Summary: The Supreme Court has held that entries in a corporate debtor’s balance sheet, when read alongside corroborative materials including cash flow statements, constitute a valid acknowledgement of debt under Section 18 of the Limitation Act, 1963, thereby resetting the period of limitation for creditors to initiate insolvency proceedings. This ruling strengthens the position of creditors under the Insolvency and Bankruptcy Code, 2016, ensuring that procedural technicalities do not frustrate their rights to take recourse through insolvency proceedings. It also places greater responsibility on auditors and accountants, as financial statements may now carry significant consequences for both debtors and creditors by operating as binding acknowledgements of liability.
Delivering a key judgment on July 30, 2025, in IL&FS Financial Services Limited v. Adhunik Meghalaya Steels Pvt. Ltd. (Civil Appeal No. 5787 of 2025), the Hon’ble Supreme Court (“SC”) settled a significant question on limitation in insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 (“Code”). Overturning the findings of the Hon’ble National Company Law Appellate Tribunal, New Delhi (“NCLAT”), and the Hon’ble National Company Law Tribunal, Guwahati Bench (“NCLT”), the SC held that an entry in a corporate debtor’s balance sheet, when read alongside corroborative materials such as cash flow statements and other admitted documents, constitutes a valid acknowledgement of debt under Section 18 of the Limitation Act, 1963 (“Limitation Act”). This acknowledgement resets the period of limitation for creditors to initiate insolvency proceedings against the corporate debtor under the provisions of the Code.
The SC further held that financial statements, when considered in the context of the surrounding circumstances, are sufficient acknowledgement of debt and establish a continuing creditor–debtor jural relationship between the parties, even if these statements do not specifically mention the financial creditor.
The SC also clarified that the COVID-19 exclusion period, granted under its suo motu order of February 10, 2022, in Suo Motu Writ Petition (C) No. 3 of 2020 in RE: Cognizance for Extension of Limitation (read with earlier orders dated 23.03.2020, 08.03.2021 and 27.04.2021) (“Suo Moto Order”),particularly Para 5(I), would be applicable here. This implies the entire period between March 15, 2020, and February 28, 2022, would stand excluded. Consequently, in this case, the period of limitation commenced on March 1, 2022, and continued until February 28, 2025. Therefore, the petition, CP (IB) 02 / GB of 2024, filed on January 15, 2024, by IL&FS Financial Services Limited (“IFIN”) under Section 7 of the Code r/w Rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 (“Company Petition”), was considered within limitation.
Thereafter, Adhunik Meghalaya Steels Pvt. Ltd. (“Adhunik”), filed a review petition, R.P. (C) No. 2132 of 2025 (“Review Petition”), seeking a review of the judgment dated July 30, 2025. On October 30, 2025, the SC dismissed the Review Petition, thereby lending finality to the judgment.
Brief Background: Addressing the Conundrum on Limitation
IFIN entered into a loan agreement on February 27, 2015 (“Loan Agreement”), with Adhunik, granting a term loan facility of ₹30 crores, secured, inter alia, by a pledge of Adhunik’s shares.
After Adhunik defaulted on the repayment of its debt to IFIN, its account was classified as a Non-Performing Asset (“NPA”) on March 1, 2018. Subsequently, in light of the continued default, IFIN filed a Company Petition before the NCLT on January 15, 2024, seeking initiation of the Corporate Insolvency Resolution Process (“CIRP”) against Adhunik.
The NCLT, vide order dated May 16, 2024, dismissed the Company Petition on the ground that (i) the claim was time-barred since the three-year limitation period from the default, i.e., declaration of the account as NPA on March 1, 2018, had expired on or before February 28, 2021, and (ii) IFIN’s name did not appear in Adhunik’s balance sheet for financial year (“FY”) 2019–2020, and therefore could not be treated as acknowledgement of liability.
The NCLAT upheld the aforesaid order on March 25, 2025, in the appeal, CA (AT) (Ins.) No. 1379 of 2024 filed by IFIN. It agreed that the Company Petition was time barred, while admitting that the signing of the FY 2019-2020 balance sheet amounted to acknowledgement of debt.
