MR. SANIL PRAKASH SAHU VS. KOTAK MAHINDRA BANK LIMITED & ANR.

Mr. Sanil Prakash Sahu, 

Erstwhile Director of Gwalior Polypipes Limited, 

E-238, 2nd Floor, Greater Kailash Part-1, 

New Delhi – 110 048

…Appellant

Vs.

Kotak Mahindra Bank Limited, 

27 BKC C-27, 

G Block, Bandra Kula Complex, 

Bandra (East), Mumbai – 400 051

…Respondent No.1 

Mr. Satyen Saraswat, 

Interim Resolution Professional of  

Gwalior Polypipes Limited, 

B 2602, DB Woods, 

Krishna Vatika Marg, 

Goregaon (East), Mumbai – 400 063

…Respondent No.2

Case No: Company Appeal (AT)(Insolvency) No. 1281 of 2023

Date of judgement: 17.11.2023

Judges: [Justice Ashok Bhushan] Chairperson,  [Barun Mitra] Member (Technical)

For Appellant: Mr. Krishnendu Datta, Sr. Advocate with Mr.  Rajat Sinha and Mr. Sanjeev Choudhary,  Advocates.  

For Respondents: Mr. Amit Mahaliyan, Advocate for R-1.

Facts:
Arguments:

Appellant:
Respondent 1:

Sections:
Cases Referred:
Relevant Laws:
Download Court Copy: https://dreamlaw.in/wp-content/uploads/2024/01/3-1.pdf

Full Text Of Judgement:

  1. The present appeal filed under Section 61 of Insolvency and Bankruptcy  Code, 2016 (“IBC” in short) by the Appellant arises out of the Order dated  01.09.2023 (hereinafter referred to as “Impugned Order”) passed by the  Adjudicating Authority (National Company Law Tribunal, Indore Bench) in CP  (IB) No.06/MP/2019. By the impugned order, the Adjudicating Authority has  admitted the application under Section 7 of the IBC filed by Kotak Mahindra  Bank Ltd-present Respondent No.1 and initiated Corporate Insolvency  Resolution Process (“CIRP” in short) of the Corporate Debtor – M/s Gwalior  Polypipes Ltd. Aggrieved by this impugned order, the present appeal has been  filed by the erstwhile Director of the Corporate Debtor.  
  2. The factual matrix of the present matter is as outlined below:  ∙ State Bank of India (“SBI” in short), the original lender granted various  financial assistance to the Corporate Debtor from the year 1984, which  came to be renewed/enhanced/reduced from time to time. SBI vide its  Arrangement Letter sanctioned renewed/reduced credit facilities  aggregating to Rs.3.95 crores on 02.02.2002. 

∙ The Corporate Debtor executed an Agreement of Hypothecation of  Goods and Assets in favour of the Financial Creditor.  

∙ The Corporate Debtor was declared to be NPA in 2001 having failed to  pay the interest due. SBI issued a Legal Notice on the Corporate Debtor  on 18.08.2003 recalling the loan facility for non-payment of dues and  in 2004 filed an application against the Corporate Debtor before DRT.

∙ Assignment Agreement came to be executed by and between SBI and  Kotak Mahindra Bank Ltd. (“KMBL” in short), the Financial  Creditor/Respondent No.1 on 16.01.2006. 

∙ DRT passed an order dated 15.03.2007 inter-alia directing the  Corporate Debtor to pay Rs.1.81 crore and issued Interim Recovery  Certificate. 

∙ KMBL issued a Demand Notice upon the Corporate Debtor under  Section 13(2) of the SARFAESI Act on 06.07.2007. 

∙ DRAT vide its judgment dated 26.08.2009 dismissed the Appeal filed by  the Corporate Debtor challenging the DRT order. 

∙ KMBL took symbolic possession of the mortgaged properties under  Section 13(4) of the SARFAESI Act on 29.11.2011. On the directions of  the Hon’ble High Court of Madhya Pradesh dated 07.05.2012, the  Corporate Debtor filed a Securitisation Application before the DRT 

challenging the action taken by KMBL under the SARFAESI Act which  is pending. 

