CAN BALANCE SHEET ENTRIES OF A CLAIM AMOUNT TO ACKNOWLEDGMENT OF LIABILITY WHICH WILL EXTEND LIMITATION OF A CLAIM WHICH IS BEYOND 3 YEARS?

 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