CRITIQUE OF THE MAJORITY DECISION IN THE CASE OF V. PADMAKUMAR VS. STRESSED ASSETS STABILISATION FUND (SASF) & ANR.
There are catena of judgments supporting the proposition that reflection of debt in balance sheet amounts to acknowledgement of liability. However, the issue has witnessed conflicting judgments being rendered by the Hon’ble Appellate Authority i.e. NCLAT. The issue has been answered in both positive1 and negative2 by the Appellate Tribunal. However, the Hon’ble Appellate Tribunal, consisting of five-member bench, answered the issue in negative, which came up for consideration as ancillary issue in the case of V. Padmakumar vs. Stressed Assets Stabilisation Fund (SASF) & Anr.3 The judgment was not delivered unanimously – it was a majority decision of 4:1.
The majority decision stated that since filing of balance sheet is a mandatory requirement under Section 92(4) of the Companies Act, 2013 and since non-filing of the same attracts penal action under Sections 92(5) and 92(6) of the Companies Act, 2013, it cannot be said that reflection of debt in balance sheet amounts to acknowledgement of debt under Section 18 of the Limitation Act, 1963. It is further stated by the majority that if the contention that reflection of debt in balance sheet amounts to acknowledgement of debt is accepted then in that case no limitation would be applicable because every year it is mandatory for the ‘Corporate Debtor’ to file balance sheet. The majority decision has merely re-iterated the aforesaid proposition as stated by two-member bench of NCLAT in the case of Sh. G Eswara Rao vs. Stressed Assets Stabilisation Fund. Interestingly, both the decisions were penned down by the same author. On the contrary, the dissenting opinion took note of the proposition of law laid down by various High Courts that statement of liability in balance sheet amounts to acknowledgement of debt. It stated that reflection of debt in balance sheet cannot be ignored as debarred from consideration and in every given matter, it would be a question of applying facts to the law and vice versa, to see whether or not the specific contents, spell out an acknowledgement. It is noteworthy that the majority decision has not relied on any judicial precedent to reach the aforesaid conclusion.
Against this backdrop, let us examine judicial stand taken by various High Courts. In one of the earliest decision, the Nagpur High Court4 stated that mere signing of balance sheet by a director does not come to rescue limitation as the same is not done with the intent to admit liability but is done because he is bound to do so. The relevant part of the judgment is reproduced hereunder:
“18. ….. The mere signing of a balance sheet by a director does not operate to save limitation because the director in drawing up a balance sheet does not do so with the intention of acknowledging liability but under a duty where he is bound to set out, among other things, the claims made on the company….”
In an appeal arising from the money decree against a company, the High Court of Judicature at Calcutta in the case of Bengal Silk Mills Co. vs. Ismail Golam Hossain Ariff5 disagreed with the Nagpur High Court’s decision (supra) and stated that even statement of liability in balance sheet amounts to acknowledgement of debt giving rise to a fresh period of limitation irrespective of the fact that the balance sheet was prepared under the compulsory mandate of the statute and articles of association of the company. The relevant part of the judgment is reproduced hereunder:
“10. ……. It is true that the balance-sheets were required to be made both by the Indian Companies Act, 1913 as also by the articles of association of the defendant company. There, was a compulsion upon the managing agents to prepare the documents but there was no compulsion upon them to make any particular admission. They faithfully discharged their duty and in doing so they made honest admissions of the company’s liabilities. Those admissions though made in discharge of their duty are nevertheless conscious and voluntary admissions. A document is not taken out of the purview of Section 19 of the Indian Limitation Act merely on the ground that it is made under compulsion of law. see Venkata v. Partha Saradhi, ILR 16 Mad 220 at p. 222, Udaya Them v. Subramania Chetti, 6 Mad LJ 266 at p. 209, Goode v. Job, (1858) 1 El and El 6 at p. 11 : 120 ER 810 at p. 812. I am unable to agree with the reasoning of the Nagpur decision that a balance- sheet does not save limitation because it is drawn up under a duty to set out the claims made on the company and not with the intention of acknowledging liability, The balance sheet contains admissions of liability; the agents of the company who makes and signs it intends to make those admissions. The admissions do not, cease to be acknowledgments of liability merely on the ground that they were made in discharge of a statutory duty.’’
There are concatenation of judgments which answers the issue in affirmative. In the case of Shahi Exports (P) Ltd. vs. CMD Buildtech (P) Ltd.6, the Hon’ble High Court of Delhi stated that it is a well-established principle that an entry made in the balance sheet of a company amounts to acknowledgement of debt and that it extends the period of limitation as stipulated under Section 18 of the Act. The same principle was followed by the Hon’ble High Court of Delhi in the case of Zest Systems (P) Ltd. vs. Centre for Vocational Entrepreneurship Studies7.
Further, in the case of Ambica Mills Ltd Ahmedabad Vs Commissioner of Income Tax8, the Hon’ble Gujarat High Court held that the unclaimed wages being recognized in the Balance Sheet of an Assessee company as a liability under the head ‘Other Finance’ every year was in itself an acknowledgment of debt under Limitation Act 1908 and such an acknowledgment does not make the debt time barred.
In the case of Mrs. Usha Jain vs. Aditya Landcon Private Limited9 , certain amount was shown by the respondent company under the head current liabilities in its balance sheet as an advance taken by it ranging from financial year 2008-09 to 2014-15. Further, all the necessary documents and affidavits were filed with the Registrar of Companies wherein by way of amended balance sheet as on 31.03.2014, the said advance was not mentioned for the first time with the explanatory note that the amount stands forfeited on 31.03.2014 on the ground of non-fulfilment of obligation by the petitioner. The Hon’ble High Court of Delhi stated that the amount having been shown under the heading current liabilities do show an admission on the part of the respondent qua the debt of the petitioner as late as till 2014 and since it was only removed on 31.03.2014, the same is within limitation.