∙ KMBL filed a Section 7 application against the Corporate Debtor on  11.10.2019 which was admitted by the Adjudicating Authority on  01.09.2023. Assailing the impugned order, the Appellant has come up  in appeal. 

  1. The Learned Counsel for the Appellant making his submissions admitted that SBI had advanced working capital loan to the Corporate Debtor, last renewed on 02.02.2002, for a total limit of Rs.3.95 crore. Having failed to  pay the interest due, the Corporate Debtor was declared to be NPA in 2001 and SBI initiated DRT proceedings against the Corporate Debtor. Though SBI  had assigned the debt in favour of KMBL on 16.01.2006 vide an Assignment Agreement, KMBL was not substituted in place of SBI in the DRT proceedings  and none of the securities lying with SBI were ever transferred to KMBL.  KMBL however filed a Section 7 application against the Corporate Debtor on  11.10.2019 though the right to sue arose on 31.03.2004 when the period of  limitation expired qua the default which arose on 31.03.2001. Thus, the  Section 7 application which was filed after 18 years in October 2019 was way  beyond the prescribed limitation period of 3 years under Section 18 of the  Limitation Act, 1963 and thus the petition stood barred by limitation.  
  1. It was also asserted that the Adjudicating Authority incorrectly relied  upon entries in the balance sheet of the Corporate Debtor to extend the  limitation period from 2001 to 2019. The caveats which formed part of the  balance sheets disputing the said liability have not been taken cognizance of  by the Adjudicating Authority. Such caveats disputing a liability forming part  of the balance sheet cannot be taken as an unqualified acknowledgment of  debt. Moreover, the Adjudicating Authority has relied upon a One Time  Settlement (‘OTS’ in short) letter to extend the limitation by wrongly assuming  that the said OTS was dated 09.07.2018 while it was actually dated as  09.07.2010. Thus, reliance placed on this document was misplaced and  incorrect. 
  2. Rebutting the submissions made by the Appellant, it was submitted by  the Learned Counsel for Respondent No.1 that though the financial facility  was extended by SBI originally, SBI had assigned the debts along with the  underlying securities in favour of KMBL. Based upon the said assignment of  debt, KMBL was substituted in place of SBI by the DRT which passed its  orders on 11.10.2006 which was not challenged by the Corporate Debtor. The DRT in its order had issued interim recovery certificate which order was based  on the admission of liability in the balance sheet in the books of accounts for  the year 2004-05 wherein the Corporate Debtor had categorically admitted  that an amount of Rs.1.81 crore was due and payable by them. It has been  further contended that since 2005 onwards, the Corporate Debtor has been  acknowledging the outstanding dues in their audited balance sheet without  fail. Since the acknowledgment has been continuing, till 2018, the Section 7  application having been filed on 11.10.2019, the said application fell within  the prescribed limitation period. As regards the OTS letter, it was admitted by  the Respondent No. 1 that the same being dated 09.07.2010 and not  09.07.2018, and hence not pressed to claim extended limitation. 
  1. We have duly considered the arguments advanced by the Learned  Counsel for the parties and perused the records carefully. 
  2. The primary issue before us is whether the impugned order is erroneous  since the claim on which Section 7 application was admitted had become  barred by limitation since the default had arisen on 31.03.2001 and the three year limitation period had exhausted. It also needs to be examined whether  the Adjudicating Authority erred in relying upon the balance sheets of the  Corporate Debtor to grant extension of limitation without taking note of the  caveats in the Auditor’s Report which qualified the balance sheets thus  putting to dispute the acknowledgement of debt. 
  3. It is the case of the Appellant that the Respondent No. 1 has brought  forth a claim before the Adjudicating Authority which no longer survived for  the limitation period of three years had already expired since the declaration  of its account as a non-performing asset. It was pointed out that the date of default in Part IV of the Section 7 application is shown as 31.03.2001. The  right to sue therefore came to an end on 31.03.2004 when the period of  limitation expired qua the default which arose on 31.03.2001. It was also  argued that Respondent No.1 while annexing the balance sheets with entries  to support their claim of dues against the Corporate Debtor had deliberately  suppressed the caveats which formed part of the balance sheets disputing the  said liability. It has been vehemently contended that the Adjudicating  Authority by relying upon the balance sheets of the Corporate Debtor as  placed by the Respondent No. 1 committed an error in holding that there is a  continuous acknowledgment of the outstanding dues by the Corporate  Debtor.  
  1. It was pressed that at best the balance sheet up to FY 2005-06 can be  treated as unequivocal acknowledgment of debt since there was no caveat attached thereto. This would have at the utmost extended the limitation upto  2008. However, there is nothing on record in the balance sheets of the  subsequent years which contained any unequivocal acknowledgment of debt  which could have given rise to any fresh periods of limitation by each such  acknowledgment and therefore the Adjudicating Authority committed error in  rejecting the Section 7 application as barred by time.  
  2. In support of their contention, it was pointed out that the Hon’ble  Supreme Court in the judgment of Asset Reconstruction Company (India)  Ltd. v. Bishal Jaiswal (2021) 6 SCC 366 (‘Bishal’ in short) has  categorically held that entries made in the balance sheet would amount to  acknowledgment only if it is an unequivocal and unconditional entry without  any note/caveat attached thereto. It has been further submitted that in the judgment of this Tribunal in CA (AT) (Ins.) 991 of 2020 in ARCIL v. Uniworth  Textiles Ltd. (‘Uniworth’ in short) it has also been held that a caveat in the  Director’s Report disputing a liability forming part of the balance sheet cannot  be taken as an unqualified acknowledgment of debt. Reference was also made  to the judgment of this Tribunal in CA (AT) (Ins.) No. 350 of 2023 in 

