Supreme Court Overturns NCLAT and NCLT Decisions in Landmark Insolvency Case: Acknowledgment of Debt in Balance Sheets
Court Clarifies Limitation Act Application in Insolvency Cases, Sets New Precedent
In a significant judgment dated July 29, 2025, the Supreme Court of India has overturned decisions by the National Company Law Appellate Tribunal (NCLAT) and the National Company Law Tribunal (NCLT), providing crucial clarity on the acknowledgment of debt within the context of insolvency proceedings under the Insolvency and Bankruptcy Code, 2016. The apex court ruled in favor of IL & FS Financial Services Limited, the appellant, against Adhunik Meghalaya Steels Private Limited, ensuring that the Section 7 application filed under the IBC was within the prescribed limitation period.
Background of the Case
The dispute revolved around a loan agreement dated February 27, 2015, between IL & FS Financial Services Limited and Adhunik Meghalaya Steels Private Limited, which involved a term loan facility of Rs. 30 crores. Following a default in repayment, the account was declared a Non-Performing Asset (NPA) on March 1, 2018. The appellant filed a Section 7 application on January 15, 2024, claiming a default amount of Rs. 55,45,97,395/-. The application was dismissed by both the NCLT and NCLAT, citing it was barred by limitation.
Supreme Court's Analysis
Justice K. V. Viswanathan, delivering the judgment, emphasized the importance of acknowledging debt under Section 18 of the Limitation Act, 1963, through balance sheet entries. The court meticulously analyzed the balance sheets from previous financial years, underscoring the acknowledgment of debt and the jural relationship between the parties. The judgment highlighted that entries in the balance sheet of FY 2019-20, when viewed in conjunction with previous financial statements, constituted a valid acknowledgment of a subsisting liability.
Key Legal Insights
The Supreme Court clarified that Section 238A of the IBC mandates the application of the Limitation Act to insolvency proceedings, reaffirming that the three-year limitation period under Article 137 applies. The judgment underscored that acknowledgment of debt in balance sheets should be interpreted liberally, considering surrounding circumstances and the general tenor of financial statements.
Furthermore, the court addressed the impact of COVID-19 on limitation periods, invoking its order dated January 10, 2022, which excluded the period between March 15, 2020, and February 28, 2022, from the limitation calculation. This exclusion extended the limitation period, allowing the appellant's application to be deemed timely.
Implications for Future Insolvency Proceedings
This landmark ruling is expected to influence how balance sheet entries are interpreted in insolvency cases, providing a clearer framework for acknowledging debts within the prescribed limitation period. Legal experts anticipate that this judgment will guide future decisions regarding the acknowledgment of liability, ensuring that creditors and debtors adhere to statutory timelines.
Conclusion
The Supreme Court's decision in IL & FS Financial Services Limited v. Adhunik Meghalaya Steels Private Limited sets a pivotal precedent in insolvency law, reinforcing the legal principles governing acknowledgment of debt and the application of limitation periods. This judgment is poised to have a lasting impact on insolvency proceedings, offering clarity and direction to tribunals and legal practitioners alike.
