Can Time Barred Debts be Revived? – The Blog of Daksh Pandit

In India, the Limitation period for recovery of money is three years as per the Limitation Act 1963 [“the Act”]. The date from which such period of limitation begins to operate differs from case-to-case basis. For example, Article 19 of the Act stipulates that the limitation period for money lent begins to operate from the date when the loan is made. However, as per Article 22, the limitation period for money deposited under an agreement that it shall be payable on demand, begins to operate from the date when the demand is made. Articles 113 and 137 of the Act are residuary articles and takes within its sweep all those cases for which the Act does not prescribe period of limitation. Articles 113 & 137 stipulates a limitation period of three years which begins to operate from the date when the right to sue accrues, for filing any suit or application for which no period of limitation is provided elsewhere in the schedule to the Act.

Can limitation period be extended?

Section 18 of the Act stipulates that a fresh period of limitation commences from the date when party against whom the payment is sought to be recovered makes an acknowledgment in writing and signs it. However, Section 18 categorically clarifies that it only extends the period limitation provided the acknowledgement is made within the already subsisting period of limitation. If a party makes an acknowledgment in terms of Section 18 beyond the period of limitation, then such a case would not be covered by Section 18 and debt would be time barred. Section 19 of the Act operates on similar grounds as it provides for a fresh computation of limitation period from the date when the party against whom the debt is sought to be recovered makes payment on account of such debt, provided, such payment is made within the already subsisting period of limitation. In Khan Bahadur Shapoor Freedom Mazda vs Durga Prasad Chamaria and Others¹, the Supreme Court culled out the principles embodied in Section 19 of the Limitation Act, 1908 (corresponding to Section 18 of Limitation Act 1963) viz.-

Acknowledgment only renews the limitation. It does not create a new right of action.
Acknowledgment need not be accompanied by a promise to pay either expressly or even by implication.
The statement on which a plea of acknowledgment is based must relate to a present subsisting liability though the exact nature or the specific character of the said liability may not be indicated in words.
Words used in the acknowledgment must indicate the existence of jural relationship between the parties such as that of debtor and creditor.
It must appear that the statement is made with the intention to admit such jural relationship.
Such intention can be inferred by implication from the nature of the admission and need not be expressed in words.
If the statement is fairly clear then the intention to admit jural relationship must be implied from it.
The admission in question need not be express but must be made in circumstances and in words from which the court can reasonably infer that the person making the admission intended to refer to a subsisting liability as at the date of the statement.
Generally courts lean in favour of a liberal construction of such statements.
In construing words used in the statements made in writing on which a plea of acknowledgment rests, oral evidence has been expressly excluded but surrounding circumstances can always be considered.

From the aforesaid principles culled out by the Supreme Court it can be fairly discerned that in order to take the benefit of Section 18, it is not necessary that the party making statement must promise to pay the debt either expressly or even by implication. What is of paramount importance, in order to attract Section 18, is that the party making statement must indicate the existence of jural relationship such as that or debtor and creditor. Court will employ liberal construction while discerning such statements. It is also noteworthy that Section 18 only saves subsisting liability as on at the date of the statement. It does not apply to any liability which is beyond the contours of the statement made by the party in writing.

Revival of Time Barred Debts

While Section 18 and 19 of the Limitation Act applies only in cases when the limitation period is still operating and has no application when limitation period has expired, Section 25 of the Contract Act 1872 [“the Contract Act”] on other hand, applies to cases and revives a debt, even after the limitation period has expired, subject to conditions envisaged in the Section. Section 25(3) of the Contract Act validates a contract wherein a person promises to pay in writing, signed by him, wholly or in part a debt, which the creditor might have enforced but for the law of limitation. Illustration (e) of Section 25 may be pressed into service in order to understand the application of this Section-

(e) A owes B Rs 1,000, but the debt is barred by the Limitation Act. A signs a written promise to pay B Rs 500 on account of the debt. This is a contract.

Therefore, even if the debt is barred by limitation, it can still be revived by seeking recourse to Section 25(3) of the Contract Act subject to fulfilling its conditions. In such cases, by virtue of Article 113 of the Limitation Act, the time barred debt would be enforceable within three years from the due date of payment. The Supreme Court in the matter of Kotak Mahindra Bank Limited vs Kew Precision Parts Pvt. Ltd & Ors² culled out the following conditions which must be satisfied to invoke Section 25(3) viz.-

It must refer to a debt, which the creditor, but for the period of limitation, might have enforced.
There must be a distinct promise to pay such debt, fully or in part.
The promise must be in writing and signed by the debtor or his duly appointed agent.

