a three member Bench of the Hon’ble Supreme Court, an obiter was pronounced as follows:

“19. The aforesaid judgments correctly hold that a suit for recovery based upon a cause of action that is within limitation cannot in any manner impact the separate and independent remedy of a winding up proceeding. In law, when time begins to run, it can only be extended in the manner provided in the Limitation Act. For example, an acknowledgement of liability under Section 18 of the Limitation Act would certainly extend the limitation period, but a suit for recovery, which is a separate and independent proceeding distinct from the remedy of winding up would, in no manner, impact the limitation within which the winding up proceeding is to be filed, by somehow keeping the debt alive for the purpose of the winding up proceeding.”

[Emphasis supplied]

In our humble opinion therefore, in terms of this obiter, Section 18 of the Limitation Act, which was applicable to the erstwhile winding up provisions, shall be equally applicable to the proceedings conducted under the IBC.

1. Gaurav Hargovindbhai Dave v Asset Reconstruction Company (India) Ltd. (September, 2019):

In this three member Bench of the Hon’ble Supreme Court, the judgement clearly differentiated between a ‘suit’ and an ‘application’ as under the IBC. Where the Limitation Act provides for a specific relief in terms of the time limit for suit relating to mortgage, even though a Financial Creditor under the IBC would typically be a mortgagee, the application under Section 7 of the IBC is an application and therefore, provisions solely conceived for regulation of application of suits and or appeals would be irrelevant insofar as the application under Section 7 or 9 of the IBC is concerned.

In light of this decision, the Annexure to this Note contains only those provisions, in the bouquet of provisions (from Sections 4 to 24 of the Limitation Act) which are not specifically applicable only to suits or appeals. Among them, Section 18 and 19 are present.

1.Akhram Khan v Bank of India and Ors. (December, 2019):

In this judgement delivered by a three-member Bench of the Hon’ble National Company Law Appellate Tribunal, the application for initiation of corporate insolvency resolution process was rejected on the basis that the balance sheet of the Corporate Debtor was not proof acknowledgement of debt and that since the Corporate Debtor had not acknowledged the debt in any other manner before the expiry of 3 years from the date on which the Applicant had termed the debt of the Corporate Debtor as an NPA.

In light of this, although the Hon’ble National Company Law Appellate Tribunal wished to apply the provisions of Section 18 of the Limitation Act, and, in fact, even analysed the facts of the case in light of the provisions of Section 18 of the Limitation Act, given that there was no other document by the Corporate Debtor acknowledging the debt owed to the Applicant within the 3 years’ time limit from the date of being characterised as an NPA, the Applicant could not be afforded the benefit of the extension of the limitation period as bestowed by Section 18 of the Limitation Act.

2.G Eswara Rao v Stressed Asset Stabilisation Fund (February, 2020):

In this division Bench judgement of the Hon’ble National Company Law Appellate Tribunal, while applying the provisions of Section 18 of the Limitation Act to the facts of the case, it was held that given the mandatory nature of the balance sheet that companies are required to file under Section 92(5) and 92(6) of the Companies Act, 2013, with the threat of penalty on non-compliance, the same even if signed, cannot be taken to be an acknowledgement of debt for the purposes of Section 18 of the Limitation Act.

Similar to Akhram Khan (supra), although the Bench applied Section 18 of the Limitation Act, given the peculiar facts of the case, the Applicant was unable to enjoy the benefit of the provision.

3.Manesh Agarwal v Bank of India and Ors. (February, 2020):

The three judge Bench of the Hon’ble National Company Law Appellate Tribunal upheld the application of Section 18 of the Limitation Act, thereby permitting the Applicant to initiate corporate insolvency resolution process as against the Corporate Debtor.

In light of the law as it stands today, this judgement has correctly applied the Limitation Act as a whole to the application undertaken under Section 7 of the IBC. It has considered Section 18 of the Limitation Act, although only in light of the Corporate Debtor agreeing to a One Time Settlement (‘OTS’), which was afforded the character of acknowledgement of debt.

4.V. Padmakumar v Stressed Asset Stabilisation Fund and Ors. (March, 2020):

This elaborate judgement was passed by a 5 member Bench of the Hon’ble National Company Law Tribunal, where the issue of applicability of Section 18 of the Limitation Act is elucidated by the intricacies of Section 18 of the Limitation Act along with the legal positions as to why a balance sheet would not be considered an acknowledgement of debt.

