IL & FS Financial Services Limited Vs Adhunik Meghalaya Steels Private Limited (Supreme Court of India)
The Supreme Court of India considered whether the National Company Law Appellate Tribunal (NCLAT) and National Company Law Tribunal (NCLT) were justified in dismissing a Section 7 application under the Insolvency and Bankruptcy Code, 2016 (IBC) on limitation.
The appellant had entered into a loan agreement with the respondent on 27.02.2015 for a term loan facility of Rs. 30 crore, secured, inter alia, by a pledge of 8,10,804 shares of Adhunik Metaliks Ltd. The respondent’s account was declared a Non-Performing Asset (NPA) on 01.03.2018.
The appellant filed the Section 7 application on 15.01.2024, claiming a default amount of Rs. 55,45,97,395/-. The application stated that the respondent had acknowledged its liability in its audited financial statements from 2015 onwards. Particular reliance was placed on the Balance Sheet for FY 2019-20, signed by the Board of Directors on 12.08.2020.
The appellant contended that the 12.08.2020 Balance Sheet constituted an acknowledgment of liability under Section 18 of the Limitation Act, 1963. On that basis, the three-year limitation period would ordinarily have extended until 11.08.2023. The appellant further relied upon the Supreme Court’s orders concerning COVID-19 limitation and contended that the period from 15.03.2020 to 28.02.2022 was required to be excluded.
The NCLT, Guwahati Bench held that the FY 2019-20 Balance Sheet did not constitute an acknowledgment because the appellant’s name did not appear in it. It also held that the Section 7 application was barred by limitation.
The NCLAT similarly dismissed the appeal. It held that, even considering the FY 2019-20 Balance Sheet signed on 12.08.2020, the benefit under the Supreme Court’s order dated 10.01.2022 would not extend limitation beyond 30.05.2022.
Before the Supreme Court, the principal question was whether the Section 7 application filed on 15.01.2024 was barred by limitation. The Court also considered whether the FY 2019-20 Balance Sheet constituted a valid acknowledgment under Section 18 of the Limitation Act and, if so, which part of the Supreme Court’s COVID-19 limitation order dated 10.01.2022 applied.
The Supreme Court noted that, by virtue of Section 238A of the IBC, the Limitation Act applies to proceedings under the IBC, and Article 137 prescribes a three-year period from the date when the right to apply accrues.
The Court examined the Balance Sheets for FYs 2015-16, 2016-17 and 2017-18 and the FY 2019-20 financial statements. Earlier Balance Sheets reflected secured borrowings and specifically recorded that they were secured by the pledge of 8,10,804 shares of Adhunik Metaliks Ltd. The FY 2019-20 Balance Sheet showed secured borrowings of Rs. 24,41,22,835/- for both FY 2018-19 and FY 2019-20.
The Court also considered the accompanying cash flow statement. It noted that borrowings of Rs. 72,30,902/- in FY 2018-19, when added to the earlier borrowing of Rs. 23,68,91,933/-, resulted in Rs. 24,41,22,835/-. The cash flow statement further showed that no part of the cash flow proceeds was utilised for repayment of existing borrowings under financing activities.
Referring to Section 18 of the Limitation Act, the Court observed that an acknowledgment must relate to a subsisting liability and indicate the existence of a jural relationship between the parties. The Court also considered the principle that the surrounding circumstances and general tenor of the document can be examined while determining whether an acknowledgment exists.
The Supreme Court referred to its earlier decisions concerning acknowledgments, including Khan Bahadur Shapoor Fredoom Mazda, Lakshmirattan Cotton Mills, Asset Reconstruction Co. (India) Ltd. v. Bishal Jaiswal, and Vidyasagar Prasad. It noted that entries in balance sheets must be examined on a case-by-case basis to determine whether they amount to acknowledgment of liability.
The Court rejected the argument that the absence of the appellant’s name in the FY 2019-20 Balance Sheet necessarily prevented it from constituting an acknowledgment. It held that the Balance Sheet had to be viewed in the background of the earlier financial statements and surrounding circumstances.
The Court concluded that the FY 2019-20 Balance Sheet constituted a valid acknowledgment of a subsisting liability and indicated the existence of the jural relationship. The Court relied, among other factors, on the continuity of the borrowing reflected in the earlier Balance Sheets and the cash flow statement showing that the borrowing remained unpaid.
The Balance Sheet was signed on 12.08.2020, within the original limitation period commencing from 01.03.2018. Consequently, the acknowledgment extended limitation until 11.08.2023.
The Court then considered its order dated 10.01.2022 concerning COVID-19 limitation. It held that Para 5(I) applied because the limitation period, after acknowledgment on 12.08.2020, had not expired during the period from 15.03.2020 to 28.02.2022. Therefore, the entire period from 15.03.2020 to 28.02.2022 stood excluded.
Accordingly, limitation commenced after the excluded period and continued until 28.02.2025. Since the Section 7 application was filed on 15.01.2024, the Supreme Court held that it was filed within limitation. Para 5(III) of the 10.01.2022 order was held inapplicable.
The Supreme Court therefore set aside the NCLAT judgment dated 25.03.2025 and NCLT judgment dated 16.05.2024. The matter was remitted to the adjudicating authority to proceed with and decide the Section 7 application in accordance with law, treating the application as having been filed within limitation. No order as to costs was made.
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