Unilateral Accounting Adjustments cannot Revive ₹1.4 Crore Operational Debt beyond Limitation: NCLAT [Read Order]

The National Company Law Appellate Tribunal (NCLAT) has rejected the appeal filed by Heena Metal Private Limited holding that unilateral accounting adjustments and internal transfer of ledger balances cannot revive an operational debt of ₹1.4 crores, which is barred by limitation.

The issue stands out of an application under Section 9 of the Insolvency and Bankruptcy Code, 2016 filed against Global Extrusions Pvt. Ltd. on the grounds of non-payment of operational debts to the tune of ₹1.4 crores.

The operational debt was due for the period between 2016 and 2017. The operational creditor sought to establish the continuity of the debt by transferring the amount from its Jamnagar operations to its Mumbai operations by means of accounting entries in the later years.

The Adjudicating Authority (NCLT) dismissed the insolvency petition on the grounds that the debt was barred by limitation and that the accounting entries could not extend the period of limitation. The operational creditor was dissatisfied with the order.

The appellant Heena Metal Pvt. Ltd., held that the transfer of balances between business units was an acknowledgment of debt and a running account, thus extending the limitation period.

The respondent corporate debtor submitted that the invoices were obviously beyond three years, that no acknowledgment of liability was sent by the debtor, and that unilateral accounting entries by the creditor cannot generate or revive enforceable liability.

The NCLAT affirmed the NCLT's decision and held that ledger transfers or journal entries made unilaterally by the operational creditor cannot be said to amount to acknowledgment of debt under Section 18 of the Limitation Act or a promise under Section 25(3) of the Contract Act. The Tribunal held that the limitation period cannot be extended by internal accounting without any express admission of liability by the debtor.

The decision was held by Justice Mohammad Faiz Alam Khan [Judicial member] and Mr. Arun Baroka (Technical member), thus reiterating that IBC proceedings cannot be used as a recovery mechanism for unenforceable operational debts.

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