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Acknowledgement of debt under IBC, 2016

The Insolvency and Bankruptcy Code, 2016 was enacted to homogenise and revise the laws relating to insolvency resolution of corporates, partnership firms, and individuals.
Written by:
Shivi Gupta
Published on
25-Jul-18

The Insolvency and Bankruptcy Code, 2016 was enacted to homogenise and revise the laws relating to insolvency resolution of corporates, partnership firms and individuals. However, it is ambiguous when it comes to the acknowledgement of debt and applicability of the Limitation Act, 1993.

The National Company Law Tribunal (NCLT) has observed that non-payment of debt is admitted by a debtor in any form, it will be rendered as an acknowledgement of such debt. Additionally, pertaining to the absence of any provisions in the Code, the Limitation Act would not be applicable to initiate Corporate Insolvency Resolution Process (CIRP).

In Urban Infrastructure Trustee Ltd v. Neelkanth Township and Constructions Pvt. Ltd., a financial creditor filed an application for recovery of debentures that became due for redemption in 2011, 2012 and 2013, which was time-barred according to the corporate debtor. The corporate debtor admitted the default in its financial statements at different occasions.

The NCLT Mumbai in its final judgement held that if a debt is shown as due in the financial statements of the company and the non-payment of debt is admitted by the debtor, it is to be construed as an acknowledgement of default. As the debt is shown due in the financial statement for 2015-16, which is rem in nature, it is to be construed as an acknowledgement of debt.

Also, acknowledgement of default gives rise to the fresh period of limitation as per Section 18 of the Limitation Act, 1963. There was an express admission of the company's default in repaying the principal amount and therefore, the debt was not a time-barred debt.

 

In S.C. Gupta v. Allied Beverages Company Pvt. Ltd., it was decided that an acknowledgement by the company in its balance sheet extends the period of limitation with regards to Section 18 of the Limitation Act.

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