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OTS Proposal Is An ‘Acknowledgement of Debt’ Under Section 18 of The Limitation Act: NCLAT, Delhi 

By - Arjun Sathish on September 19, 2022

OTS Proposal Acknowledgement of Debt

The Bank of Baroda had extended some financial assistance to a Corporate Debtor. Thereafter, in 2013, a notice under Section 13(2) of the SARFAESI Act, 2002 was issued by the Bank to the Corporate Debtor demanding payment. In 2016, the DRT had allowed the bank to recover a sum of INR 50,00,000/- and a sum of INR 20,00,000/- towards interest. Thereafter a One Time Settlement (OTS) proposal was filed before the DRT by the Corporate Debtor which remained unaccepted. In 2018, another OTS proposal was made which was accepted by the bank. Even though the bank accepted the OTS proposal, the Corporate Debtor failed to fulfil the repayment obligation.

Hence, the bank filed a petition under Section 7 of the Insolvency and Bankruptcy Act, 2016 (IBC) seeking initiation of Corporate Insolvency Resolution (CIRP) against the Corporate Debtor. Adjudicating Authority under the IBC admitted the application and initiated CIRP against the Corporate Debtor. The Corporate Debtor filed an appeal before the NCLAT, challenging the initiation of CIRP, contending that the ‘date of default and the date of NPA was in 2013, whereas the bank has filed the IBC petition in 2019.’

Therefore, the Corporate Debtor contended that the three-year limitation had expired in 2016 and therefore, the petition was barred by limitation. The Corporate Debtor contended further before the NCLAT that the bank had not raised the plea of extension for limitation or ‘acknowledgement of debt’ under Section 18 of Limitation Act, 1963 and therefore the bank cannot agitate this plea at such a belated stage. 

Subsection (1) of Section 18 of the Limitation Act, 1963 is reproduced below:-

“(1) Where, before the expiration of the prescribed period for a suit of application in respect of any property or right, an acknowledgement of liability in respect of such property or right has been made in writing signed by the party against whom such property or right is claimed, or by any person through whom he derives his title or liability, a fresh period of limitation shall be computed from the time when the acknowledgement was so signed.”

NCLAT, in its order concerning the above appeal, referred to the observations of the Apex Court in Dena Bank vs C Shivkumar Reddy and Anr in which, the Apex Court observed that;

"Section 18 of the Limitation Act gets attracted the moment acknowledgement in writing signed by the party against whom such right to initiate resolution process under Section 7 IBC ensures. Section 18 of the Limitation Act would come into play whenever the principal borrower and/or the corporate guarantor (corporate debtor), as the case may be, acknowledge their liability to pay the debt. Such acknowledgement, however, must be before the expiration of the prescribed period of limitation including the fresh period of limitation due to acknowledgement of the debt, from time to time, for an institution of the proceedings under Section 7 IBC. Further, the acknowledgement must be of liability in respect of which the financial creditor can initiate action under Section 7 IBC."

The NCLAT held that OTS proposals fall within the definition of the ambit of ‘acknowledgement of debt’ under Section 18 of the Limitation Act and dismissed the appeal filed by the Corporate Debtor.

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