Justice Cheema has elaborated and expressed his dissenting opinion on the issue of whether a balance sheet of a company would be considered an acknowledgement of debt. He has quoted a myriad of judgements passed by the Hon’ble Supreme Court in the field of income tax and others in order to substantiate why a signed balance sheet of a company would be considered as an acknowledgement of debt. His dissenting opinion was overruled by the majority (4:1 on this issue).

5.Babulal Vardharji Gurjar v Veer Gurjar Aluminium Industries Pvt. Ltd. & Anr. (August, 2020):

In this judgement by a division Bench of the Hon’ble Supreme Court, the obiter in the Jignesh Shah (supra) judgement was distinguished as follows:

“32.…Prima facie, it appears that illustrative reference to Section 18 of the Limitation Act, in paragraph 21 of the decision in Jignesh Shah, had only been in relation to the suit or other proceedings, wherever it could apply and where the period of limitation could get extended because of acknowledgment of liability. Noticeably, in contradistinction to the proceeding of a suit, this Court observed that a suit for recovery, which is a separate and independent proceeding distinct from the remedy of winding up would, in no manner, impact the limitation within which the winding up proceeding is to be filed… The findings in paragraph 12 in Jignesh Shah makes it clear that the Court indeed applied the principles so stated in B.K. Educational Services, and held that the winding up petition filed beyond three years from the date of default was barred by time.

…

32.2. In view of the above, we are not inclined to accept the arguments built up by the respondents with reference to one part of observations occurring in paragraph 21 of the decision in Jignesh Shah (supra).”

This judgement also mentions that even assuming Section 18 of the Limitation Act applied, it was not claimed in the application and hence the applicability of the same could not have been considered.

In light of this judgement, it seemed that Section 18 of the Limitation Act was not applicable as the same had not been mentioned in B. K. Educational Services (supra) and the only method for condonation of delay in filing of an application is Section 5 of the Limitation Act which invokes the special powers of the Tribunal or Court to condone the delay in circumstances it finds fit.

• Yogeshkumar Jashwantlal Thakkar v Indian Overseas Bank and Anr. (September, 2020)

While distinguishing from the judgement of the Supreme Court in Gurjar (supra), the division Bench of the Hon’ble Appellate Tribunal held as follows:

“Furthermore, in view of the fact, that ingredients of Section 18 of the Limitation Act, 1963 are quite applicable both for ‘Suit’ and ‘Application’ and the debit confirmation letters in the instant case were duly acknowledged in accordance with Law laid down on the subject, the instant Appeal deserves to be dismissed and accordingly the same is dismissed, since there being no legal infirmities found in the impugned order passed by Adjudicating Authority in admitting CP No. (IB) 257/7/NCLT/AHM/2019 and declaring moratorium etc….”

1. State Bank of India v Krishidhan Seeds Pvt. Ltd. (November, 2020)

On the same day as the Hon’ble Supreme Court passed their judgement in the case of M.M. Ramachandran (supra) upholding the applicability of Section 18 of the Limitation Act on the issue of computing the limitation for the purpose of filing an application under Section 7 or 9 of the IBC, a three Member bench of the Hon’ble Appellate Tribunal passed a contrary judgement holding that Section 18 of the Limitation Act would not get triggered for the purpose of computing the limitation period as regards an application under Section 7 or 9 of the IBC.

Balance sheet of a Corporate Debtor as an acknowledgement of debt:

In terms of Section 18 of the Limitation Act, a contentious issue is as regards the admissibility of the audit balance sheet of the Corporate Debtor as an acknowledgment of debt. There have been contradictory decisions of the Hon’ble Appellate Tribunal.

The decision of the Hon’ble Appellate Tribunal in V. Padmakumar rejecting the balance sheet of the Corporate Debtor as an a acknowledgement of debt was passed by a majority decision (4:1). The dissenting member, Justice Cheema, differed from the view of the majority that the balance sheet filed under Section 92 of the Companies Act, 2013, was a mandatory requirement, involving penalties for non-compliance, and hence could not be considered an acknowledgement of debt.

