Supreme Court Clarifies Limitation Period for Section 7 IBC Applications: Balance Sheets Constitute Valid Acknowledgment

The Hon’ble Supreme Court, in one of its recent judgments addressed the central issue of whether the application filed by the appellant (IL&FS Financial Services Limited) under  Section 7 of the IBC was barred by limitation. The appeal arose after the National Company Law Appellate Tribunal (NCLAT) and the National Company Law Tribunal (NCLT) dismissed the appellant’s Section 7 application.

The Loan Agreement between the appellant and respondent was entered into on February 27, 2015. The respondent’s account was declared a Non-Performing Asset (NPA), marking the date of default, on March 1, 2018. The application was filed nearly six years later on January 15, 2024.

The appellant contended that the respondent acknowledged the liability and default in its audited financial statements, specifically relying on the Balance Sheet for F.Y. 2019-2020, which was signed on August 12, 2020. According to the appellant, taking this date of acknowledgment (which was within three years of the default date, 01.03.2018), limitation would have expired on August 11, 2023. However, due to the Supreme Court’s orders extending limitation during the Covid-19 period, the period from March 15, 2020, till February 28, 2022, should be excluded, extending the limitation till February 27, 2025, thereby making the application filed on January 15, 2024, timely.

The respondent, defending the Tribunals’ orders, argued that the Section 7 application was time-barred from the date of default (March 1, 2018). Crucially, the respondent argued that the F.Y. 2019-2020 balance sheet could not be construed as an acknowledgment because the name of the appellant was not mentioned, and there was a mismatch in the debt claimed. The Tribunals below had agreed with the time-bar argument, concluding that the application should have been filed by May 30, 2022.

The Hon’ble Supreme Court examined two incidental questions: (i) whether entries in the Balance Sheet of F.Y. 2019-2020 constituted a valid acknowledgment under Section 18 of the Limitation Act, 1963, and (ii) whether the Supreme Court’s limitation extension order dated January 10, 2022, applied.

The Court held as follows:

1. Valid Acknowledgment (Section 18, Limitation Act): The Court reiterated that an acknowledgment must relate to a subsisting liability and indicate the existence of a jural relationship (debtor and creditor), which can be inferred by implication from the admission and surrounding circumstances.

2. Reading the Balance Sheet: The Balance Sheet of F.Y. 2019-2020 showed the secured borrowings figure of Rs. 24,41,22,835/-. The Court found that this figure matched the previous year’s borrowings plus proceeds from borrowings raised in F.Y. 2018-2019, as seen in the Cash Flow Statement.

3. Surrounding Circumstances: Crucially, the Cash Flow Statement indicated that no part of cash flow proceeds was utilized in the repayment of existing borrowings. This supported the appellant’s argument that the debt owed remained unpaid even in 2019-2020.

4. Conclusion on Acknowledgment: The general tenor and context of the F.Y. 2019-2020 Balance Sheet, viewed in the background of the previous years’ financial statements (2015-2016, 2016-2017, and 2017-2018 which specifically referenced the debt and the shares pledged as security), clearly pointed to a valid acknowledgment of a subsisting liability.

5. Application of Limitation Extension: Since the acknowledgment occurred on August 12, 2020, limitation would ordinarily run till August 11, 2023. The Court confirmed that Para 5(I) of the order dated January 10, 2022, excluding the period from March 15, 2020, to February 28, 2022, applied. The Court clarified that Para 5(III), which applies where limitation would have expired during that excluded period, was not applicable as limitation, reckoning the acknowledgment, commenced on August 12, 2020.

6. Final Outcome: Excluding the specified period meant limitation continued until February 27, 2025. Since the application was filed on January 15, 2024, it was held to be filed well within time.

The judgments of the NCLAT and NCLT were set aside, and the matter was remitted to the adjudicating authority to proceed, treating the application under Section 7 of the IBC as one filed within limitation.

With this ruling, the Supreme Court reinforces the principle that courts should lean in favour of a liberal construction of acknowledgment statements, considering surrounding circumstances, and confirms that the specific name of the creditor is not mandatory for a Balance Sheet entry to be a valid acknowledgment.