CAN BALANCE SHEET ENTRIES OF A
CLAIM AMOUNT TO ACKNOWLEDGMENT
OF LIABILITY WHICH WILL EXTEND
LIMITATION OF A CLAIM WHICH IS
BEYOND 3 YEARS?
THE DELHI HIGH COURT IN SNG DEVELOPERS LIMITED V. LORD VARDHMAN BUILDTECH PRIVATE LIMITED
CORE LEGAL ISSUE
Whether disclosure of a claim or outstanding amount in the balance sheet
of a company constitutes an acknowledgment of liability under Section 18 of the
Limitation Act, 1963, thereby extending the limitation period beyond three
years.
LEGAL
FRAMEWORK
Section 18, Limitation Act, 1963
An acknowledgment of liability:
- Must be in writing
- Signed by the party against
whom the right is claimed
- Made before expiry of the limitation period
- Must indicate a conscious admission of subsisting
liability
KEY JUDICIAL QUESTION
Does
a balance sheet entry:?
- Merely reflect
statutory compliance?
- Or amount to a
voluntary acknowledgment extending limitation?
THE FACTS
•
₹7.5 Crores paid under an Agreement to Sell.
•
Deal did not go through.
•
Email in 2013 offering refund.
•
Arbitration invoked later.
•
Refund claim challenged as time barred.
PETITIONER ARGUED:
⛔ Claim is beyond 3 years.
⛔ Balance sheets cannot
extend limitation.
⛔ Agreement was unregistered.
DELHI HIGH COURT’S APPROACH
In
SNG Developers Limited v. Lord Vardhman Buildtech Private Limited, the Delhi
High Court examined:
✔ WHETHER:
·
The amount was shown as a clear, admitted payable
·
There were qualifications, notes, disputes, or contingent tagging
·
The entry reflected an unqualified admission of debt
✘ NOT AUTOMATICALLY:
·
Every balance sheet entry extends limitation
·
Mere compliance under the Companies Act equals acknowledgment
WHAT THE DELHI HIGH COURT HELD?
Balance sheet entries CAN amount to
acknowledgment of liability.
·
If a
company consistently reflects an amount as “Advance against sale”
·
in its
financial statements, that is a written acknowledgment.
·
And under
Section 18, that gives a fresh period of limitation.
EARLIER PRECEDENT
The Delhi
High Court relied on the Supreme Court view in Asset Reconstruction Company
(India) Ltd. v. Bishal Jaiswal.
WHEN LIMITATION EXTENDS
·
Debt shown
as “Payable”
·
No dispute
mentioned
·
No conditional
language
WHEN LIMITATION DOES NOT EXTEND
·
Shown as
“Contingent Liability”
·
Marked
“Disputed”
·
Qualified
in Notes to Accounts
·
Entry after
limitation expired
IMPORTANT:
Mere
statutory compulsion to prepare balance sheets does NOT dilute acknowledgment.
If it is
shown as a liability, it counts.
ACKNOWLEDGEMENT DURING CROSS EXAMINATION
But during
cross examination, the witness admitted:
✔ He signed the financial statements.
✔ They were uploaded with the ROC.
TAKEAWAYS FOR COMPANIES
·
What you
show in your balance sheet matters.
·
Accounting
entries can legally extend limitation.
·
Evasive
denials in arbitration can backfire.
·
Section 34
is not an appeal. Courts will not reappreciate evidence.
THIS RULING REINFORCES THAT:
·
Balance
sheet entries can extend limitation only if they amount to conscious admission
·
Courts
apply a substance over form test
·
The burden
lies on the party invoking Section 18
YOUR
COMPLIANCE PARTNER – R V SECKAR , FCS, LLB, 79047 19295