Distinction between Section 18 of the Limitation Act and Section 25(3) of the Contract Act

The commonality between the two Sections is that both the Promise and Acknowledgment should be made in writing coupled by the signature of the debtor and both have the effect of creating a fresh starting of limitation period. The differences which can be culled out are herein below-

S.N.	Section 18 of Limitation Act	Section 25(3) of Contract Act
1	Section 18 operates only when acknowledgment has been made before the expiry of limitation period.	A promise under Section 25(3) can be made even after the limitation period has expired.
2	An Acknowledgment may not be accompanied by any promise to pay.	Under Section 25(3) the debtor must make an express promise to pay a debt that is time barred on any part thereof.
3	Acknowledgement made under Section 18 may not be express and can be inferrred from the words used in the statement for which the court will employ liberal construction.	The Promise should be clear and unconditional.

Case Studies

In Kotak Mahindra Bank (supra) the Appellant/Financial Creditor declared the Account of the Respondent as NPA on 30.09.2015. Pursuant thereto, an agreement dated 20.12.2018 was signed between the parties whereby the Corporate Debtor agreed to discharge the whole amount of the debt by 31.12.2018. An application u/s 7 of the IBC was filed by the Financial Creditor before NCLT on 30.01.2019 which came be admitted by the NCLT and a moratorium was imposed. However, upon challenge, the NCLAT held that there was no acknowledgment of debt within three years from the date of declaration of NPA i.e. 30.09.2015, therefore held that the application filed u/s 7 on 30.01.2019 was time barred. In Appeal, the Supreme Court reversed the finding and held that the Appellate Tribunal failed to notice that a fresh agreement dated 20.12.2018 was signed between the parties whereby the Corporate Debtor agreed to discharge its debt. The said agreement, in terms of Section 25(3) of the Contract Act shall revive the limitation period and as per Article 137 of the limitation, an application ought to be filed within three years from the date the right to sue accrues, i.e. date of default. Therefore, an application filed u/s 7 of IBC on 30.01.2019 after agreement dated 20.12.2018 in terms of Section 25(3) of the Contract Act, shall be within the limitation period.

Section 18 will extend limitation only with respect to the present subsisting liability that is acknowledged.

In J.C. Budhiraja vs Chairman, Orissa Mining Corporation Ltd. and Anr.³, the work under the contract was completed on 15.06.1975 and the final bill was signed by the Appellant/Contractor under protest on 14.04.1977. Dispute arose with respect to the amount payable to the Contractor who made representations to the employer to settle his claims. The Employer, vide letter dated 28.10.1978 requested contractor to give quantification of his claims. The Contractor, vide letter dated 16.11.1978 gave quantification of his claims to the tune of Rs 50,15,820/- The Respondent/Employer responded stating that the claims of the contractor are admissible only to the extent of Rs 3.5 lakhs and the same was paid on 04.03.1980. Being aggrieved the contractor invoked arbitration proceedings on 04.06.1980. However, in his statement of claim, the Contractor increased his claim amount from that mentioned in his letter dated 16.11.1978. From Rs 50,15,820/- as claimed by the contractor in his letter dated 16.11.1978, the contractor abandoned claims amount to the extent of Rs 21,83,692/- and only claimed the balance amount of Rs 28,32,128/-. In addition, the Contractor introduced fresh claims in his statement of claims to the tune of Rs 67,64,488/-. Therefore, the Contractor sought a total amount of Rs 96,66,107/- from the Arbitral Tribunal as opposed to Rs 50,15,820/- originally sought by the Contractor in his letter dated 16.11.1978. The arbitrator allowed the claims and held him entitled to a sum of Rs 1,02,66,901.36/- and the same came to be decreed by the court. Being aggrieved, the Respondent challenged the same before High Court which held that claims of the contractor were time barred since the final bill was signed by the contractor on 14.04.1977 and cause of action arose on that date. However, the Contractor invoked arbitration only on 04.06.1980 i.e. beyond the limitation period of three years.