Abhiruchi Vision Pvt. Ltd. v. Jayaswal Neco Industries Ltd. (‘Abhiruchi’  in short) where it has been held that the presence of a caveat corresponding  to the entry of liability in the balance sheet of the Corporate Debtor does not  amount to acknowledgment of debt. Stating that in the present case, the notes  appended to the balance sheets reveals that there is a denial of the liability, 

hence, the entries relied upon by the Respondent No. 1 to substantiate their  claim cannot be relied upon for the purposes of extending limitation. The three  years’ period after 31.03.2001 having long expired there is no justified cause  of action to file a Section 7 Application in 2019.  

  1. The Learned Counsel for the Respondent No. 1 rebutting the averments  made by the Appellant submitted that there is a continuous acknowledgment  of the outstanding dues by the Corporate Debtor in its balance sheet from  2005 onwards till 2018 as has been correctly noted in paras 4.3 and 4.4 of  the impugned order. These balance sheets of the Corporate Debtor contain  clear acknowledgement of debt which was initially owed to SBI and later  assigned to KMBL which acknowledgments continuously give rise to a fresh  period of limitation by each acknowledgment. Since the acknowledgment of  debt has been continuing, the Section 7 application having been filed on  11.10.2019, the said application fell within the prescribed limitation period. 
  2. and stated that in view of the continuous acknowledgment of the outstanding  dues in the balance sheets of the Corporate Debtor from 2005 to 2018 there  is an acknowledgment within the meaning of the Section 18 of the Limitation  Act extending the period of limitation by fresh period of limitation by each  acknowledgment and therefore the Adjudicating Authority committed no error  in holding the Section 7 application to be within the limitation period. It was  also added that the contention raised by the Appellant that the  acknowledgments in the balance sheets were accompanied by a caveat does  not carry substance since the contents of the caveat do not negate the fact  that the Corporate Debtor had clearly acknowledged the outstanding dues. 
  3. Before we start answering as to whether limitation for filing Section 7  application had already come to an end in the present facts of the case when  Section 7 petition was filed by the Appellant on 11.10.2019, it may be  constructive to have a glance at Section 18 of the Limitation Act which is as  reproduced below:  

“18. Effect of acknowledgment in writing.— 

(1) 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.

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 authorized 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.” 

