Supreme Court: Balance Sheet need not list Creditor names; General entry of debt is enough to start CIRP
The Insolvency and Bankruptcy Code (IBC) has been a transformative piece of legislation in India, aimed at streamlining the process of resolving corporate insolvencies and ensuring timely recovery for creditors. By establishing a structured framework for insolvency proceedings, the IBC seeks to balance the interests of debtors and creditors, fostering an environment conducive to business continuity and economic stability. One of the critical aspects of the IBC is the provision for the initiation of the corporate insolvency resolution process (CIRP), which allows creditors to take decisive action when debtors default on their obligations.
In a recent case, the Supreme Court addressed an important facet of the IBC regarding the acknowledgment of debt in balance sheets. The court dismissed a plea from a suspended director of a corporate debtor, emphasizing that there is no legal requirement for companies to list every secured or unsecured creditor in their balance sheets. The bench, comprising Justice PS Narasimha and Justice Sandeep Mehta, ruled that a corporate debtor cannot deny its liabilities based solely on the absence of specific creditor entries, especially when general debt entries exist. In this instance, while the balance sheet acknowledged a debt to a financial creditor, it did not specify the amounts owed to individual creditors. Additionally, an auditor's note indicated that the company had defaulted on term loans and interest payments.
The financial creditor, UCO Bank, initiated the CIRP through a section 7 application, which was contested by the director, who argued that the balance sheet lacked a clear acknowledgment of debt. The NCLT dismissed this argument, citing the Explanation to Section 7(1) of the Insolvency and Bankruptcy Code, which allows proceedings based on any default by the debtor to any financial creditor.
The Supreme Court upheld the findings of the NCLT and NCLAT, agreeing that the balance sheet entries constituted a clear acknowledgment of debt. The judgment authored by Justice Narasimha observed as follows:
"Having considered the specific facts and circumstances of this case, the Adjudicating Authority as well as the NCLAT have concurrently held that the entries in the balance sheets amount to clear acknowledgment of debt. We agree with the findings. Further, Ne 3.4 appended to said balance sheet entry dated 31.03.2017 mentions that "company has made certain defaults in the repayment of term loans and interest. It further mentions of a continuing default. The entry also mentions long-term borrowings. The conclusions of NCLT and NCLAT that there is acknowledgment of debt are unimpeachable."
It highlighted that the auditor's note confirmed the company had defaulted on repayments, reinforcing the conclusion of debt acknowledgment. The court referred to its earlier ruling in Asset Reconstruction Company (India) Limited v. Bishal Jaiswal (2021)[1], in which it was held by the Supreme court that:
"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".
This judgment underscores the importance of maintaining accurate and comprehensive financial records, as they play a pivotal role in insolvency proceedings under the IBC, ensuring that creditors can pursue their claims effectively. Therefore, the appeal was dismissed.
The implications of this ruling extend beyond the immediate case, serving as a significant precedent for future insolvency proceedings under the IBC. By affirming that general entries in a balance sheet can constitute an acknowledgment of debt, the Supreme Court has reinforced the principle that financial transparency is crucial in corporate governance. This decision may encourage creditors to take more proactive steps in monitoring the financial health of their debtors, knowing that even implicit acknowledgments of debt can trigger the CIRP. Furthermore, it underscores the necessity for companies to maintain detailed and accurate records, as the lack of specificity may no longer serve as a shield against insolvency proceedings.
Author: Robin Singh, Associate
[1] 2021 6 SCC 366