Insolvency plea under Sec 7 not barred by limitation if debt is acknowledged before expiry of 3-yr period

The Supreme Court of India in an important judgement has held that an application under Section 7 of the Insolvency and Bankruptcy Code (IBC) would not be barred by limitation, on the ground that it had been filed beyond a period of three years from the date of declaration of the loan account of the corporate debtor (CD) as NPA, if there were an acknowledgement of the debt by the CD before expiry of the period of limitation of three years, in which case the period of limitation would get extended by a further period of three years.

The apex court of the country passed this important verdict in the matter of Asset Reconstruction Company (India) Limited (Arcil) Vs. Tulip Star Hotels Limited & Ors.  Arcil, the appellant had approached the apex court after the National Company Law Tribunal (NCLAT) allowed appeal by the corporate debtor saying that Arcil has failed to bring on record any acknowledgment in writing by the ‘Corporate Debtor’ or its authorised person acknowledging the liability in respect of debt.

It also said that the Books of Account cannot be treated as an acknowledgement of liability in respect of debt payable to the Arcil signed by the ‘Corporate Debtor’ or its authorised signatory

The Supreme Court in its judgment dated 1 August 2022 while allowing the appeal by Arcil observed that the NCLAT erred in law in holding that the books of account of a company could not be treated as acknowledgement of liability in respect of debt payable to a financial creditor (FC).

It further says that an application under Section 7 of the IBC would not be barred by limitation, on the ground that it had been filed beyond a period of three years from the date of declaration of the loan account of the CD as NPA, if there were an acknowledgement of the debt by the CD before expiry of the period of limitation of three years, in which case the period of limitation would get extended by a further period of three years.

The court further observed that there is no specific period of limitation prescribed in the Limitation Act, 1963, for an application under the IBC, before the Adjudicating Authority. An application for which no period of limitation is provided anywhere else in the Schedule to the Limitation Act, is governed by Article 137 of the Schedule to the said Act. Under Article 137 of the Schedule to the Limitation Act, the period of limitation prescribed for such an application is three years from the date of accrual of the right to apply.

The Section 18 of the Limitation Act speaks of an acknowledgment in writing of liability, signed by the party against whom such property or right is claimed. Even if the writing containing the acknowledgment is undated, evidence might be given of the time when it was signed. The explanation clarifies that an acknowledgment may be sufficient even though it is accompanied by refusal to pay, deliver, perform or permit to enjoy or is coupled with claim to set off, or is addressed to a person other than a person entitled to the property or right. ‘Signed’ is to be construed to mean signed personally or by an authorised agent.

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