Issue in Point
Can entries in a corporate balance sheet be treated as acknowledgment of debt under Section 18 of the Limitation Act, 1963, thereby extending limitation? The Supreme Court in IL&FS Financial Services Ltd. v. Adhunik Meghalaya Steels Pvt. Ltd. (2025 INSC 911) has provided much-needed clarity, reaffirming the evidentiary value of balance sheets.
Background facts:
- On 27.02.2015, a Loan Agreement was entered into between the IL&FS and the Adhunik for a term loan facility of Rs. 30 crores, secured by way of a pledge of shares.
- On 15 January 2024, IL&FS initiated corporate insolvency resolution process against Adhunik.
- IL &FS contented that Adhunik acknowledged the liability and its default in all its year to year audited financial statements from 2015 till the latest available Balance Sheet for the financial year 2019-20; that the financials were duly filed by Adhunik with the Registrar of Companies.
- In view of the covid limitation extension orders, It was contended that the period between 15.03.2020 till 28.02.2022 ought to be excluded.
Question framed by the court:
Whether at all there was a valid acknowledgment of the debt under Section 18 of the Limitation Act 1963, in view of the entries in the Balance Sheet of F.Y. 2019-20.
Balance sheet in question:
Adhunik :- In the Balance Sheet of 2015-16 under the head “Textual information (14) – Disclosure of sub classification and notes on liabilities and assets explanatory (Text Block)”, it was shown as follows: –
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From IL & FS Financial Services
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24,57,40,400
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24,57,40,400
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Similar entries were mentioned in balance sheets in subsequent years, without any mention of IL&FS and pledge of shares.
Decision of NCLT: Guwahati Bench
held that there was no acknowledgement of liability in the Balance Sheet of F.Y. 2019-20 since the name of the financial creditor did not appear in the Balance Sheet. It also held that the application under Section 7 filed by the appellant was barred by limitation…
IL&FS appealed before the National Company Appellate Tribunal (NCLAT)
NCLAT reversed the decision of the NCLT and further held that as far as the Balance Sheet of F.Y. 2017-18 was concerned, it was signed on 02.09.2018 and the three-year period would have ended on 01.09.2021. According to the NCLAT, limitation would have extended in view of the order of this Court dated 10.01.2022. According to the NCLAT, limitation would stand extended under Para 5(III) up to 30.05.2022. It was further held that the date of signing the Balance Sheet would be the relevant date for commencement of time.
Adhunik challenged the decision of NCLAT before the Supremem Court of India – Decision of Supreme Court of India.
- 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
- The general tenor and context of the balance sheet of F.Y. 2019- 2 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.
Conclusion:
The Supreme Court of India, reaffirmed that balance sheets are not mere compliance documents but can operate as powerful acknowledgments of debt under Section 18 of the Limitation Act. This judgment fortifies creditors’ rights by ensuring that corporate acknowledgments in financial statements can extend limitation, preventing debtors from escaping liability merely by passage of time.