Consequently, the question that arose for consideration before the SC was whether, in this case, the tribunals i.e., NCLT and NCLAT were justified in dismissing the Company Petition as time barred. The two incidental questions the SC framed were: (i) whether the entry in the balance sheet for FY 2019–2020 constitutes an acknowledgement of debt under Section 18 of the Limitation Act? and (ii) if yes, will Para 5(I) or Para 5(III) of the Suo Moto Order govern the situation in the case at hand?
Balance Sheet Entries Considered in the Context of Surrounding Circumstances Constitute Valid Acknowledgement of Debt
Section 18 of the Limitation Act provides that an acknowledgement of liability in writing, made before the expiry of the prescribed limitation period, grants a fresh period of limitation to be computed from the date of such acknowledgement. In a consistent line of precedents, the SC has held that entries in a balance sheet amount to acknowledgement of liability for the purposes of Section 18 [Asset Reconstruction Company (India) Limited v. Bishal Jaiswal & Anr., 2021 6 SCC OnLine 366].
In this case, Adhunik’s balance sheets for FY 2015–2016 and FY 2016–2017 expressly acknowledged the debt owed to IFIN. The balance sheet for FY 2017–2018 omitted the name of IFIN from the list of creditors, while reflecting the identical details of pledged shares, clearly corresponding to IFIN. Further, for the FY 2019–2020, the balance sheet consistently reflected Adhunik’s debt to IFIN under “Secured Borrowings”, thereby extending the limitation period on each occasion.
Balance Sheet Entries Establish Unequivocal Debtor – Creditor Jural Relationship Between Parties
It is settled law that a statement relied upon for acknowledgement must relate to a present, subsisting liability, but its exact nature or character need not be specified. What matters is that the words used in the acknowledgement indicate the existence of a jural relationship of a debtor and creditor between the parties by considering the surrounding circumstances and the general tenor in which acknowledgement was given [Khan Bahadur Shapoor Fredoom Mazda v. Durga Prasad Chamaria & Ors., AIR 1961 SC 1236].
This acknowledgement need not always be express and may be inferred from the entries made in the balance sheet on a case-to-case-basis to decide the question of acknowledgement [Asset Reconstruction Company (India) Limited v. Bishal Jaiswal & Anr., 2021 6 SCC OnLine 366].
In this case, Adhunik’s balance sheets from FY 2015–2016 to FY 2019–2020 consistently recorded the debt owed to IFIN under “Secured Borrowings.” No notes or caveats were added to these entries. The SC held this factual premise to support the inference that these were clear acknowledgements of liability and reflected a continuing debtor–creditor relationship.
The SC also reiterated its earlier opinion in Lakshmirattan Cotton Mills Co. Ltd. v. Aluminium Corporation of India Ltd., (1971) 1 SCC 67, that an intention to admit a jural relationship need not be explicit and can be inferred from the nature of the admission and the surrounding circumstances. Therefore, the FY 2019–2020 balance sheet cannot be viewed in isolation and must be read together with other contemporaneous records, such as cash flow statements, index of charges filed with the RoC, and the record of default submitted to the Information Utility (a registered entity that collects, authenticates, stores and disseminates financial information to facilitate insolvency and other financial processes).
Taken together, these materials demonstrate the jural relationship of the creditor (IFIN) and debtor (Adhunik), extending the period of limitation under Section 18 of the Limitation Act.
Key Takeaways from an Accounting Perspective
The SC judgment strengthens the position of creditors under the Code by recognising that statutory financial statements can operate as acknowledgements of debt. Even without expressly naming a creditor, entries showing outstanding borrowings, when read in context, can revive limitation. A single year’s entry may appear ambiguous, but when taken together with earlier disclosures, the acknowledgement of debt becomes clear.
By resolving the interpretative conflict between Para 5(I) and Para 5(III) of its Suo Motu Order, the SC has provided a uniform framework. This ensures that procedural technicalities such as limitation do not frustrate the substantive objective of the Code, namely, timely resolution of insolvency while protecting creditor rights.
In practice, CIRP proceedings are often bogged down by limitation objections. This judgment brings much-needed clarity by confirming that accounting disclosures and statutory deadlines must be harmonised, not treated in isolation.
The judgment also carries wider implications. It reaffirms that statutory financial disclosures are not mere compliance documents but can operate as binding acknowledgements of liability. At the same time, it places greater responsibility on auditors and accountants, as preparing balance sheets/financial statements can no longer be viewed as a mechanical exercise. Such statements may now carry significant consequences for both debtors and creditors.