Acknowledgment of Debt and Corporate Insolvency: Insights from Vidyasagar Prasad Vs. UCO Bank and Anr.

Introduction:

The Supreme Court’s judgment in Vidyasagar Prasad Vs. UCO Bank clarifies pivotal aspects of the Insolvency and Bankruptcy Code (IBC), 2016, particularly around debt acknowledgment and limitation in Corporate Insolvency Resolution Processes (CIRP). The issue was whether the corporate debtor’s balance sheets and a one-time settlement (OTS) proposal could constitute valid acknowledgment of debt, thereby extending the limitation period for UCO Bank’s claim.

In this case, the appellant, a suspended director, argued that UCO Bank’s claim was time-barred, as more than three years had passed since the debtor’s account became a Non-Performing Asset (NPA) in 2014. Key to the Court’s ruling were Section 7 of the IBC, which allows financial creditors to initiate CIRP, and Section 18 of the Limitation Act, which extends the limitation period based on debt acknowledgment within the original timeframe.This judgment reinforces creditors' rights by recognizing financial statements and OTS proposals as valid acknowledgments, shaping the approach to corporate debt recovery.

Background:

The appellant, Vidyasagar Prasad, a suspended director of a corporate debtor, challenged the order of the National Company Law Appellate Tribunal (NCLAT), which upheld the National Company Law Tribunal's (NCLT) decision to admit UCO Bank’s application for initiating CIRP. The corporate debtor, represented by an Insolvency Resolution Professional (IRP), had taken loans and credit facilities from UCO Bank and other consortium banks between 2010 and 2012. The funds were intended to support the corporate debtor's thermal power plant project.

However, the corporate debtor defaulted on repayments, and the bank classified its account as a Non-Performing Asset (NPA) on November 5, 2014. Subsequently, UCO Bank initiated recovery proceedings under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act and the Debts Recovery Tribunal (DRT). The primary legal contention arose when UCO Bank filed an application under Section 7 of the IBC, 2016, to initiate CIRP against the corporate debtor, triggering resistance from the latter on multiple grounds, including the bar of limitation and alleged lack of acknowledgment of debt.

Questions of Law:

1. Does an acknowledgment of debt in the financial statements and balance sheets suffice to extend the limitation period under Section 18 of the Limitation Act?
2. What constitutes an acknowledgment of debt under the IBC in the context of corporate insolvency proceedings, especially when the debt amount or creditor is not explicitly mentioned?
3. Is the application under Section 7 of the IBC barred by limitation when filed beyond three years from the classification of the account as NPA, and what is the role of subsequent acknowledgments in extending this period?
4. Does the competency of the bank’s representative to sign the Section 7 application affect its validity?

Findings and Rationale:

1. Competency to Sign the Application: The Court upheld that UCO Bank's General Manager was legally authorized to sign the Section 7 application, as the bank had vested him with the power to perform necessary actions in representing it.
2. Existence and Acknowledgment of Debt: The Court confirmed that the corporate debtor had availed the loan facilities and defaulted on the repayment obligations. The entries in the financial statements constituted acknowledgment of debt, which met the requirements of Section 18 of the Limitation Act.
3. Limitation Period and Acknowledgment of Debt: The Court emphasized that the limitation period for filing the CIRP application could be extended under Section 18 of the Limitation Act, given the existence of debt acknowledgment in the corporate debtor’s balance sheets and the auditor's notes for the financial year ending on March 31, 2017. The Court referenced past cases, including Dena Bank v. C. Shivakumar Reddy and Bishal Jaiswal, which held that debt entries in balance sheets qualify as acknowledgment of debt, extending the limitation period.
4. OTS Proposal as Acknowledgment: The Court further highlighted that the corporate debtor's One Time Settlement (OTS) proposal in 2016 constituted an acknowledgment of debt, indicating a subsisting liability owed to UCO Bank. Citing judgments like Lakshmirattan Cotton Mills v. Aluminium Corporation of India, the Court noted that an OTS proposal reflects an intention to settle dues, thus reaffirming the jural relationship between creditor and debtor.
5. Impact of the Balance Sheet Entries: Following the rationale of Bishal Jaiswal, the Court determined that financial statements prepared per the Companies Act do not necessarily have to specify creditor names to indicate debt acknowledgment. Section 129 of the Companies Act, read with Schedule III, requires companies to record liabilities without obligating specific creditor names. As long as the entries suggest a debtor-creditor relationship, they satisfy Section 18, thereby extending the limitation period for CIRP initiation.
6. Final Judgment: The Supreme Court concluded that the NCLT and NCLAT had rightly admitted the Section 7 application within the extended period of limitation. Thus, the appeal by the corporate debtor was dismissed.

Conclusion:

The Vidyasagar Prasad Vs. UCO Bank judgment elucidates critical principles in insolvency law, primarily about the effect of acknowledgment of debt on the limitation period in CIRP proceedings. The Court’s interpretation underscores the significance of balance sheet entries and OTS proposals as legitimate acknowledgment, reinforcing the jural relationship between debtor and creditor. This case further establishes that procedural technicalities regarding the authority to file applications are secondary to the substantive merits of debt acknowledgment.

The judgment enhances the judicial understanding of acknowledgment under the IBC, serving as a benchmark for interpreting the interaction between debt acknowledgment and limitation. This clarity benefits both financial institutions and corporate debtors by ensuring fair adherence to CIRP timelines and fostering accountability within insolvency proceedings.