  1. A plain reading of Section 18 of the Limitation Act, 1963 shows that it  provides for the admission of debts owed by a debtor to its creditor if a written  acknowledgement, duly signed by him or his authorized agent has been  provided. Any such acknowledgement marks the commencement of a fresh  period of limitation for the creditor for making an enforceable claim seeking  repayment of the debts due from the debtor. Thus, the three-year period for  recovering debts under Limitation Act can be extended if the debtor  acknowledges the debt within that period. This brings us to the present  question whether the balance sheet of a company can be looked upon as valid  acknowledgement of debts for the purposes of Section 18 of the Limitation Act  in the context of IBC.  
  2. The law is well settled that for finding out acknowledgement within the  meaning of Section 18 of the Limitation Act, balance sheets can be looked into. Hon’ble Supreme Court in Bishal supra has extensively examined the  question in reference to Section 18 of the Limitation Act and upheld the  consideration of balance sheets as a valid acknowledgment of debts but also  observed that it would depend on the facts of each case as to whether an entry  made in a balance sheet qua, any particular creditor, is unequivocal or has  been entered into with caveats. It spelt out in its judgement that the annexed  notes and the auditors’ reports, both of which are to be read with the balance  sheets, can clearly state with reasons that a particular entry in the balance  sheet does not constitute an acknowledgment of debt. Therefore, the status  of balance sheets as valid acknowledgment of debts needs to be examined  depending upon the facts of each case while considering the mention of such  non-acknowledging statements in the annexed notes or the auditor’s report. 
  1. In the Bishal judgment, the Hon’ble Supreme Court after examining  the issue of entry made in the balance sheet in the context of the Limitation  Act held at paragraphs 14, 35 and 46 as follows:- 

“14. Several judgments of this Court have indicated that an entry  made in the books of accounts, including the balance sheet, can  amount to an acknowledgment of liability within the meaning of  Section 18 of the Limitation “Act. Thus, in Mahabir Cold  Storage v. CIT, 1991 Supp (1) SCC 402, this Court held: 

  • It is, therefore, clear that the majority decision of the Full  Bench in V. Padmakumar [V. Padmakumar v. Stressed Assets  Stabilisation Fund, 2020 SCC OnLine NCLAT 417] is contrary to  the aforesaid catena of judgments. The minority judgment of Justice (Retd.) A.I.S. Cheema, Member (Judicial), after  considering most of these judgments, has reached the correct  conclusion. We, therefore, set aside the majority judgment of the  Full Bench of NCLAT dated 12-3-2020 [V. Padmakumar v.  Stressed Assets Stabilisation Fund, 2020 SCC OnLine NCLAT  417].” 
    1. The ratio that can be culled from the Bishal judgement is that the facts  and circumstances of each case essentially determines whether an entry in a  balance sheet related to a particular creditor is unequivocal or has been  entered with caveats to extend the limitation. In the light of the said judgment  of Hon’ble Supreme Court, we may now begin by examining whether the  Adjudicating Authority while holding that entries in balance sheet, in the facts  of the present case, had qualified as acknowledgement of debts enabling  extension of limitation period, it also conducted due diligence in scrutinizing entries in balance sheets and the notes annexed thereto while passing the  impugned order. 
    1. At this stage, it would be useful and relevant to reproduce the relevant  excerpts from the impugned order which is as follows:  

    “4.2………Now, we will examine the relevant entries made in the  balance sheet. 

    Then the balance sheet as on 31.03.2007 (for FY 2006-07)  reflects the secured loan at Rs. 1,81,40,225/- [ the same amount]  in the name of Kotak Mahindra Bank Limited. In the notes of  financial statements (Note No.1), the facts of having taken the working capital facilities from State Bank of India is mentioned.  Moreover, the facts that in August 2003 State Bank of India had  cancelled the limits and recalled facility and filed a suit before  DRT is also mentioned therein in the same notes. The fact of  assignment of the loan from State Bank of India to Kotak  Mahindra Bank Limited is also mentioned. It also shows that the  outstanding from bank and interest thereon had been provided  on the basis of statement of account received form the State Bank  of India which is under dispute and that interest of cash credit  from bank has not been provided for the year as the Directors  are of the view that the provisions made till the last year, as a  matter of prudence, are more than sufficient to cover the interest  till 31.03.2007. 

