IBC | Balance Sheet Entry Amounts to Acknowledgment of Debt under Section 18 of Limitation Act – Supreme Court

"Limitation laws must be applied with contextual justice – not pedantic rigidity”, In a significant ruling , the Supreme Court of India held that a Section 7 application filed under the Insolvency and Bankruptcy Code (IBC), 2016 in January 2024 was not barred by limitation. Reversing the decisions of both the NCLT and NCLAT, the Court ruled that the balance sheet entry for FY 2019–20 constituted a valid acknowledgment of debt under Section 18 of the Limitation Act, 1963, and that the COVID-19 exclusion orders of the Court further extended the limitation period.

The appellant, IL & FS Financial Services Ltd., had granted a secured term loan of ₹30 crores to Adhunik Meghalaya Steels Pvt. Ltd. on 27 February 2015, backed by a pledge of 8,10,804 shares of Adhunik Metaliks Ltd.. The respondent’s account was declared a Non-Performing Asset (NPA) on 1 March 2018, and a recall notice was issued on 10 August 2018.

IL&FS filed a Section 7 IBC application on 15 January 2024, claiming an outstanding debt of over ₹55 crores. It relied on the balance sheets from FY 2015–16 to FY 2019–20, especially the FY 2019–20 balance sheet signed on 12 August 2020, as acknowledgment of debt under Section 18 of the Limitation Act.

Both the NCLT (16 May 2024) and the NCLAT (25 March 2025) rejected the application as time-barred, holding that the absence of the creditor’s name in the balance sheet nullified any acknowledgment. They also applied Paragraph 5(III) of the Supreme Court’s COVID-19 limitation extension order dated 10 January 2022, concluding that the application ought to have been filed before 30 May 2022.

Whether the balance sheet entry of FY 2019–20 constituted a valid acknowledgment under Section 18 of the Limitation Act?

The Supreme Court observed that the debtor’s financial statements from FY 2015–16 to 2017–18 consistently reflected the same loan as a secured borrowing, identifying it by the pledge of shares. While the FY 2019–20 balance sheet omitted direct mention of IL&FS or the share pledge, it retained the exact figures from previous years and appended a cash flow statement indicating that no repayment had been made.

“The Balance Sheet of F.Y. 2019–20, viewed in the background of the other admitted documents… clearly constitutes a valid acknowledgment of a subsisting liability and indicated the existence of a jural relationship.” [Para 41]

The Court reiterated that naming the creditor explicitly is not essential, as long as the document indicates subsisting liability and acknowledges a jural relationship between the parties.

“Courts lean in favour of a liberal construction of such statements, though it does not mean that where no admission is made, one should be inferred.” – Khan Bahadur Shapoor, quoted in [Para 26]

The Court held that the balance sheet signed on 12.08.2020 extended the limitation period by three years till 11.08.2023.

Applicability of COVID-19 Limitation Exclusion Orders – Para 5(I) vs 5(III)?

The Supreme Court clarified the misapplication of Para 5(III) of its own 10.01.2022 order by the NCLT and NCLAT. Since the acknowledgment occurred before the original limitation expired, Para 5(I) applied, resulting in the exclusion of the entire period from 15.03.2020 to 28.02.2022.

“We have no manner of doubt that sub-Para 1 of Para 5… would apply… Limitation would commence on 01.03.2022 and continue till 28.02.2025.” [Para 46]

Thus, the Section 7 application filed on 15.01.2024 was held to be well within the extended limitation period.

• Section 18 of Limitation Act: The Court reaffirmed that acknowledgment of debt in financial statements, even without naming the creditor, may suffice, if it reflects a subsisting liability and is signed by the party admitting liability.

• Surrounding Circumstances: Courts are entitled to examine prior and subsequent conduct, past balance sheets, and related financial records.

“Surrounding circumstances can always be considered. Courts lean in favour of a liberal construction.” [Para 26]

• Indian Accounting Standards (Ind AS) 7: The cash flow statement showed no outflows toward repayment, reinforcing the presumption that the loan remained unpaid.

• COVID Limitation Orders: The benefit of Para 5(I) was made applicable as limitation had not expired as of 15.03.2020. The entire period till 28.02.2022 was excluded, resetting the limitation clock from 01.03.2022.

The Supreme Court allowed the appeal, set aside the orders of NCLT and NCLAT, and remitted the matter to the adjudicating authority (NCLT) for merits-based adjudication of the Section 7 application under IBC.

This decision reaffirms several critical legal positions:

• Balance sheet entries can constitute valid acknowledgments under Section 18 of the Limitation Act.

• Surrounding circumstances and financial continuity matter more than rigid formalism.

• Liberal interpretation of limitation and procedural statutes is justified, especially when substantial rights like debt recovery under IBC are at stake.

• The COVID-19 exclusion orders must be applied with precision, avoiding mechanical misapplication of blanket deadlines.

“Limitation laws must not be construed with pedantic rigidity in insolvency proceedings.” [Para 39]

Date of Decision: 29 July 2025