Background
Determining the existence of an undisputed debt is one of the most crucial tests a tribunal must undertake under the Insolvency and Bankruptcy Code, 2016 (“IBC”).
In March 2020, a five-member bench of the National Company Law Appellate Tribunal (“NCLAT”) rendered a decision in the case of V. Padmakumar vs. Stressed Assets Stabilization Fund (SASF) & Another.[1] (“Padmakumar”) wherein four out of five members held, inter alia, that entries reflected in the balance sheet of a company do not amount to acknowledgement of debt under the Limitation Act, 1963 (“Limitation Act”). On this question of law, the fifth member dissented with the opinion of the majority by relying on a catena of judicial precedents.
In September 2020, a three-member bench of the NCLAT had the occasion to consider the applicability of Padmakumar in the case of Bishal Jaiswal vs. Asset Reconstruction Company (India) Limited. & Another (“Referral Order”). The bench made a reference to a larger bench to reconsider the majority opinion in Padmakumar[2]. The referral was turned down by a five-member bench of the NCLAT[3] (“Rejection Order”). Subsequently, the Rejection Order was challenged before the Supreme Court (“SC”). Before we understand the decision of the SC on this issue, it is worthwhile to analyze the ratio in Padmakumar and the reasons why Padmakumar came to be referred.
- Referral Order: Why Was Padmakumar Referred by the Three-Member Bench of NCLAT?
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- To hold that the entries in the balance sheet of a corporate debtor do not come to the rescue of a financial creditor, the majority decision in Padmakumar relied on two judgments of the NCLAT – (i) G. Eswara Rao vs. Stressed Assets Stabilization Fund & Another.[4] (“Eswara Rao”), which was decided by a division bench, and (ii) V Hotels Limited vs. Asset Reconstruction Company (India) Limited[5] (“V Hotels”) decided by a three-member bench.
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