    4.4 We also noted that the same amount is reflected as a secured  loan from Kotak Mahindra Bank Limited in the balance sheet as  on 31.03.2008 (for FY 2007-08). Also in the notes on account the  similar fact as mentioned in the balance sheet as on 31.03.2007 is given. But then the balance sheet as on 31.03.2009 (for FY  2008-09) reflects the same loan in the name of Kotak Mahindra  Bank Limited as unsecured loan. In the notes on financial  statements it is stated that following deed of assignment of the  loan from State Bank of India to Kotak Mahindra Bank Limited,  no documents were executed for transfer of charge and,  therefore, in view of the received legal advice, the loan assigned  to Kotak Mahindra Bank Limited has been reclassified as  unsecured loan. Thereafter the balance sheet as on 31.03.2010, 31.03.2012, 31.03.2013, 31.03.2014, 31.03.2015 and  31.06.2016 shows the debt at the same amount of Rs. 1,81,40,225/- as short-term borrowing. It is noted that the  Corporate Debtor had submitted a letter dated 09.07.2018 to  Kotak Mahindra Bank Limited for settlement of its dues whereby  it had proposed to enter into an OTS (One Time Settlement) by  making a lump sum amount payment of Rs. 90 Lac. We also find  that the said amount has also reflected in the balance sheet as  on 31.03.2017 also and as per note No. 4.2 given in the  disclosure of significant accounting policies, it has stated that the  interest on unsecured loan payable to Kotak Mahindra Bank  Limited has not been provided for the year as the liability amount  and transfer of a security interest has been disputed. For a ready  reference the entire note at 4.2 (b) is reproduced here as under: 

    Working capital facilities were originally sanctioned by  State Bank of India Gwalior. The said loan was secured by first on all assets of the company and a personal guarantee  by Managing Director, a Promoter and two Former Directors  of the Company. The said working capital facilities were  further secured by mortgage of land, building and plant and  machinery of the units of the company. 

    (iv) Interest on unsecured loans payable to KMBL has not  been provided for the year as the liability amount and transfer of security interest has been disputed. Further that  Directors are of the view that existing provisions in the books made earlier as a matter of prudence are more than  sufficient to cover the interest liability, if held otherwise, and  the shortfall shall be dealt with on cash basis at the time of  settlement. 

    4.5. From the perusal of the various notes as appended to the  financial statements as well as keeping in view the OTS proposal  whereby it has proposed to pay an amount of Rs. 90 Lacs as  against the principal amount of Rs. 1,81,40,225/- reflects that it  does acknowledge the liability through its various balance sheets  year after year and the dispute if any could be as regards the  quantum of interest and as to whether the debt would be  considered as secured or unsecured. The notes/ caveats in the  balance sheets cannot be read as a categorical denial of the  liability in full. We are thus of the view that there is a debt above  threshold limit, the payment of which is defaulted by the  Corporate Debtor. The acknowledgment through balance sheet  does extend the limitation period and as such we hold that the  application is well within the extended limitation period and the  same is maintainable. The application otherwise is complete and  is in order.” 