In his dissenting note, Justice Cheema has referred to the decisions of various High Courts as well as the Hon’ble Supreme Court to buttress the argument that the books of account and an audited balance sheet would be admissible as an acknowledgement of debt and that this would have an impact on the purpose of recalculating the limitation period in terms of Section 18 of the Limitation Act, as regards the debt.

With the introduction of the Companies Act, 2013, and the requirements as regards the auditor’s report and the director’s report, read with the financial statements accompanying them, carry a responsibility statement in the form and manner as below:

“Section 134 of the Companies Act, 2013:

…

(5) The Directors’ Responsibility Statement referred to in clause (c) of sub-section (3) shall state that—

(a) in the preparation of the annual accounts, the applicable accounting standards had been followed along with proper explanation relating to material departures;

(b) the directors had selected such accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the company at the end of the financial year and of the profit and loss of the company for that period;

(c) the directors had taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of this Act for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities;

(d) the directors had prepared the annual accounts on a going concern basis; and

(e) the directors, in the case of a listed company, had laid down internal financial controls to be followed by the company and that such internal financial controls are adequate and were operating effectively.

Explanation.—For the purposes of this clause, the term “internal financial controls” means the policies and procedures adopted by the company for ensuring the orderly and efficient conduct of its business, including adherence to company’s policies, the safeguarding of its assets, the prevention and detection of frauds and errors, the accuracy and completeness of the accounting records, and the timely preparation of reliable financial information;

(f) the directors had devised proper systems to ensure compliance with the provisions of all applicable laws and that such systems were adequate and operating effectively.”

“Management’s Responsibility for the Financial Statements

The Company’s Board of Directors is responsible for the matters in section 134(5) of the Companies Act, 2013 (“the Act”) with respect to the preparation of these financial statements that give a true and fair view of the financial position, financial performance of the Company in accordance with the accounting principles generally accepted in India, including the Accounting Standards specified under Section 133 of the Act, read with Rule 7 of the Companies (Accounts) Rules, 2014. This responsibility also includes the maintenance of adequate accounting records in accordance with the provision of the Act for safeguarding of the assets of the Company and for preventing and detecting the frauds and other irregularities; selection and application of appropriate accounting policies; making judgments and estimates that are reasonable and prudent; and design, implementation and maintenance of internal financial control, that were operating effectively for ensuring the accuracy and completeness of the accounting records, relevant to the preparation and presentation of the financial statements that give a true and fair view and are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.

The Board of directors are also responsible for overseeing the Company’s financial reporting process.”

“Auditor’s Responsibility for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with SAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

As part of an audit in accordance with SAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

• Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances. Under section 143(3)(i) of the Companies Act, 2013, we are also responsible for expressing our opinion on whether the company has adequate internal financial controls system in place and the operating effectiveness of such controls

• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

• Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern.

• Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.”

A combined reading of the afore-stated statements made by the auditor and the director clearly establishes that the financial statement discloses the true and fair view of the state of financial affairs of the Company. It follows, therefore, that the liabilities disclosed in the signed financial statements are acknowledged to be due and payable by the directors and are also affirmed by the auditors of the Company as on the date of preparation of the financial statements.

In support of our view, please find below the judgement of the Hon’ble Supreme Court and the High Court of Calcutta as follows:

1.Decision of the Supreme Court in Mahabir Cold Storage v Commissioner of Income Tax

“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.”

2.The decision of the High Court of Delhi in “Sheetal Fabrics v Coir Cushions Ltd.”.

“10. Let me first deal with the case of Padam Tea Co. Ltd. (supra). This case relied upon by learned Counsel for the respondent company in support of his plea that acknowledgement contained in the balance sheet could not be relied upon by the petitioner. However, on going through this judgment, one would clearly notice that it does not lay down the proposition which is sought to be advanced by the learned Counsel. That was a case where balance sheet was not confirmed or passed by the shareholders. The Court observed that such a balance sheet, before it could be relied upon, must be duly passed by the shareholders at the appropriate meeting and must be accompanied by a report, if any, made by the Directors for its validation. The principle of law laid down was that statement in the balance sheet indicating liability is to be read along with the Directors’ report to see whether both so read would amount to an acknowledgement. There is no dispute about this proposition of law. However, in that case, the Court refused to accept entry in the balance sheet as acknowledgement of debt because of two reasons:

(a) The balance sheet was not passed by the shareholders at the appropriate meeting.

