Sanil Prakash Sahu vs Kotak Mahindra Bank & Anr

[Arising out of order dated 01.09.2023 passed by the Adjudicating Authority, National Company Law Tribunal, Indore Bench in CP(IB) No. 06/MP/2019]

IN THE MATTER OF:

Mr. Sanil Prakash Sahu, Erstwhile Director of Gwalior Polypipes Limited, E-238, 2nd Floor, Greater Kailash Part-1, New Delhi - 110 048 ...Appellant

Versus

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

Present:

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

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

Company Appeal (AT) (Ins.) No. 1281 of 2023 1 JUDGMENT

[Per: Barun Mitra, Member (Technical)]

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.

Company Appeal (AT) (Ins.) No. 1281 of 2023 2  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.

3. 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

Company Appeal (AT) (Ins.) No. 1281 of 2023 3 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.

4. 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.

5. 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

Company Appeal (AT) (Ins.) No. 1281 of 2023 4 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.

6. We have duly considered the arguments advanced by the Learned

Counsel for the parties and perused the records carefully.

7. 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.

8. 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

Company Appeal (AT) (Ins.) No. 1281 of 2023 5 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.

9. 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.

10. 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

Company Appeal (AT) (Ins.) No. 1281 of 2023 6 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.

11. 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.

Company Appeal (AT) (Ins.) No. 1281 of 2023 7

12. The Learned Counsel for the Respondent No.1 has relied on the

judgment of this Tribunal in the matter of Jumbo Chemical & Allied

Industries Pvt. Ltd. v. Arjun Industries Ltd. in CA(AT) (Ins.) 948 of 2022

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.

13. 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.

Company Appeal (AT) (Ins.) No. 1281 of 2023 8 (2) 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."

14. 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.

15. 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 Company Appeal (AT) (Ins.) No. 1281 of 2023 9 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.

16. 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:

"12. The entries in the books of accounts of the appellant

would amount to an acknowledgment of the liability to

M/s Prayagchand Hanumanmal within the meaning of

Section 18 of the Limitation Act, 1963 and extend the

Company Appeal (AT) (Ins.) No. 1281 of 2023 10 period of limitation for the discharge of the liability as

debt....."

35. A perusal of the aforesaid sections would show that there is

no doubt that the filing of a balance sheet in accordance with the

provisions of the Companies Act is mandatory, any transgression

of the same being punishable by law. However, what is of

importance is that notes that are annexed to or forming part of

such financial statements are expressly recognised by Section

134(7). Equally, the auditor's report may also enter caveats with

regard to acknowledgments made in the books of accounts

including the balance sheet. A perusal of the aforesaid would

show that the statement of law contained in Bengal Silk Mills

[Bengal Silk Mills Co. v. Ismail Golam Hossain Ariff, 1961 SCC

OnLine Cal 128 : AIR 1962 Cal 115], that there is a compulsion

in law to prepare a balance sheet but no compulsion to make any

particular admission, is correct in law as 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, which then has to be examined on a

case by case basis to establish whether an acknowledgment of

liability has, in fact, been made, thereby extending limitation

under Section 18 of the Limitation Act."

46. 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

Company Appeal (AT) (Ins.) No. 1281 of 2023 11 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]."

17. 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.

18. 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.

4.3. We have perused these financial statements. The balance

sheet of the Corporate Debtor as on 31.03.2006 (for FY 2005-06)

clearly reflects the secured loan from State Bank of India at Rs.

1,81,40,225/-. In the notes of accounts thereof (Note No. 5), it is

mentioned that the State Bank of India at Gwalior with whom

Company Appeal (AT) (Ins.) No. 1281 of 2023 12 the company was enjoying as credit facilities for its working

capital requirement have since cancelled the limit and recalled

the facility for its working capital requirement on 18.08.2003;

and that the bank has filed a suit for a recovery of the loan before

the DRT Jabalpur and the proceedings are in progress before the

DRT. The same balance sheet of FY 2005-06 also reflects the

corresponding figures as on 31.03.2005 also. Though the

balance sheet for FY 2004-05 has not been enclosed, it has been

stated that the Hon'ble DRT had issued an interim recovery

certificate dated 15.03.2007 on the basis of the balance sheet for

FY 2004-05. Even otherwise it is also noted that the default date

is stated to be since 31.03.2001. Following that, on 02.02.2002,

the Financial Creditor had revised limits and reduced that to Rs.

