Summary and Analysis of IL & Fs Financial Services Ltd. Vs Adhunik Meghalaya Steels Pvt. Ltd

1. Heading:

Balance Sheet Entries Constitute Valid Debt Acknowledgment Under Limitation Act; Section 7 IBC Application Timely

2. Citation:

• Case Name: IL & FS Financial Services Ltd. vs Adhunik Meghalaya Steels Pvt. Ltd.

• Citation: 2025 INSC 911 (Reportable)

• Civil Appeal No.: 5787 of 2025

• Judgment Date: July 29, 2025

3. Subject:

The Supreme Court reversed NCLT/NCLAT orders, holding that entries in a corporate debtor’s Balance Sheet (FY 2019-20) constituted a valid acknowledgment of debt under Section 18 of the Limitation Act, 1963, extending the limitation period for filing a Section 7 IBC application. The Court also clarified the applicability of COVID-19 limitation extensions.

4. Key Legal Framework:

Law/ProvisionRole in CaseInsolvency and Bankruptcy Code, 2016 (IBC):• Section 7: Allows financial creditors to initiate corporate insolvency resolution for defaults ≥ ₹1 crore.• Section 238A: Makes Limitation Act, 1963 applicable to IBC proceedings.Limitation Act, 1963:• Section 18: Acknowledgment of debt in writing resets limitation period from the signing date.• Article 137: Standard 3-year limitation period for applications.COVID-19 Orders (Supreme Court):• Order dated 10.01.2022 (Suo Motu WP(C) 3/2020): Excluded period from 15.03.2020 to 28.02.2022 for limitation purposes.Precedents:• Bishal Jaiswal v. ARCIL (2021): Balance Sheet entries can acknowledge debt.• Vidyasagar Prasad v. UCO Bank (2024): Context determines acknowledgment validity.Bench: 2-Judge Bench (Justices Manoj Misra and K.V. Viswanathan).

5. Step-by-Step Explanation of the Judgment:

Background

• Loan Agreement: Appellant (IL & FS) lent ₹30 crores to Respondent (Adhunik Meghalaya) on 27.02.2015, secured by pledged shares.

• Default: Respondent’s account declared NPA on 01.03.2018.

• IBC Application: Filed on 15.01.2024 for default of ₹55.45 crores.

• Defense: Respondent claimed application was time-barred (default date: 01.03.2018 → normal limitation expired on 28.02.2021).

Appellant’s Argument

• Acknowledgment in Balance Sheet:
  FY 2019-20 Balance Sheet (signed 12.08.2020) showed secured borrowings of ₹24.41 crores.
  Previous Balance Sheets (2015–2018) explicitly named appellant and loan details.
  Cash Flow Statement: Indicated no repayment of borrowings.

• Limitation Reset:
  Acknowledgment on 12.08.2020 reset limitation under Section 18, Limitation Act.
  COVID-19 orders excluded 15.03.2020–28.02.2022 → effective limitation till 28.02.2025.

Tribunals’ Decisions

• NCLT & NCLAT: Dismissed application as time-barred because:
  FY 2019-20 Balance Sheet did not name appellant.
  Applied Para 5(III) of COVID order (90-day grace after 28.02.2022) → deadline 30.05.2022.

Supreme Court’s Analysis

1. Valid Acknowledgment Under Section 18:
   Legal Principle: Acknowledgment requires:
   Subsisting liability and jural relationship (debtor-creditor).
   Intention to admit liability (inferred from context).
   Application to Facts:
   FY 2019-20 entries, read with previous Balance Sheets and cash flow statements, confirmed the same debt remained unpaid.
   Omission of creditor’s name not fatal (Vidyasagar Prasad followed).

2. Limitation Calculation:
   Fresh Period Starts: From acknowledgment date (12.08.2020).
   COVID Exclusion: Entire period (15.03.2020–28.02.2022) excluded (Para 5(I) of 10.01.2022 order).
   New Deadline: 28.02.2025 (application filed on 15.01.2024 was within time).

3. Tribunals’ Error:
   Wrongly applied Para 5(III) (for cases where limitation expired during COVID).
   Ignored contextual evidence proving acknowledgment.

Verdict

• Allowed the appeal.

• Section 7 application deemed within limitation.

• Remanded to NCLT for fresh admission under IBC.

6. Conclusion:

The Supreme Court reinstated the Section 7 IBC application, ruling:

"Balance Sheet entries, when read holistically, constitute valid debt acknowledgment under Section 18 of the Limitation Act. The COVID-19 exclusion period (15.03.2020–28.02.2022) applies fully, making the application timely."

Key Impact: Ensures contextual interpretation of financial documents for debt acknowledgment and upholds creditors’ rights during exceptional circumstances like pandemics.