Ashutosh Gupta and Gaurav Rana

Moot question VII, is statement made in auditor report is an acknowledgment of debt under IBC

Post enactment of Insolvency Bankruptcy Code, 2016 of India (IBC or Code) most of the provisions of the Limitation Act have gone through judicial scanner, so as to ascertain their applicability vis-a-vis IBC proceedings. Be it, Section 5 of the Limitation Act (i.e. condonation of delay), Section 12 of the Limitation Act (i.e. exclusion of time in legal proceedings), Section 18 of the Limitation Act (i.e. extension of limitation by acknowledgement of debt), and Section 19 of the Limitation Act (i.e. extension of limitation by part payment). Recently, National Company Law Appellant Tribunal (“NCLAT”) has deliberated and dealt upon an interesting question of law that, whether statement made in Auditor report is an acknowledgement of debt under IBC, and whether director report has to be read with balance sheet for ascertaining the acknowledgement of debt (“Moot Questions”) in Gautam Sinha Vs UV Asset Reconstruction Company Limited Company Appeal (AT) (Ins) No. 1382 of 2019 dated 25.02.2020.

In this article we will be discussing Moot Questions and the NCLAT finding on the same.


That the Appeal was preferred by Shareholder and ex-Director of M/s. Kalpataru Cold Storage Pvt. Ltd. (“Corporate Debtor”) taking the stand that the application filed before the Adjudicating Authority, Kolkata Bench (“NCLT” or “Adjudicating Authority”) by UV Asset Reconstruction Company Limited (“Financial Creditor”) was time barred and hereby challenging the order dated 30.09.2019 (“Impugned Order”). As per Application filed by the Financial Creditor the date of default was 30.3.2014 and said Application was filed before the Adjudicating Authority on 31.10.2018.

That in the year 2006 the United Bank of India (“Bank”) had sanctioned financial facility to the Corporate Debtor, to which the loan was later on assigned by the Bank to the Financial Creditor on 29.03.2017.

The Adjudicating Authority while admitting the petition noted that, the Corporate Debtor  in its Balance Sheet for the FY 2015-16  acknowledged the Debt to be paid to the Bank. In the light of the above, Adjudicating Authority, held that Corporate Debtor in its balance sheet for the year 2016 has acknowledged the debt to be payable by it to the Bank, and thus said would fall under Section 18 of the Limitation Act as the acknowledgement has been made within period of limitation counted from the NPA date. Hence, debt is not time barred.


Financial Creditor argued that Application was filed before the Adjudicating Authority on 31.10.2018 and to buttress his argument by relying upon, Judgments in the matters of “Sheetal Fabrics versus Coir Cushions Ltd.” reported as 2005 SCC OnLine DEL 247; “The Commissioner of Income Tax-III v. Shri Vardhman Overseas Ltd.” reported as 2011 SCC OnLine DEL 5599 and “M/s Mahabir Cold Storage Versus C.I.T., Patna” reported as 1991 Supp (1) Supreme Court Cases 402. The NCLAT has also noted the relevant paras of the aforesaid judgments. In The Commissioner of Income Tax (Supra), it was observed that :

“The entries in the books of accounts of the appellant would amount to an acknowledgement of the liability to Messrs. Prayagchand Hanumanmal within the meaning of Section 18 of the Limitation Act, 1963, and extend the period of limitation for the discharge of the liability as debt.”  

In the Judgement in the matter of “Sheetal Fabrics” (supra), Hon’ble High Court of Delhi referred  to content in the Judgement in the matter of “In re. Padam Tea Company Ltd.” AIR 1974 Calcutta. The reference has been reiterated herein;

“10. Let me first deal with the case of Padam Tea Co. Ltd. (supra). This case relied upon by learned Counsel for the respondent company in support of his plea that acknowledgement contained in the balance sheet could not be relied upon by the petitioner. However, on-going through this judgment, one would clearly notice that it does not lay down the proposition which is sought to be advanced by the learned Counsel. That was a case where balance sheet was not confirmed or passed by the shareholders. The Court observed that such a balance sheet, before it could be relied upon, must be duly passed by the shareholders at the appropriate meeting and must be accompanied by a report, if any, made by the Directors for its validation. The principle of law laid down was that statement in the balance sheet indicating liability is to be read along with the Directors’ report to see whether both so read would amount to an acknowledgement. There is no dispute about this proposition of law. However, in that case, the Court refused to accept entry in the balance sheet as acknowledgement of debt because of two reasons:

(a) The balance sheet was not passed by the shareholders at the appropriate meeting.