3.5 crores only. On 05.02.2002, the Board of Directors of

Corporate Debtors had also given its ascent. But then due to

further default, the Financial Creditor had issued on 18.08.2003

the recall notice for the entire facility and thus the default date

for balance amount (on reduced limit] can be taken as

18.08.2003 also. Thus on consideration of these facts,

acknowledgement as per balance sheet as on 31.03.2006

extends the limitation till that day and as such there is no

ambiguity.

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

Company Appeal (AT) (Ins.) No. 1281 of 2023 13 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,

Company Appeal (AT) (Ins.) No. 1281 of 2023 14 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:

4.2 (b) (i) Financial liabilities and borrowings: -

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.

(ii) During August, 2003, State Bank of India had cancelled

the limits and recalled the loans and filed a suit before the

DRT Jabalpur for recovery of the amount due.

Subsequently, State Bank of India had assigned the said

Company Appeal (AT) (Ins.) No. 1281 of 2023 15 loan to Kotak Mahindra Bank Limited (KMBL), pursuant to

the execution of a deed of assignment on 16.01.2006.

(iii) The loan payable to KMBL has been consistently

considered as unsecured, as no charge on the assets has

ever been created/registered in its favour. KMBL had

issued a notice dated 06.07.2007 to the Company under

Section 13 (2) of SARFAESI Act 2002, despite being an

unsecured creditor against which the company filed writ

petition before the Hon'ble High Court of Judicature

Jabalpur Bench at Gwalior on the ground that it assignee

assigning of the debt is not a secured creditors and hence

cannot take action under SARFAESI Act 2002. During the

pendency of the case but before final hearing, KMBL took

an action on 28/29-11-2011 purportedly under Section 13

(4) of SARFAESI Act 2002 and took the symbolic possession

of the assets of the Company. On being approached by the

Company against the said action of KMBL, an order dated

07.12.2011 was passed by the Hon'ble High Court directing

KMBL that no coercive action be taken against the

Company. Later the Hon'ble High Court directed the

Company to file appropriate application before the DRT

against the action of KMBL taken under SARFAESI Act

2002. The company has filed the application before the DRT,

which is being heard.

(iv) Interest on unsecured loans payable to KMBL has not

been provided for the year as the liability amount and

Company Appeal (AT) (Ins.) No. 1281 of 2023 16 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."

19. 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

Company Appeal (AT) (Ins.) No. 1281 of 2023 17 maintainable. We now proceed to examine whether this finding of the

Adjudicating Authority is sustainable.

20. 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'.

21. 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.

22. The copy of the balance sheet for the FY 2007-08 of the Corporate

Debtor alongwith the other reports have been placed at pages 814-844 of the

APB. The relevant portion of the balance sheet wherein a caveat has been

attached at page 839 of APB is as reproduced below: - "The secured loan from

the State Bank of India and the interest thereon had been provided on the basis

Company Appeal (AT) (Ins.) No. 1281 of 2023 18 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.

23. 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.

Company Appeal (AT) (Ins.) No. 1281 of 2023 19

24. 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.

25. 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.

26. This brings us to the issue raised by the Learned Counsel for the

Appellant that the Corporate Debtor being a solvent company in good financial

health, the Adjudicating Authority should have exercised discretion in not

admitting the Section 7 application in terms of the judgment of the Hon'ble

Supreme Court in Vidarbha Industries Power Ltd. v. Axis Bank (2022) 8

SCC 352 ('Vidarbha' in short). We notice that the Adjudicating Authority has

duly considered this contention and relying on the judgement dated

11.05.2023 of the Hon'ble Supreme Court in M. Suresh Kumar Reddy v.

Canara Bank & Ors in Civil Appeal No. 7121 of 2022 held that the

Company Appeal (AT) (Ins.) No. 1281 of 2023 20 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.

27. 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.

[Justice Ashok Bhushan] Chairperson

[Barun Mitra] Member (Technical) Place: New Delhi Date: 17.11.2023

PKM

Company Appeal (AT) (Ins.) No. 1281 of 2023 21