In Appeal before the Supreme Court, the court observed that what can be acknowledged is a present subsisting liability. An acknowledgement made with reference to a liability, cannot extend the limitation for a time barred liability or a claim that was not made at the time of acknowledgement or some other liability relating to other transactions. The court explicated by laying down the following illustrations-

If a person executes a work and issues a demand letter making a claim for the amount due as per the final bill and the defendant agrees to verify the bill and pay the amount, the acknowledgment will save limitation for a suit for recovery of only such bill amount, but will not extend the limitation in regard to any fresh or additional claim for damages made in the suit which was not part of the bill or the demand letter.
If a house is constructed under the item rate contract and the amount due in regard to two executed is Rs two lakhs and certain part payment say aggregating to Rs 1,25,000/- have been made and the contract demands payment of the balance of Rs 75,000/- due towards the bill and the employer acknowledges liability, that acknowledgement will be only regard to the sum of Rs 75000/- which is due. If the contractor files a suit for recovery of the said Rs 75,000/- due in regard to work done and also for recovery of Rs 50,000/- as damages for breach by the employer and the said suit is filed beyond the three years from completion of work and submission of the bill but within the three years from the date of acknowledgement, the suit will be saved from the bar of limitation only regard to Rs 75,000/- and not in regard to the fresh or additional claims of Rs 50,000/- which was not the subject matter of acknowledgement.

Upon the bedrock of the above illustrations and principles of law laid down, the court began to examine the dispute at hand. The court observed that vide letter dated 28.10.29178, the Respondent/employer admitted “jural relationship” between the parties as it agreed to settle the pending claims of the contractor after being satisfied about them. Pursuant thereto, the contractor quantified his pending claims to the tune of Rs 50,15,820/- vide letter dated 16.11.1978. The Respondent however, agreed to pay only Rs 3.5 lakhs and paid the same on 04.03.1980. Therefore, the court observed that in view of the acknowledgment in writing made by the employer on 28.10.1978 and amount of 3.5 lakhs paid on 04.03.1980, the limitation stood extended by three years from 04.03.1980 and at all events by three years from 28.10.1978. The contractor invoked arbitration on 04.06.1980 which was within the period of three years. However, the court observed that claims before the arbitrator would be admissible only to the extent of Rs 50,15,820/- claimed by the contractor vide letter dated 16.11.1978 pursuant to the acknowledgement made by the employer on 28.10.1978 to settle pending claims. The fresh claims introduced by the contractor in arbitration to the tune of Rs 67,64,488/- are barred by limitation since they were not “pending claims” in respect of which the acknowledgment was made. Therefore, the court held that contractor was only entitled to Rs 28,32,128/- which was in respect of the ‘existing debt’ and the rest of the fresh claims which did not form part of the acknowledgement and freshly introduced in arbitration are time barred.

Whether entry in balance sheet amounts to acknowledgment of liability under Section 18 of Limitation Act?

In Asset Reconstruction Company (India) Ltd vs Bishal Jaiswal and Anr.⁴, the Financial Creditor filed an Application u/s 7 of IBC before NCLT which admitted the same after observing that the balance sheets of the corporate debtor acknowledged the liability and the same were signed before the expiry of three years from the date of default, thereby extending limitation u/s 18 of Limitation Act. In Appeal, the NCLAT differed with the full bench judgment of the NCLAT in the matter of V. Padmakumar vs Stressed Assets Stabilization Fund⁵ in which the NCLAT had held that entries in balance sheets do not amount to acknowledgment of debt. Taking exception to the same, a three judge bench of the NCLAT referred the matter to the acting chairman for forming an appropriate bench to reconsider the ratio laid down in the judgment. However, a five-member bench of NCLAT refused to adjudicate the issue. In Appeal before the Supreme Court, the court referred to a plethora of case laws which have already extensively adjudicated upon the issue and held that entries in balance sheets amount to acknowledgement of debt for the purpose of Section 18 of the Limitation Act.

The Court predicated its finding upon the provisions of the Companies Act, 2013 which makes it mandatory for the company to maintain financial statements. However, court also observed the import of Section 134 (7) of Companies Act which stipulates that a signed copy of the financial statement shall be published along with a copy each of any notes annexed to or forming part of financial statement. Referring to the ratio laid down in Bengal Cotton Mills Co. vs Ismail Golam Hossain Ariff 1961⁶, the court reiterated that there may be a compulsion in law to file financial statement, however, there is no compulsion to make any particular admission. The Financial Statements published by the company may be carrying various caveats in terms of Section 134(7) of the Companies Act, and it would have to be scrutinized from a case-to-case basis whether the admission made in the Balance sheet can be termed as acknowledgment for the purpose of Section 18 of the Limitation Act.

Does issuance of a cheque amounts to promise to pay u/s 25(3) of the Contract Act, resurrecting a time barred debt?

