Acknowledgement of debt by a company will restart the clock on the limitation period, the Supreme Court said while considering an insolvency application against V Hotels Ltd.
While this is not the first time the apex court has laid down this principle, it has elaborated on what would constitute as an acknowledgement.
The law on limitation lays down the time period within which a remedy can be sought. In the case of financial debt, a lender can file an insolvency application within three years of default.
Asset Reconstruction Company (India) Ltd., a financial creditor of V Hotels, filed an insolvency application against the company in mid-2018—nine years after the debt became due in 2008. Every three years, when the limitation period was set to expire, ARCIL and the company entered into a settlement agreement extending the date of repayment.
When it failed to recover the dues, ARCIL filed an insolvency application which was admitted by the National Company Law Tribunal, but dismissed at the appellate stage. The NCLAT said that books of accounts cannot be treated as an acknowledgement of liability. And that ARCIL had failed to bring on record any acknowledgment in writing by the company admitting to the existence of debt.
The Supreme Court disagreed noting that books of accounts and/or balance sheets of the borrower would amount to an acknowledgment of debt. If there’s an acknowledgement of the debt by the company before it becomes time barred, the limitation period will start afresh from the date on which such an acknowledgement is made, the apex court said.
V Hotels had acknowledged its liability and proposed a settlement well within three years when the debt would’ve become time barred, and also made several requests of extension of time to make payment, the Supreme Court pointed out.
In doing so, the company had acknowledged its liabilities in its financial statements from 2008-09 till 2016-17, relying on which the apex court allowed ARCIL’s insolvency application.