2025 (8) TMI 99 - SC - IBC

Acknowledgment in Balance Sheet Valid Under Section 18 Restarts Limitation Period for IBC Section 7 Filing

IL & FS FINANCIAL SERVICES LIMITED Versus ADHUNIK MEGHALAYA STEELS PRIVATE LIMITED

The SC allowed the appeal, holding that the entry in the respondent's Balance Sheet for F.Y. 2019-20 constituted a valid acknowledgment of debt under ... Dismissal of Section 7 application filed by the appellant against the respondent under the Insolvency and Bankruptcy Code, 2016 - dismissal of application on the ground that the same was being barred by limitation - entry in the Balance Sheet of F.Y. 2019-20 constitute a valid acknowledgement of debt by the respondent under Section 18 of the Limitation Act, 1963 or not - HELD THAT:- It is now well settled in view of Section 238A of the IBC that the Limitation Act, 1963 shall, as far as may be, apply to the proceedings under the Code. It is also well settled that Article 137 of the first schedule to the Limitation Act providing a period of three years from the date when the right to apply accrues will govern the situation. The question as to what constitutes a valid acknowledgment has come up for consideration before this Court both under the Limitation Act, 1908 and the Limitation Act, 1963 - an acknowledgment of debt merely renews the debt and does not create a new right of action. 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. It has also been held 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. In the application under Section 7 detailed averments were made referring to a series of audited financial statements and Balance Sheet from F.Y. 2015-16 to F.Y. 2019-20 to make out a case that the entry in F.Y. 2019-20 constituted an acknowledgment under Section 18 of the Limitation Act by the respondent. In any event, we have not based our finding on the mere factum of non-denial but have construed the entry in the Balance Sheet of F.Y. 2019-20 to conclude that the entry in the F.Y. 2019-20 constitutes a valid acknowledgment. There are no manner of doubt that sub-Para 1 of Para 5 of the order of this Court dated 10.01.2022 would apply and the entire period from 15.03.2020 to 28.02.2022 would stand excluded, which would mean that the limitation would, reckoning the acknowledgment of 12.08.2020, commence on 01.03.2022 and continue till 28.02.2025. Since the application has been filed on 15.01.2024 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. 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 - appeal allowed. ISSUES: Whether the entries in the Balance Sheet of a financial year constitute a valid acknowledgment of debt under Section 18 of the Limitation Act, 1963.Whether the National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) were justified in dismissing a Section 7 application under the Insolvency and Bankruptcy Code, 2016 (IBC) on the ground of limitation.Whether the extension of limitation period by the Supreme Court's order dated 10.01.2022 applies under sub-para (I) or sub-para (III) of paragraph 5 in the context of the present case.Whether the absence of the financial creditor's name in the Balance Sheet affects the validity of acknowledgment under Section 18 of the Limitation Act.The scope and nature of acknowledgment required to extend limitation under Section 18 of the Limitation Act in insolvency proceedings under the IBC. RULINGS / HOLDINGS: The entries in the Balance Sheet of the financial year 2019-20, when considered in the context of preceding financial statements and accompanying documents, constitute a valid acknowledgment of a subsisting liability under Section 18 of the Limitation Act, indicating the existence of a jural relationship between the parties.The NCLT and NCLAT erred in holding that the Section 7 application was barred by limitation; the application filed on 15.01.2024 is within time considering the acknowledgment dated 12.08.2020 and the exclusion of the period from 15.03.2020 to 28.02.2022 under sub-para (I) of paragraph 5 of the Supreme Court's order dated 10.01.2022.The relevant extension of limitation applicable is sub-para (I) of paragraph 5 of the order dated 10.01.2022, which excludes the entire period from 15.03.2020 to 28.02.2022, rather than sub-para (III), which applies only where limitation would have expired during that period without acknowledgment.The absence of the financial creditor's name in the Balance Sheet does not preclude it from constituting an acknowledgment of debt, as the Balance Sheet is prepared in statutory format and may not mention specific creditors; acknowledgment must be examined on a case-by-case basis.The scope of acknowledgment under Section 18 of the Limitation Act requires indication of a subsisting liability and intention to admit the jural relationship, which can be inferred from the tenor and context of the document, including financial statements and accompanying notes. RATIONALE: The Court applied Section 18 of the Limitation Act, 1963, which provides that a written acknowledgment of liability signed by the party against whom the right is claimed restarts the limitation period from the date of acknowledgment.Precedents such as Khan Bahadur Shapoor Fredoom Mazda v. Durga Prasad Chamaria and Others and Asset Reconstruction Co. (India) Ltd. v. Bishal Jaiswal were relied upon to establish that acknowledgment need not specify exact nature of the debt but must indicate a subsisting liability and jural relationship, with intention inferred from context and surrounding circumstances.The Court emphasized a liberal construction of acknowledgment while cautioning against far-fetched inferences, endorsing a fact-specific, case-by-case examination especially in the context of entries in Balance Sheets and accompanying notes.The Court distinguished the applicability of the Supreme Court's order dated 10.01.2022 on limitation extension, holding that sub-para (I) applies where acknowledgment exists and the limitation period is extended by excluding the entire period of 15.03.2020 to 28.02.2022, whereas sub-para (III) applies only where limitation expired during that period without acknowledgment.The Court rejected the argument that absence of the creditor's name in the Balance Sheet negates acknowledgment, noting that statutory formats under the Companies Act do not require naming each creditor and that acknowledgment must be construed in light of all relevant documents and facts.The Court set aside the impugned orders of the NCLT and NCLAT, remitting the matter to the adjudicating authority to proceed treating the Section 7 application as filed within limitation.