(b) The Directors’ report, in the balance sheet, contained the following statement:

11. Your Directors are of the opinion that the liabilities shown in Schedules ‘A’ and ‘B’ of the balance sheet excepting those of United Bank of India, M/s. Goenka and Co. Private Ltd. and Caritt, Moran and Co. Pvt. Ltd. are barred by limitations, hence these liabilities are not confirmed by your Directors.

12. These were the two considerations which led the Court to conclude that even the debt shown in the balance sheet in respect of the said petitioning creditor would not amount to an acknowledgement as contemplated under Section 18 of the Limitation Act and following observations in this regard are reported:

“Therefore, in understanding the balance sheets and in explaining the statements in the balance-sheets, the balance-sheets together with the Directors’ report must be taken together to find out the true meaning and purport of the statements. Counsel appearing for petitioning creditor contended that under the statute the balance sheet was a separate document and as such if there was unequivocal acknowledgement on the balance-sheet is a statutory document and perhaps is a separate document but the balance sheet not confirmed or passed by the shareholders at the appropriate meeting and in order to do so it must be accompanied by a report, if any, made by the Directors. Therefore, even though the balance sheet may be a separate document these two documents in the facts and circumstances of the case should be read together and should be construed together.

13. In the same breath, the High Court also explained as to what would constitute an acknowledgement under Section 18 of the Limitation Act by referring to the judgment of the Supreme Court and this discussion would be found in the following passage:

“It was held by the Supreme Court in the case of L.C. Mills v. Aluminium Corpn. of India Ltd., (1971) 1 SCC 67 : AIR 1971 SC 1482, that it was clear that the statement on which the plea of acknowledgement did not create a new right of action but merely extended the period of limitation. The statement need not indicate the exact nature or the specific character of the liability. The words used in the statement in question must, however, relate to a present subsisting liability and indicate the existence of a jural relationship between the parties such as, for instance, that of a debtor and a creditor and the intention to admit such jural relationship. Such an intention need not, however, be in express terms and could be inferred by implication from the nature of the admission and the surrounding circumstances. Generally speaking, a liberal construction of the statement in question should be given. That of course did not mean that where a statement was made without intending to admit the existence of jural relationship, such intention should be fastened on the person making the statement by an involved and far-fetched reasoning. In order to find out the intention of the document by which acknowledgement was to be construed the document as a whole must be read and the intention of the parties must be found out from the total effect of the document read as a whole.”

[Emphasis supplied]

Correspondently the  parties also relied on the relevant portion of the Auditor Report for the said FY, is as under:-

“(viii) In our opinion and according to the information and explanations given to us, that Company has not defaulted in the repayment of loans or borrowings to financial institution. The Company did not have any dues outstanding to Government as at the beginning of the year nor did it obtain any such loans during the year. However, the Company has failed to repay its dues owing to bank and has been declared as NPA by bank and the matter is lying with Debts Recovery Tribunal and subjudice (Note No. 29). Amount”

[Emphasis supplied]

The Note No.29 referred by the Auditor is as under:-

“29. No balance confirmation/Bank Statement in respect of Term Loans and Other Loans obtained from United Bank of India, Lohapatty Branch, Kolkata has been received by the Company for the period from 01.04.2015 to 31.03.2016, the Company has not provided interest on these loans in the books of account.

Company’s accounts were declared non-performing assets (NPA) earlier on certain defaults in repayment of loans instalments and interest dues thereon to the bank. A Notice under Section 13(2) of the SARFAESI Act, 2002 has been served by bank on 03.04.2014 and date of declaration of NPA is 31.03.2014. The matter is sub judice before the Debts Recovery Tribunal (DRT).”

[Emphasis supplied]


NCLAT, while examining the auditor report noted that, the Auditor has relied on the information and explanation given by the Company/Corporate Debtor rather giving its own opinion. Further, NCLAT observed that Company has claimed to the auditor that it has not defaulted in the repayment of loans. NCLAT also noted that the Auditor only reproduced the list of pending cases and has not given his opinion.

