Supreme Court: In an appeal filed by IL&FS Financial Services Ltd. (‘IFIN’) against the judgment of the National Company Law Appellate Tribunal (‘NCLAT’) which had dismissed IFIN’s application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (‘IBC’), for initiation of corporate insolvency resolution process against Adhunik Meghalaya Steels Pvt. Ltd (‘respondent/Corporate Debtor’) on the ground of limitation, the division bench of Manoj Misra and KV Viswanathan*, JJ. held that the entry in the Balance Sheet of the Corporate Debtor for the financial year 2019—20 constituted a valid acknowledgment of debt under Section 18 of the Limitation Act, 1963. This acknowledgment effectively extended the limitation period for initiating insolvency proceedings.
The Court further clarified that the exclusion of limitation during the COVID-19 period granted through its earlier orders in Cognizance for Extension of Limitation, In re, (2021) 5 SCC 452,, was applicable under Paragraph 5(I) of its order dated 10-01-2022. As a result, IFIN’s Section 7 application was held to be well within the extended limitation period.
Setting aside the concurrent findings of the NCLT and NCLAT, the Court remitted the matter to the NCLT for fresh consideration of IFIN’s application under Section 7 of the Insolvency and Bankruptcy Code on its merits.
Background
On 27-02-2015, IFIN and respondent entered into a Loan Agreement for a term loan of ₹30 crores, secured in part by a pledge of 8,10,804 shares of Adhunik Metaliks Ltd. via a Pledge Agreement on the same date.
The respondent’s account was declared a Non-Performing Asset (NPA) on 01-03-2018 due to default in repayment. IFIN filed a Section 7 IBC application on 15-01-2024, stating a default amount of ₹55.45 crore, with the default date recorded as 01-03-2018 and acknowledged in the information utility.
IFIN relied on a recall notice dated 10-08-2018 (unanswered) and consistent acknowledgments of debt in the respondent’s audited financial statements from FY 2015 to FY 2019-20. The Balance Sheet for FY 2019-20, signed on 12-08-2020 and made public on 14-02-2021, was approved by the Board of Directors and filed with the Registrar of Companies.
IFIN argued that the signing date of 12-08-2020 constituted an acknowledgment under Section 18 of the Limitation Act, extending the limitation period to 11-08-2023. With the benefit of the Supreme Court’s COVID-related limitation extension (excluding the period from 15-03-2020 to 28-02-2022), the limitation was further extended to 27-0-.2025. Thus, the Section 7 application filed on 15-01-2024 was within limitation. 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 held that there was no valid acknowledgment of liability in the Balance Sheet for FY 2019—20, as it did not mention the name of the financial creditor. It concluded that the Section 7 IBC application filed by IFIN was barred by limitation, stating it should have been filed by 30-05-2022.
Aggrieved by this decision, IFIN filed an appeal before the NCLAT. The NCLAT observed that the Balance Sheet for FY 2017—18 was signed on 02-09-2018, and the three-year limitation would ordinarily expire on 01-09-2021. However, with the benefit of the Supreme Court’s limitation extension order, the limitation period extended up to 30-05-2022. Accordingly, the appeal was dismissed, prompting IFIN to approach the Supreme Court.
Issue
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 the appellant against the respondent under the IBC, 2016, on the ground that the same was being barred by limitation.
Analysis and Decision
The Court reiterated that, in view of Section 238A of IBC, the provisions of the Limitation Act, 1963 would apply, as far as possible, to proceedings under the Code. It reaffirmed that Article 137 of the Limitation Act, which prescribes a limitation period of three years from the date when the right to apply accrues, would govern such applications.
The Court noted that it was undisputed that the respondent’s account was declared an NPA on 01-03-2018. However, IFIN relied on certain entries in the Balance Sheet for FY 2019-20, which was signed by the Directors on 12-08-2020. The key question before the Court was whether those entries constituted an acknowledgment of debt under Section 18 of the Limitation Act, thereby extending the limitation period.