    1. The Adjudicating Authority has concluded after scrutinizing the  balance sheet and the caveats/notice attached thereto that acknowledgments  contained in the balance sheet extends the limitation period and hence the  Section 7 application is well within the extended limitation period and thus maintainable. We now proceed to examine whether this finding of the  Adjudicating Authority is sustainable.  
    1. We notice that until 31.03.2007 the outstanding amount of Rs.1.81  crore was figuring in the balance sheet of the Corporate Debtor as ‘Secured  Loans’ as at page 785 of Appeal Paper book (‘APB’ in short). In the balance  sheet as on 31.03.2009, the same amount continues to be shown as part of  Loan Fund but as ‘Unsecured Loan’ as at page 793 of APB. We also find that  the reason for reclassifying the loan as unsecured loan has also been  appended at the notes to Financial Statement at page 794 of APB. In the  balance sheets of the Corporate Debtor for FY 2013-14, 2014-15, 2015-16  and 2016-17, the amount of Rs. 1.81 crore continues to be shown under the  sub-heading of ‘Short Term Borrowings’ under the head of ‘Current  Liabilities’.  
    2. This brings us to the question whether the Adjudicating Authority took  the precaution of also going though the other reports annexed to the balance  sheets to find out if there were any caveats which negated the  acknowledgement of debt. We notice that the impugned order at para 4.4, as  extracted above, has clearly taken notice of the caveats attached to the  balance sheets and duly considered its implications and thus the Bishal ratio  cannot be said to have been flouted. 
    3. The secured loan from  the State Bank of India and the interest thereon had been provided on the basis of statement of account received from the bank and as per the accounting  policies, being disputed, not admitted as a liability by the management.” The  copy of the balance sheets of the FY 2016-17 to FY 2018-19 is placed at page  845-946 of the APB. It is noticed that the caveat contained in the Auditor’s  Report for 2016-17 as at page 859 of the APB against the entry of liability qua  the Respondent No.1 is continued in the subsequent balance sheets which  reads as follows: – “Interest on unsecured loans payable to KMBL has not been  payable for the year as the liability amount and transfer of security interest  with KMBL has been disputed. Further, the directors are of the view that the  existing provision in the books made earlier as a matter of prudence, is  considered sufficient to cover the interest liability, if held otherwise and the  shortfall, if any, shall be dealt with on cash basis at the time of settlement.” In  the light of these entries in the balance sheets, the Adjudicating Authority has  held that there has been an acknowledgement of debt. 
    1. After glancing through the above balance sheets and related reports  thereto, we are satisfied that balance sheets contain an acknowledgement of debt from SBI, the original lender and assignment of the said debt to KMBL.  To our mind, merely because the notes to the account and the director’s report  narrate the different stages of subsequent litigation with respect to the said  unsecured loan, it cannot be said that these notes in any manner diminish the relevance and import of the debt which finds mention in the balance  sheets for the purposes of Section 18 of the Limitation Act. Such  caveat/information, read together with the balance-sheet do not negate the  acknowledgment of that liability. Hence, in view of the facts of this case we  are of the considered opinion that the judgements of this Tribunal in  Uniworth supra and Abhiruchi supra do not come to the aid of the Appellant. 
    1. The Adjudicating Authority therefore committed no error in holding that  the Section 7 application filed by the Respondent No. 1 was not barred by  time there being continuous acknowledgment in their respective balance  sheets of the Corporate Debtor which acknowledgment was within the  meaning of Section 18 of the Limitation Act extending the period of limitation  by fresh period of limitation by each acknowledgment.  
    2. We would however like to add that the Adjudicating Authority  committed a mistake in inter alia predicating the extension of limitation  period also on the basis of an OTS proposal from the Corporate Debtor to  KMBL dated 09.07.2010 by wrongly holding it to be dated 09.07.2018. Since  it is of 2010 vintage, it cannot be relied upon for extension of limitation until  2019. Be that as it may, it is clear that insofar as acknowledgement of debt is  concerned it has been conceded in the OTS that the working capital facilities  had been taken from SBI which subsequently had been assigned to KMBL  and that for settlement of its dues it had proposed to enter into the OTS by  making a lump sum amount payment of Rs. 90 lakhs. 
    3. held that the Vidarbha judgement was passed in the context of a certain set of facts. We  are inclined to agree with the Adjudicating Authority that the Vidarbha  judgement was given under very specific set of facts where the realizable dues  of the Corporate Debtor were more than the payable dues. The facts in the  present case being clearly distinguishable, the Vidarbha judgement cannot be  said to apply ipso facto as claimed by the Appellant. Section 7 of the IBC  allows a financial creditor to initiate an insolvency resolution process against  the corporate debtor upon showing a default in debt owed by the corporate  debtor. The trigger under Section 7 of IBC is non-payment of dues owed to  creditors. In the given facts of the case, where debt and default on the part of  the Corporate Debtor qua KMBL stands established, there were no cogent  grounds for not admitting the Section 7 petition.  
    1. In fine, we do not find any error in the impugned order passed by the  Adjudicating Authority admitting the Section 7 application. There is no merit  in the Appeal. The Appeal is dismissed. No costs.