In the case of V. Padmakumar v. Stressed Assets Stabilization Fund and Others (dated March 12, 2020), the National Company Law Appellate Tribunal ("NCLAT") held that an entry in a balance sheet or annual return cannot be considered to be an acknowledgement under Section 18 of the Limitation Act, 1963 ("Limitation Act").
In the instant case titled Padmakumar v. Stressed Assets Stabilisation Fund and Others the issue raised for clarification before the NCLAT was:
Whether the application made in accordance with Section 7 of the Code was time-barred?
With regard to this issue, The majority opinion, which was written by Justice Mukhopadhaya and co-signed by Justices Bansi Lal, Bhat, Justice Venugopal, and Kanthi Narahari, cited previously decided cases like Gaurav Hargovindbhai Dave v. Asset Reconstruction Company (India) Limited [(2010) 10 SCC 72] and held that the application under Section 7 was barred because the default had already occurred and the account had been declared a non-performing asset on July 21, 2011. The Report of the Insolvency Law Committee explicitly stated that the aim of the Code could not have been to extend the life of obligations that have already passed their expiration date, and that the application under Section 7 was prevented by limitation. It was further noted in the decision in the case of V. Hotels Limited v. Asset Reconstruction Company (India) Limited (decided on December 11, 2019) that the language of Section 18 of the Limitation Act, 1963, makes it clear that the purpose of filing a suit or application in respect of any property or right, an acknowledgement of liability in respect of such property or right has to be made in writing duly signed by the party against. The Supreme Court's decision in Jignesh Shah and Others v. Union of India and Others (decided on September 25, 2019), stated that the date of default must be taken into account for calculating the time of limitation of an application under Section 7 of the Code, was also mentioned. It was further noted that a lawsuit for the recovery of money based on a cause of action that is within the statute of limitations may only be initiated in cases of late payments. The date of default cannot be advanced to the date of the decree, even if it is approved. It cannot be stated that a decree is in default or that dues have not been paid if the decree can be carried out within the statute of limitations. The NCLAT ruled that the date of default cannot be moved forward for the purposes of computing the time limit for submitting an application under the Code by the simple act of filing an action for recovery or a court's decree.
Justice Cheema expressed his disagreement with a portion of the ruling that deals with annual reports and audited balance sheets in his dissent, which was indicated to be the reason for his disagreement. It was claimed that a number of high courts, including the High Court of Delhi, had issued decisions addressing balance sheets and annual reports of businesses, in which entries had been deemed to constitute "acknowledgements of debt" and even accepted for the purposes of Section 18 of the Limitation Act, 1963. The NCLAT ruled that the application under Section 7 of the Code was time-barred and unmaintainable since the item in the balance sheet or annual return cannot be construed as an acknowledgement under Section 18 of the Limitation Act, 1963.
The NCLAT categorically stated that,
“In effect, order(s), passed by the Adjudicating Authority appointing 'Interim Resolution Professional', declaring moratorium, freezing of account, and all other order (s) passed by the Adjudicating Authority pursuant to impugned order and action, if any, taken by the 'Interim Resolution Professional', including the advertisement, if any, published in the newspaper calling for applications all such orders and actions are declared illegal and are set aside. The application preferred by Respondent under Section 7 of the 'I&B Code' is dismissed. Learned Adjudicating Authority will now close the proceeding. The 'Corporate Debtor' (company) is released from all the rigour of law and is allowed to function independently through its Board of Directors from immediate effect.”