The Court held that, upon examining the facts of the case, the Balance Sheet for FY 2019-20, when considered alongside admitted documents, including previous years’ financial statements, clearly constituted a valid acknowledgment of a subsisting liability. It reflected the existence of a jural relationship and an admission of such relationship. The Court gave the following reasons:
i) The overall tenor and context of the FY 2019-20 Balance Sheet, viewed in light of the Balance Sheets for FYs 2015-16, 2016-17, and 2017—18, indicated that the entry related to the same borrowing and amounted to a valid acknowledgment of debt.
ii) As per Indian Accounting Standards (Ind AS) 7, a cash flow statement was appended to the financials. The statement showed proceeds from borrowings of ₹72,30,902 in FY 2018-19, which, when added to ₹23,68,91,933, resulted in a total of ₹24,41,22,835.
iii) Importantly, the cash flow statement revealed that no part of the proceeds was used for repayment of borrowings, as the figure under “cash flows from (used in) financial activities” was nil, clearly indicating that the debt remained unpaid even during FY 2019-20.
The Court further noted that, in addition to the above, the respondent’s reply to the Section 7 application contained only a general objection on the ground of limitation and offered merely a bare denial, without specifically disputing the acknowledgments reflected in the financial statements.
The Court observed that the Section 7 application contained detailed averments referring to a series of audited financial statements and Balance Sheets from FY 2015-16 to FY 2019-20, to establish that the entry in the FY 2019-20 Balance Sheet amounted to an acknowledgment under Section 18 of the Limitation Act. The Court clarified that its finding was not based merely on the respondent’s non-denial, but rather on a substantive construction of the entry itself, which was deemed a valid acknowledgment of debt.
It was noted that the FY 2019-20 Balance Sheet was signed by the Board of Directors on 12-08-2020, which fell within the original limitation period, computed from 01-03-2018 to 28-02-2021. The acknowledgment on 12-08-2020 extended the limitation up to 11-08-2023.
However, due to the COVID-19 pandemic, the Supreme Court had issued a series of orders extending the limitation period, with the relevant order in this case dated 10-01-2022. The parties were in dispute as to whether sub-para (I) or sub-para (III) of paragraph 5 of that order would apply.
The Court concluded that sub-para (I) of para 5 of its order dated 10-01-2022 was applicable, and therefore the entire period from 15-03-2020 to 28-02-2022 stood excluded for the purpose of limitation. As a result, the limitation period reckoning from the acknowledgment dated 12-08-2020 would commence on 01-03-2022 and run until 28-02-2025. Since the Section 7 application was filed on 15-01-2024, it was held to be within the prescribed limitation period.
The Court clarified that once the fresh period of limitation began on 12-0-2020, there was no question of limitation expiring between 15-03-2020 and 28-02-2022, making sub-para (III) of the order dated 10-01-2022 inapplicable to the case.
Accordingly, the judgments of the NCLT (dated 16-05-2024) and NCLAT (dated 25-03-2025) were set aside. The appeal was allowed, and the matter was remitted to the adjudicating authority to proceed in accordance with law, treating the Section 7 application as having been filed within limitation.
[IL & FS Financial Services Ltd. v. Adhunik Meghalaya Steels (P) Ltd., 2025 SCC OnLine SC 1567, decided on 29-07-2025]
*Judgment Authored by: Justice K.V. Viswanathan
Advocates who appeared in this case:
For Appellant(s): M/s. Cyril Amarchand Mangaldas, AOR, Mr. Raunak Dhillon, Adv., Ms. Aishwarya Gupta, Adv., Ms. Niharika Shukla, Adv., Mr. Jeezan Pakhliwal, Adv., Mr. Vikash Kumar Jha, Adv.
For Respondent(s): Mr. Ramji Srinivasan, Sr. Adv., Mr. Pranav Sachdeva, AOR, Mr. D N Sharma, Adv., Mr. Nilay Sengupta, Adv., Ms. Shefali Munde
