Entries In Balance Sheets Can Constitute Valid Acknowledgement Of Debt U/S 18 Of Limitation Act: Supreme Court

The Supreme Court reiterated that the entries in Balance Sheets could constitute a valid acknowledgement of debt under Section 18 of the Limitation Act, 1963.

The Court reiterated thus in a Civil Appeal filed by a company in which the question arose as to whether the National Company Law Appellate Tribunal (NCLAT) and the NCLT were justified in dismissing the Application under the Insolvency and Bankruptcy Code, 2016 (IBC) on the ground that the same was barred by limitation.

The two-Judge Bench of Justice Manoj Misra and Justice K.V. Viswanathan enunciated, “It was not disputed before us that entries in Balance Sheets could constitute a valid acknowledgement and in fact it could not have been disputed, in view of the categoric pronouncement of this Court in Asset Reconstruction Co. (India) Ltd. v. Bishal Jaiswal and Another, (2021).”

The Bench observed that an acknowledgment of debt merely renews the debt and does not create a new right of action.

Senior Advocate Ritin Rai appeared for the Appellant while Senior Advocate Ramji Srinivasan appeared for the Respondent.

Factual Background

A loan agreement was entered into between the Appellant and the Respondent for a term loan facility of Rs. 30 crores and the same was secured by way of a pledge of 8,10,804 shares of Adhunik Metaliks Ltd. in favour of the Appellant by virtue of a pledge agreement in 2015. In 2018, the Respondent’s account was declared as a Non-Performing Asset (NPA) as it was unable to meet its debt obligations. In the Section 7 IBC Application filed by the Appellant in 2024, a default amount was set out. The Appellant’s stand was that if August 12, 2020, the date on which the balance sheet of 2019-20 was signed, is taken as the date of acknowledgement, limitation would expire only on August 11, 2023.

The Appellant contended that there was clear acknowledgement of debt and the jural relationship in the balance sheet. The Respondent filed a reply affidavit to the Section 7 Application, contending that the same was barred by limitation. The NCLT, Guwahati Bench held that there was no acknowledgement of liability in the balance sheet since the name of the financial creditor did not appear in the same. It also held that the Section 7 Application was barred by limitation. Being aggrieved, the Appellant approached the NCLAT, which held that Section 7 Petition ought to have been filed or on before May 30, 2022. Holding so, it dismissed its Appeal and hence, the Appellant challenged this before the Apex Court.

Reasoning

The Supreme Court after hearing the arguments from both sides, noted, “It is further essential that the acknowledgment must relate to a subsisting liability and must indicate the jural relationship between the parties such as that of debtor and creditor, and it must appear that the statement is made with the intention to admit such jural relationship. It was also held that such intention can be inferred by implication from the nature of the admission and need not be expressed in words.”

The Court added that in construing the words used in the statements, surrounding circumstances can always be considered and that Courts lean in favour of a liberal construction of such statements, though intention cannot be fastened by an involved or far-fetched process of reasoning.

“The only dispute was whether the entry in F.Y. 2019-20 did or did not constitute a valid acknowledgement. Among the grounds canvassed was the aspect that the name of the appellant was not mentioned in the Balance Sheet of F.Y. 2019-20. It is worthwhile to notice certain observations from the judgement in Bishal Jaiswal (supra) as it does have a bearing for the disposal of the present matter. This Court in Bishal Jaiswal (supra) held that entries in Balance Sheet had to be examined on a case-by-case basis to examine whether an acknowledgment of liability exists”, it further said.

The Court observed that whether a certain document in a given case constitutes a valid acknowledgement would depend on the facts and circumstances of each case.

“Keeping all these principles in mind, if we examine the facts of the present case, it will be clear that the Balance Sheet of F.Y. 2019 20, viewed in the background of the other admitted documents, including the financial statements of the previous years, clearly constitutes a valid acknowledgment of a subsisting liability and indicated the existence of a jural relationship and an admission as to the existence of such relationship”, it also held.

Moreover, the Court said that the limitation would, reckoning the acknowledgment, commence on March 1, 2022 and continue till February 2, 2025 and since the Application has been filed on January 15, 2024, the same is within time.

“Limitation, in view of the acknowledgment as found above, having commenced only on 12.08.2020, the question of limitation expiring between 15.03.2022 and 28.02.2022 cannot arise. Hence, Para 5(III) of the order of this Court dated 10.01.2022, has no application to the facts of this case”, it concluded.

Accordingly, the Apex Court allowed the Appeal, set aside the impugned Judgments, and remitted the case to the adjudicating authority to proceed with and decide in accordance with law, treating the Application under Section 7 of the IBC, as one filed within limitation.

Cause Title- IL & FS Financial Services Limited v. Adhunik Meghalaya Steels Private Limited (Neutral Citation: 2025 INSC 911)

Appearance:

Appellant: Senior Advocate Ritin Rai, Advocates Raunak Dhillon, Aishwarya Gupta, Niharika Shukla, Jeezan Pakhliwal, and Vikash Kumar Jha.

Respondent: Senior Advocate Ramji Srinivasan, AOR Pranav Sachdeva, Advocates D N Sharma, Nilay Sengupta, and Shefali Munde.

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