In A.V. Murthy vs B.S. Nagabasavanna⁷, the Supreme Court was dealing with a case wherein the Trial Court had dismissed the complaint filed u/s 138 of the NI Act for the reason that the cheque had been given for a liability which was time barred. The Supreme Court applied Section 25(3) of the Contract Act to the issuance of cheque and observed that a cheque would revive a time barred debt. The decision of the Supreme Court in B.S. Nagabasavanna (supra) was followed by Supreme Court in K.Hymavathi v. State of A.P. & Anr⁸. Recently the Delhi High Court was also posed with a similar issue in the matter of Rajeev Kumar vs State of NCT⁹. In the facts of the said case, the Trial Court had acquitted the accused after observing that the loan amount was disbursed to the accused on 30.04.2012 and the cheque that came to be issued by the accused in discharge of the loan amount and which came be dishonoured, was issued on 31.12.2015 i.e. beyond the limitation period of three years. In Appeal, the High Court applied the ratio laid down by Supreme Court in B.S. Nagaasavanna and K.Hymavathi (supra) and held that provisions of Section 25(3) of the Contract Act squarely applies to the case at hand. The furnishing of a cheque of a time-barred debt effectively resurrects the debt itself by a fresh agreement through the deeming provision under Section 25(3) ICA….By the act of drawing a cheque, the promisor i.e. the drawer, is effectively stating that he has liability to pay the drawee. Drawing of the cheque in itself, is acknowledgment of a debt or liability. It is the resurrection or the revival of the prior debt which would trigger the provisions under Section 138 of NI Act. To deny a complainant/drawee of invoking the penal provisions under Section 138 of NI Act, despite the categorical premise of Section 25(3) of the ICA recognizing a fresh agreement to pay, would be unfortunate disentitlement.

Can Time Barred Debts be recovered by seeking recourse to special laws?

The Limitation Act provides remedy to the litigants to approach the courts within the limitation period prescribed under the Act to espouse their claims to recover the debt. The Act does not facilitate revival of time barred debt. Therefore, when a debt is time barred under the provisions of limitation act, can a party seek recourse to statutory provisions of a special Act and revive a time barred debt?

In K.P. Khemka & Anr. vs Haryana State Industrial and Infrastructure Development Corporation Ltd. & Ors.¹⁰, the Supreme Court was vexed with the contrary ratio laid down by a three judge bench of the Supreme Court in the matter of State of Kerala & Ors vs V.R. Kalliyanikutty & Anr.¹¹ and Constitution Bench of the Supreme Court in the matter of Bombay Dyeing and Manufacturing Company Ltd vs The State of Bombay & Ors¹². In V.R. Kalliyanikutty (supra) the three judge bench of the Supreme Court, while construing the provisions of the Kerala Revenue Recovery Act, 1968, held that a debt which is barred by the law of limitation cannot be recovered by seeking recourse to the special Act as the Act only provides speedy disposal of cases and does not confer an additional right upon the party to recover a time barred debt. Contra distinction to this, the Constitution Bench of the Supreme Court in Bombay Dyeing (supra) recognized the principle that Limitation Act only bars the remedy and does not extinguish the debt. It is also pertinent to note that the decision of Supreme Court in Bombay Dyeing (supra) was not brought to the notice of three judge bench in V.R. Kalliyanikutty (supra).

Debt and Right of Action for its Recovery are two separate things

The Court observed that a debt is not the same thing as the right of action for its recovery. While the debt is the right in the creditor with the corelative duty on the debtor, the right of action for its recovery is in the nature of a legal power. The Court observed that while arriving at the ratio laid down in V.R. Kalliyanikutty (supra), the court overlooked Section 32-G of the State Financial Corporation Act, 1951 which is also applicable to Kerala, which confers a distinct power under the Act to the State to recover its dues, notwithstanding that another mode of recovery through a civil suit is time barred. Therefore, the court deemed it fit to refer the matter to a three-judge bench for an authoritative pronouncement after taking into account all aspects.

Conclusion

Recovery of debt is subject to the provisions of the Limitation Act and if the debt is beyond the limitation period prescribed in the Limitation Act, the same cannot be enforced. In such circumstances the only recourse available to recover a time barred debt is to enter into an agreement in terms of Section 25(3) of the Contract Act. Subject to the conditions laid down in Section 25(3) of the Contract Act, a time barred debt can be recovered.

By Daksh Pandit