Entry in Balance Sheet Acknowledges Debt: Supreme Court Allows IL&FS Plea [Read Judgement]

The Supreme Court in its recent judgment has ruled that entry in a company's balance sheet amounts to a valid acknowledgment of debt under Section 18 of the Limitation Act, 1963 and allowed the plea of IL&FS for a default of ₹55.45 crore.

The short question that arises for consideration is whether the National Company Law Appellate Tribunal (‘NCLAT’) and the National Company Law Tribunal ( ‘NCLT’) were justified in dismissing the Section 7 application filed by IL & FS Financial Services Limited, the appellant against the respondent under the Insolvency and Bankruptcy Code, 2016 (for short ‘IBC’), on the ground that the same was being barred by limitation.

On 27.02.2015, a Loan Agreement was entered into between the appellant and the respondent for a term loan facility of Rs. 30 crores. The loan was secured, inter alia, by way of a pledge of 8,10,804 shares of Adhunik Metaliks Ltd. in favour of the appellant by virtue of a Pledge Agreement dated 27.02.2015.The account of the respondent was admittedly declared as a Non-Performing Asset (NPA) as the respondent was unable to meet its debt obligations.

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In the Section 7 IBC application filed by the appellant, a default amount of Rs. 55,45,97,395/- was set out and it was mentioned therein that the date of default was 01.03.2018; that it was duly recorded in the information utility as annexed; that a recall facility notice was issued on 10.08.2018 for which there was no response.

The respondent 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, the Balance Sheet of F.Y. 2019-20 was duly approved by the Board of Directors and the date of signing of the said financial statement was 12.08.2020. It was contended that the period between 15.03.2020 till 28.02.2022 ought to be excluded.

The stand of the appellant was that if 12.08.2020, the date on which the Balance Sheet of 2019-20 was signed, is taken as the date of acknowledgment (which was within the 3 years from 01.03.2018) limitation would expire only on 11.08.2023. However, in view of the benefit of the extension orders passed by this Court on 10.01.2022, the entire period up to 28.02.2022 ought to be excluded and if that were so limitation was available till 27.02.2025. Hence, the Section 7 application filed on 15.01.2024 was well within time.

The entire case revolves around the question as to 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.

The 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, since, according to the NCLT, the application ought to have been filed on or before 30.05.2022 applying Para 5(III) of the order of this Court dated 10.01.2022 extending the period of limitation.

The appellant aggrieved filed an appeal before the NCLAT. The NCLAT 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.

The NCLAT further held that even if the entry in the Balance Sheet of F.Y. 2019-20 is taken, since the said Balance Sheet was signed on 12.08.2020, limitation would have extended only up to 30.05.2022. Thereafter, the NCLAT examined the argument whether the date of signing the Balance Sheet would be the relevant date or whether the date of uploading the Balance Sheet on the website of the Ministry of Corporate Affairs would be the relevant date for commencement of time.

It was held that the date of signing the Balance Sheet would be the relevant date and, on that basis, concluded that the Section 7 petition ought to have been filed on or before 30.05.2022. Holding so, it dismissed the appeal of the appellant. Aggrieved, the appellant is before us in appeal.

The two judge bench of Justices Manoj Misra and KV Viswanathan found that the Balance Sheet of F.Y. 201920, 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.

“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”, the bench viewed..

The court held that the Balance Sheet of F.Y. 2019-20 was admittedly signed by the board of directors on 12.08.2020. This date was within the subsisting period of limitation for the reason that taking 01.03.2018 as the commencement of limitation, limitation ordinarily would have continued till 28.02.2021. Since an acknowledgment came into effect on 12.08.2020, limitation would have stood extended till 11.08.2023. However, Covid-19 intervened resulting in this Court passing a series of orders extending the period of limitation. The relevant order applicable in this case is the order of 10.01.2022.

Further ruled that 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. The court set aside the judgments of the NCLAT and NCLT by allowing the appeal.

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