Supreme Court Holds Balance-Sheet Entry Amounted To Acknowledgement; Section 7 Petition Treated As Within Limitation

A bench of Justices Manoj Misra and K.V. Viswanathan heard an appeal by IL & FS Financial Services Limited challenging concurrent orders of the NCLT and NCLAT which had dismissed the appellant’s Section 7 insolvency petition against Adhunik Meghalaya Steels Private Limited as time‑barred. The primary question before the Court concerned whether an entry in the corporate debtor’s audited financial statements for FY 2019‑20 constituted an acknowledgment of liability under Section 18 of the Limitation Act, 1963 and which part of this Court’s limitation‑extension order of 10.01.2022 applied.

The Court allowed the appeal, set aside the orders of the NCLAT and NCLT, and remitted the matter to the adjudicating authority to proceed in accordance with law treating the Section 7 application as filed within limitation. The Court held that the FY 2019‑20 balance sheet, read in the light of earlier balance sheets and the appended cash‑flow statement, “clearly constitute[d] 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.” The Court noted that “the Limitation Act, 1963 shall, as far as may be, apply to the proceedings under the Code.” The Court, in its reasoning, observed: “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. We say so for the following reasons: (i) 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 and pertains to the same borrowing as was reflected in the balance sheet of F.Y. 2015‑16, 2016‑17 & 2017‑18; (ii) Under the Indian Accounting Standards (Ind AS) 7, a cash flow statement is appended to the financial statement. The cash flow statement indicates that in F.Y. 2018‑19 there was proceeds from borrowings of Rs.72,30,902/- and added to Rs.23,68,91,933/-, a figure of Rs.24,41,22,835/- is arrived at; (iii) More importantly, in the cash flow statement it was indicated that 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.”

Background The appellant executed a loan and pledge agreement in February 2015 for a Rs.30 crore term loan secured by pledge of shares. The account was declared NPA on 01.03.2018. IL & FS filed a Section 7 application on 15.01.2024 claiming default from 01.03.2018 and relying on audited financial statements ending 31.03.2020, signed on 12.08.2020, as an acknowledgment under Section 18 of the Limitation Act. The appellant also relied on this Court’s orders in Suo Moto Writ Petition (C) No. 3 of 2020 to exclude the period from 15.03.2020 to 28.02.2022 when reckoning limitation.

The respondent denied the balance sheet could be treated as an acknowledgment and maintained the petition was barred by limitation; the NCLT found no acknowledgment since the creditor’s name did not appear in the FY 2019‑20 statements and held the petition should have been filed by 30.05.2022. The NCLAT affirmed, finding the relevant date to be the date of signing of financial statements and applying Para 5(III) of the January 2022 order to limit relief to 90 days from 01.03.2022.

The Supreme Court reviewed precedent on acknowledgement under Section 18, including Khan Bahadur Shapoor, Lakshmirattan Cotton Mills, Bishal Jaiswal and Vidyasagar Prasad, observed that entries in balance sheets must be examined case‑by‑case and surrounding circumstances may be considered, and concluded the FY 2019‑20 entries, read against earlier annual statements and the cash flow particulars, evidenced an acknowledgment signed on 12.08.2020. The Court held that Para 5(I) of the 10.01.2022 order applied and the excluded period ran from 15.03.2020 to 28.02.2022, so limitation commenced from 01.03.2022 for the renewed period; reckoning the acknowledgment, the Section 7 petition filed on 15.01.2024 was within time. The Supreme Court remitted the matter to the adjudicating authority to decide the Section 7 application on merits; no costs were ordered.

Case No.: CIVIL APPEAL NO. 5787 OF 2025 (2025 INSC 911) Case Title: IL & FS Financial Services Limited v. Adhunik Meghalaya Steels Private Limited Appearances: For the Petitioner(s): Mr. Ritin Rai, Senior Counsel For the Respondent(s): Mr. Ramji Srinivasan, Senior Counsel