NCLAT moving ahead also noted that in the matters of Sheetal Fabrics (Supra), it was held that Balance Sheet would be required to be read with Directors’ Report. Further recorded that Directors’ Report of the Corporate Debtor does not contain any confirmation or acknowledgement of debt.

NCLAT also noted that, aforesaid aspects and particulars were not considered by the Adjudicating Authority while passing Impugned Order.


NCLAT declined to accept the stand of the Financial Creditor that Statement in the Auditor Report is an acknowledgement of debt and would fall under Section 18 of the Limitation Act. NCLAT specifically stated that mentioning of the list of pending cases cannot be treated as acknowledgement. Further even the director report is silent document on the aspect of the Debt under question.

Further NCLAT categorically stated that they are not deliberating whether entry in balance sheet can be termed as acknowledgement in law.

NCLAT held that default dated 31.12.2013 which was declared NPA on 30.03.2014, was time bared for the Application under Section 7 of the IBC on 31.10.2018, thus Application should not have been admitted in the first place.

In the light of aforesaid NCLAT set aside the Impugned Order of the Adjudicating Authority.


At this juncture it is relevant to understand the law of interpretation of Section 18 of the Limitation Act, which deals with acknowledgement of debt and its effect on period of limitation. In Teumal Bishamal Sindhi V Mohandas Sindhi 1972 74 Bom LR 644 it was held that :

“Section 18 must be construed liberally, it does not require an acknowledgment to be in any particular form or to be express. Even a statement which if literally construed, does not amount to acknowledgement may be sufficient, it if implies an addition of liability.”  

Thus in cases of Section 18 of Limitation Act, liberal approach must be taken while considering the acknowledgment and no hard and fast rule can be applied to ascertain whether statement is acknowledgement or not, it solely depends on the circumstances under which it is made.        

Further basic and imperative facet of an acknowledgement was discussed in the case of Variety Supply Agency V. W.B. State Electricity Board 1991-92 96 CWN 814. Wherein it was held that, if statement is made, which relates to a present subsisting liability and indicate the existence of jural relationship between the parties such as, that of debtor and creditor and the intention to admit such jural relationship is evident, it amount to a valid acknowledgement. Such intention need not be in express terms and can always be inferred by implication from the nature of the admission and surrounding circumstances. Liberal construction of the statement in question should be given as far as possible. Further Sheetal Fabrics (supra) also held similar test.

That in the present case the Auditor Report categorically states it has relied on the information provided by the management of the Company and as per the management there was no default in the repayment of loans or borrowings to financial institution. However, the Company has failed to repay its dues to bank and has been declared as NPA by bank and the matter is lying with Debts Recovery Tribunal.

That the said statement in Auditor Report could have been considered as acknowledgement as the same passes the test mentioned in the aforesaid dictums, wherein only statement referring to existing debt and jural relationship is least required for falling under the Section 18 of the Limitation Act. However same was not considered by the NCLAT in its Order.

Moving onto the next question settled by NCLAT, whether director report has to be considered along with the balance sheet for ascertaining acknowledgement of debt. That, the said question was settled in the Sheetal Fabrics (supra) and the same was upheld by the NCLAT that when there is no confirmation in the Auditor Report or the balance sheet then Director Report can be resorted to. In Sheetal Fabrics (supra), balance sheet was not approved by the shareholders and hence statement made in the Director Report was resorted to by the Court.

Authors are advocates at New Delhi and Managing Partner and Partner respectively at Indo Legal Services a boutique law firm in New Delhi.

Disclaimer : This article is for information purposes only. Nothing contained herein is, purports to be, or is intended as legal advice and you should seek legal advice before you act on any information or view expressed herein. Although we have endeavoured to accurately reflect the subject matter of this article, we make no representation or warranty, express or implied, in any manner whatsoever in connection with the contents of this article. No recipient or reader of this article should construe it as an attempt to solicit business in any manner whatsoever.

Author Bio

Qualification: LL.B / Advocate
Company: Indo Legal Services LLP
Location: New Delhi, New Delhi, IN
Member Since: 18 Feb 2020 | Total Posts: 9
MR. GAURAV RANA(Advocate, CS) Mr. Rana, Advocate is a member of Bar Council Association of Delhi High Court, India and an Associate member of Institute of Company Secretaries of India. He has extensive experience in commercial litigation, arbitration and regularly argues at various fora. He advises View Full Profile

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June 2021