Balance Sheet entry amounts to acknowledgment of debt as per Section 18 of the Limitation Act: SC

Recently, the Supreme Court held that entries in balance sheets could amount to an acknowledgment of debt to extend the limitation u/s 18 of the Limitation Act.

A Bench headed by Hon’ble Justice RF Nariman had set aside a judgement of the Full Bench of NCLAT in V Padmakumar vs Stressed Assets Stabilization Fund where the Bench had an opposite view.

Issues of the Case:-

Before the Apex Court, whether an entry made in the balance sheet of a corporate debtor would amount to an acknowledgement of liability u/s 18 of Limitations Act?. Another issue was whether Section 18 of the Limitation Act that extends the limitation period depending on an acknowledgement of a debt made in writing, signed by a corporate debtor, would be applicable u/s 238A.

Observations of the Bench

To address the first issue, the Bench referred to various judgements where it was held that an entry made in the books of accounts (including balance sheets could amount to an acknowledgement of liability as per the meaning of Section 18 of the Limitation Act.

The Bench referred to Bengal Silk Mills Co. vs Ismail Golam Hossain Ariff and remarked that as per that judgement, even though filing a balance sheet was a compulsory acknowledgement of debt was not.

In this context, the Court stated that it is essential to have notes annexed or part of the financial statements recognised by Section 134(7). The auditor;’s report might also mention acknowledgements made in account books (including balance sheets).

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The Bench further remarked that as per the mandate of the Bengal Silk Mills case, there is a compulsion to prepare a balance sheet but no compulsion to make an admission as it would depend on the facts of the case.

Decision

Taking note of the judgements described above, the Bench ruled that the majority decision of the Full Bench vs Padmakumar case is wrong

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