Kiran Raj

The Supreme Court of India Division Bench of Justice Manoj Misra and Justice K.V. Viswanathan held that an entry in a corporate debtor's balance sheet for the Financial Year 2019-20 constituted a valid acknowledgment of debt under Section 18 of the Limitation Act, 1963. The Court allowed a Section 7 Insolvency and Bankruptcy Code, 2016 application filed in 2024, setting aside the decisions of the National Company Law Tribunal and the National Company Law Appellate Tribunal which had held the application barred by limitation. The Court directed that the matter be remitted to the adjudicating authority to proceed with and decide the application in accordance with law, treating it as filed within limitation.

The appellant, IL & FS Financial Services Limited, had entered into a term loan agreement with the respondent, Adhunik Meghalaya Steels Private Limited, on 27.02.2015 for a sanctioned amount of Rs. 30 crores. The loan was secured, inter alia, by a pledge of 8,10,804 shares of Adhunik Metaliks Ltd. via a Pledge Agreement dated 27.02.2015. On 01.03.2018, the respondent's account was declared a Non-Performing Asset (NPA) due to its failure to meet its repayment obligations.

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Subsequently, the appellant filed a Section 7 IBC application on 15.01.2024, claiming an outstanding default of Rs. 55,45,97,395/-. The date of default was stated to be 01.03.2018. It was submitted that a recall notice had been issued on 10.08.2018, which received no response. The appellant relied on a series of audited financial statements filed by the respondent from the financial year 2015-16 to 2019-20 as acknowledgment of the debt, contending that the date of signing the 2019-20 Balance Sheet on 12.08.2020 fell within the three-year limitation period from 01.03.2018. Consequently, it was argued that limitation would expire on 11.08.2023. Further, by invoking the Supreme Court's order dated 10.01.2022 in Suo Moto Writ Petition (C) No. 3 of 2020, which excluded the limitation period from 15.03.2020 to 28.02.2022 due to COVID-19, the appellant claimed the limitation period extended to 27.02.2025.

The appellant contended that the Balance Sheets disclosed borrowings secured by the pledge of the same shares and that the amounts stated therein remained unpaid. The Balance Sheet of 2019-20 showed the amount of secured borrowings for 2018-19 and 2019-20 as Rs. 24,41,22,835/-, which aligned with the amounts shown in earlier financial years. The appellant argued that this constituted a continuous acknowledgment of debt. Additionally, it was pointed out that the cash flow statement for the relevant period recorded no repayment of borrowings, indicating the debt remained outstanding.

The respondent denied the claims, asserting that the Section 7 application was barred by limitation. In its reply, the respondent stated that the limitation should be calculated from the date of default (01.03.2018), and that the financial creditor had issued a recall notice on 10.08.2018. It contended that the limitation period expired on 09.08.2021 and that the Supreme Court's order on limitation did not revive a time-barred claim.

The NCLT, Guwahati Bench, held that the 2019-20 Balance Sheet did not constitute an acknowledgment of liability because the financial creditor's name did not appear. It concluded that the application was time-barred and ought to have been filed by 30.05.2022.

The appellant appealed to the NCLAT, which upheld the NCLT's decision. The NCLAT held that even if the 2019-20 Balance Sheet signed on 12.08.2020 were taken as acknowledgment, limitation would have expired on 30.05.2022, considering Para 5(III) of the Supreme Court’s order dated 10.01.2022.

Aggrieved, the appellant approached the Supreme Court, contending that the entries in the Balance Sheet of F.Y. 2019-20 amounted to a valid acknowledgment of debt and that Para 5(I) of the Supreme Court’s order was applicable, thereby excluding the entire period from 15.03.2020 to 28.02.2022.

The Court recorded that the acknowledgment must relate to a present subsisting liability and must indicate the jural relationship of debtor and creditor. It stated "Words used in the acknowledgment must, however, indicate the existence of 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."

The Court held that the financial statements of the previous years—2015-16, 2016-17, and 2017-18—reflected secured borrowings of approximately Rs. 24.5 crore, supported by the pledge of 8,10,804 shares. The Court observed "The general tenor and context of the balance sheet of F.Y. 2019-20 considered in the background of surrounding circumstances arising from the balance sheets of F.Y. 2015-16, 2016-17 & 2017-18 clearly points to the fact that the entry in the balance sheet of F.Y. 2019-20 constitutes a valid acknowledgement."

Referring to the cash flow statement appended to the financial statement as per Indian Accounting Standards (Ind AS) 7, the Court found that borrowings raised in 2018-19 were Rs. 72,30,902/-, which when added to earlier borrowings, totalled Rs. 24,41,22,835/- shown in 2019-20. It noted "No part of cash flow proceeds was utilised in the repayment of existing borrowings under the financial activities since the amount under the head 'cash flows from (used in) financial activities' is nil. This clearly indicates that the debt remained unpaid even in 2019-20."

Addressing the respondent’s contention regarding absence of the appellant’s name in the 2019-20 Balance Sheet, the Court stated "The company’s Balance Sheet is prepared in the statutory format as per schedule 3 of the Companies Act which did not provide for giving the specific name of every secured or unsecured creditor."

The Court relied on judgments including Khan Bahadur Shapoor Fredoom Mazda v. Durga Prasad Chamaria (1961 SCC OnLine SC 147), Lakshmirattan Cotton Mills Co. Ltd. v. Aluminium Corporation of India Ltd. (1971) 1 SCC 67, Asset Reconstruction Co. (India) Ltd. v. Bishal Jaiswal (2021) 6 SCC 366, and Vidyasagar Prasad v. UCO Bank (2024 SCC OnLine SC 2993). It concluded that acknowledgment of debt could be inferred from the context and documents viewed holistically.

On the question of limitation, the Court held that Para 5(I) of its order dated 10.01.2022 was applicable. It stated "Limitation, in view of the acknowledgment as found above, having commenced only on 12.08.2020, the question of limitation expiring between 15.03.2020 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."

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The Supreme Court allowed the civil appeal. It stated: "In view of the observations made hereinabove, the judgments of the NCLAT dated 25.03.2025 and NCLT dated 16.05.2024 are set aside."

It further directed: "The appeal is allowed. The matter is remitted to the adjudicating authority to proceed with and decide in accordance with law, treating the application under Section 7 of the IBC, filed by the appellant, as one filed within limitation."

No costs were awarded.

Advocates Representing the Parties:

For Appellant(s): M/s. Cyril Amarchand Mangaldas, AOR, Mr. Raunak Dhillon, Ms. Aishwarya Gupta, Ms. Niharika Shukla, Mr. Jeezan Pakhliwal, Mr. Vikash Kumar Jha, Advocates.

For Respondent(s): Mr. Ramji Srinivasan, Sr. Adv., Mr. Pranav Sachdeva, AOR, Mr. D. N. Sharma, Mr. Nilay Sengupta, Ms. Shefali Munde, Advocates.

Case Title: IL & FS Financial Services Limited v. Adhunik Meghalaya Steels Private Limited

Neutral Citation: 2025 INSC 911

Case Number: Civil Appeal No. 5787 of 2025

Bench: Justice Manoj Misra, Justice K.V. Viswanathan