We would see that a caveat has been added in few cases to the extent that balance sheet duly signed and passed by the shareholders should be read along with directors’ report to see whether there is actually an acknowledgement of debt or not. This ratio is laid down in the cases of Sheetal Fabrics versus Coir Cushions Ltd.10 and In re. Padam Tea Company Ltd.11
We are of the opinion that an entry in balance sheet amounts to admission of a jural relationship of debtor and creditor; such statement would not cease to be an acknowledgment merely because the same is not addressed to the creditor; and director’s signature satisfies the test having the acknowledgement signed by an agent of a person against whom the payment is claimed.
There is no decision by the Hon’ble Apex Court on the instant issue. Recently, the Kerala High Court, in the case of Kesavan Namboodiri vs. B S Radhakrishnan12 stated that admission made pursuant to compulsion imposed by statute does not amount to acknowledgement in terms of Section 18 of the Limitation Act. However, like the majority decision of the Hon’ble NCLAT, the said decision also did not cite any authority to countenance its proposition.
Provisions of Companies Act, 2013 & Accounting Standards:
The sanctity and righteousness of books of accounts and the financial statements cannot be undermined. This gets surfaced from the fact that the provisions of the Companies Act and Accounting Standards mandates company, its auditor(s) and its directors to give the ‘true and fair view’ of the state of affairs of the company. Adherence to accounting standards, periodical preparation of various statements, difficulty in falsification, regular maintenance of books of accounts, auditors’ report, preparation of directors’ report etc. makes the financial statements reliable. Even the Hon’ble Supreme Court of India, in the case of Ishwar Dass Jain vs. Sohan Lal13 stated that the aforementioned things give financial statements and books of accounts a probability of trustworthiness.
The books of accounts and the financial statements of company should give ‘true and fair view’ of the state of affairs of the company. This contention finds expression in Section 128 (1) of the Companies Act. Further, Section 129 (1) of the Companies Act states that the financial statements of company should give ‘true and fair view’ and shall comply with the accounting standards notified under Section 133 of the Companies Act. It further states that the financial statement shall be in the form or forms as may be provided for different class or classes of companies in Schedule III.
The Companies Act bestows auditor with the responsibility to prepare report as evidenced from Section 143. It states that the report should be prepared after taking into consideration the provisions of the Companies Act, the accounting and auditing standards and matters which are required to be included in the audit report under the provisions of the Companies Act or any rules made thereunder. It is further stated that such report should give a ‘true and fair view’ of the state of the affairs of the company at the end of its financial year and profit or loss and cash flow for the year and such other matters as may be prescribed. This, undoubtedly, would mean that the auditor has the duty to verify the transactions as to their genuineness and take an informed decision as to their reflection and recognition in books of accounts. Further, Accounting Standard-1 states that financial statements should give a true and fair view of the financial position and financial performance of the company.
When the financial statement is laid before company in a general meeting, a report by the Board of Directors is also placed which include Directors’ Responsibility Statement. This is evidenced from Section 134 (3) (c) of the Companies Act. The directors’ report, as per Section 134 (5) (b) of the Companies Act, shall state that ‘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’.
Further, Schedule III attached to the Companies Act, which deals with ‘General Instructions for Preparation of Balance Sheet and Statement of Profit and Loss of a Company’ makes a distinction between acknowledged debt and unacknowledged debt inasmuch one can simply write unacknowledged debt under the head ‘Claims against the Company not acknowledged as debt’.
The true and fair view of financial statements mean that the same is free from the taint of material misstatements and represent the financial performance and position of the company. Though preparation of the same is a mandate under the Companies Act, however, making any admission of liability is not. When any liability finds reflection in the balance sheet of any company, it cannot be gainsaid that it is merely shown without any conscious decision on the part of the Directors’ who admit such liability.
The majority opinion failed to take into consideration of the various aspects of Companies Act, Accounting Standards as also judicial precedents. The authors accede to the ratio laid down by courts stating that a director’s report should be read along with balance sheet indicating liability to reach the conclusion as to whether there is an actual acknowledgement or not. The minority opinion takes into consideration the above aspects while reaching the conclusion and the authors are of the opinion that it is in fact minority opinion that should hold the field.
Needless to say, this conundrum created by the majority decision shall only be rested when the matter reaches Hon’ble Apex Court.
-Adv. Nikhil Gupta & Ms. Kriti Mittal
- Gautam Sinha Ex-Director/Promoter of M/s. Kalpataru Cold Storage Pvt. Ltd. vs. UV Asset Reconstruction Company Limited [Company Appeal (AT) (Ins) No.1382 of 2019]
- G Eswara Rao vs. Stressed Assets Stabilisation Fund [Company Appeal (AT) (Insolvency) No. 1097 of 2019]
- Company Appeal (AT) (Insolvency) No. 57 of 2020
- Kashinath Shankarappa vs. The new Akot Cotton Ginning and Pressing Co. Ltd.[AIR 1951 Nag 255 (Nagpur)]
- AIR 1962 Cal. 115
- 2013 SCC Online Del. 3739
- 2018 SCC Online Del 12116
- AIR 1964 Guj. 208
- PET. 301 of 2015, Judgment Date: Sep 26, 2017, Delhi High Court
- 2005 SCC OnLine DEL 247
- AIR 1974 Calcutta 170
- No.17 of 2007, decided on December 4, 2018
- AIR 2000 SC 426