(b) The Directors’ report, in the balance sheet, contained the following statement:

11.Your Directors are of the opinion that the liabilities shown in Schedules ‘A’ and ‘B’ of the balance sheet excepting those of United Bank of India, M/s. Goenka and Co. Private Ltd. and Caritt, Moran and Co. Pvt. Ltd. are barred by limitations, hence these liabilities are not confirmed by your Directors.”

The decision of the Hon’ble Supreme Court in Shapoor Freedom Mazda (supra) what section 19 of the erstwhile Limitation Act, 1908 requires is that the words used in the acknowledgment must indicate the existence of “jural relation-ship between the parties such as that of debtor and creditor” and the courts lean in favour of a liberal construction of such a statement unless it is shown that it was made clearly without intending to admit the existence of such relationship. In Babulal Rukmanand v. Official Liquidator, Bharatpur Oil Mills Pvt. Ltd., in which the Hon’ble Supreme Court, placing reliance on Shapoor Freedom Mazda (supra), held that if an entry in a balance sheet fulfils the requirement of Section 19 of the erstwhile Limitation Act, 1908, the same would amount to an acknowledgment of liability and give a fresh start to the period of limitation. Where the Section 19 of the erstwhile Limitation Act, 1908, is pari materia to the present Section 18 of the Limitation Act, the law laid down by the Hon’ble Supreme Court is the law to be followed, in terms of the provisions contained in Article 141 of the Constitution of India.

In the light of the above, we are of the view that the balance sheet signed for and on behalf of the board of directors and the statutory auditors, would constitute an acknowledgement of debt by the Company for the purposes satisfying the prerequisites of Section 18 of the Limitation Act.

Conclusion:

In light of the foregoing discussion on the provisions of the Limitation Act as well as the IBC, it is notable that neither the IBC nor the law laid down by the Hon’ble Supreme Court in B.K. Educational (supra) restricts the application of all provisions of the Limitation Act as applicable; the Limitation Act also supports the interpretation that its Articles cannot be interpreted in isolation from the Sections.

Further, the operative provision of the Limitation Act, being Section 3(1) of the Limitation Act is automatically applied to any case where the Limitation Act is applicable. However Section 3(1) of the Limitation Act, must be permitted operation only after the provisions to which it is subject, have been discussed and understood as being not applicable in the facts of the case at hand.

The law as it stands today, in terms of the law laid down by the Hon’ble Supreme Court in M. M. Ramachandra (supra), upholds the application of Section 18 of the Limitation Act to an application under Section 7 or 9 of the IBC.

However, it is also of importance to note that even before the law was laid down by the Hon’ble Supreme Court in M. M. Ramachandran (supra), the Hon’ble National Company Law Tribunal in V. Padmakumar (supra) and Yogeshwar (supra) were also headed in a similar direction, i.e. that of applying the Limitation Act as a whole to the proceedings conducted under the IBC so as to determine the narrow question of the time limit in which to file an application for initiation of corporate insolvency resolution process under Section 7 or 9 of the IBC.

There is no ratio decidendi of the Hon’ble Supreme Court in any of its decision elucidating the rationale for not considering the application of Sections 4 to 24 of the Limitation Act to determine the limitation period as regards Sections 7 or 9 of the IBC barring the judgement laid down by the Hon’ble Supreme Court in Gurjar (supra) wherein Section 18 was found as being not applicable.

With the decision of Hon’ble supreme court M.M. Ramachandran v South Indian Bank Ltd, it is now established that the provisions of Section 18 of the Limitation Act shall be applicable in determining the limitation period for the purpose of admitting the application under Section 7 or 9 of the IBC. In our humble view, applying the same ratio, the other provisions of the Limitation Act which have a bearing on the operation of Section 3(1) of the Limitation Act, shall insofar as may be applicable, be applied for the purpose of computing the limitation period as regards the proceedings conducted under the IBC.

Submitted by

1.Raghunath

Chartered Accountant

For Samata Nagari Sahkari Maryadit, Kopargaon

Appearing in C.P. No. 4666(MB)/2019

Enclosed as above: Annexure

Annexure containing the provisions of Sections 4 to 24 of the Limitation Act as are relevant for the purposes of an application under Section 7 or 9 of the IBC for initiation of the corporate insolvency resolution process: