Supreme Court Revives Insolvency Plea, Holds Balance Sheet Entry Constitutes Valid Acknowledgment of Debt

Supreme Court Revives Insolvency Plea, Holds Balance Sheet Entry Constitutes Valid Acknowledgment of Debt

Introduction

The Supreme Court has reaffirmed that an entry in a company’s balance sheet amounts to a valid acknowledgment of debt under Section 18 of the Limitation Act, 1963 — even if the creditor is not explicitly named — and has revived an insolvency plea filed by IL&FS against Adhunik Meghalaya Steels for a default of ₹55.45 crore.

Factual Background

IL&FS extended a ₹30 crore term loan to Adhunik in 2015, secured through a pledge of shares. Following a default, the account was declared a Non-Performing Asset (NPA) on March 1, 2018, and a recall notice was issued in August 2018. The Section 7 application for initiating Corporate Insolvency Resolution Process (CIRP) under the Insolvency & Bankruptcy Code, 2016 (IBC) was filed in January 2024. The application relied on an entry dated 12.08.2020 in the Respondent’s balance sheet acknowledging the debt.

Procedural Background

The NCLT and NCLAT had dismissed the application as time-barred, holding that the 2019–20 balance sheet did not name IL&FS as a creditor and thus did not qualify as a valid acknowledgment under Section 18. Aggrieved by these findings, IL&FS approached the Supreme Court.

Contentions of the Parties

Appellant’s Contentions:

• The balance sheet entry constitutes a valid acknowledgment of debt, entitling the benefit of extension of the limitation period.
• The NCLT and NCLAT erred in dismissing the application as time-barred.

Respondent’s Contentions:

• The balance sheet entry does not qualify as an acknowledgment of debt since IL&FS was not named as a creditor.
• The application is time-barred, and the limitation period has expired.

Reasoning and Analysis

The Supreme Court, relying on Vidyasagar Prasad v. UCO Bank and Anr., held that entries in balance sheets can qualify as acknowledgments under Section 18 of the Limitation Act, even if the creditor is not explicitly named. It observed that the ₹24.41 crore entry in Adhunik’s 2019–20 balance sheet matched earlier disclosures when IL&FS was named, and this fact was not disputed in Adhunik’s reply. The Court further explained that since the balance sheet was signed on 12.08.2020 — within the original limitation period ending 28.02.2021 — the limitation stood extended till 11.08.2023. The Covid-related orders further extended this period, making the Section 7 application timely filed in January 2024.

Implications

The Supreme Court’s decision reaffirms the principle that balance sheet entries can constitute valid acknowledgments of debt, extending the limitation period for filing insolvency pleas. This judgment provides clarity on the interpretation of Section 18 of the Limitation Act and its application to insolvency proceedings.

Outcome

The bench of Justices Manoj Misra and KV Viswanathan allowed the appeal, set aside the impugned findings, and remitted the matter to the adjudicating authority to proceed with and decide in accordance with law, treating the application under Section 7 of the IBC as one filed within the limitation.

In this case, the appellant was represented by Mr. Ritin Rai, Sr. Adv., Mr. Raunak Dhillon, Ms. Aishwarya Gupta, Ms. Niharika Shukla, Mr. Jeezan Pakhliwal, M/S. Cyril Amarchand Mangaldas, AOR. Meanwhile, the respondent was represented by Mr. Ramji Srinivasan, Sr. Adv., Mr. Pranav Sachdeva, AOR, Mr. D.N. Sharma, Mr. Nilay Sengupta, Mr. Arjun Bhatia, and Ms. Shefali Munde, Advocates.