The Supreme Court has held that an acknowledgment of debt need not specifically name the creditor or follow a fixed format to attract Section 18 of the Limitation Act, 1963, provided it acknowledges a subsisting liability when read with the surrounding circumstances and connected records.

The Bench of Justices Vikram Nath, Augustine George Masih and Sandeep Mehta restored a contractor’s recovery suit after finding that the defendant society’s balance sheets, read with cheques and bank reconciliation statements, supported an acknowledged liability carried forward up to 2013.

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The Court set aside the Delhi High Court’s November 4, 2024 judgment rejecting the plaint as time-barred. However, it expressly left the merits of the recovery claim, including the actual amount payable, open for determination at trial.

The dispute arose from a civil works contract concerning construction connected with a multi-storey building in Mayur Vihar, Delhi.

The original plaintiff, Wazir Hussain, instituted a summary suit under Order XXXVII of the Code of Civil Procedure, 1908, in 2014. Relying on running bills raised between 2000 and 2003, he sought recovery of ₹11,16,000, together with interest of ₹11,04,840 calculated at 9% per annum. He also claimed interest during the pendency of the proceedings and future interest at the same rate until realisation.

The defendant society had issued cheques in his favour, which were dishonoured. The plaintiff’s case, however, did not rest solely on those transactions. He relied on subsequent financial records of the society, contending that the outstanding liability continued to appear in its accounts until the financial year 2012–13.

The society filed an application under Order VII Rule 11 CPC seeking rejection of the plaint. It contended, among other things, that the suit was barred by limitation, disclosed no cause of action and was not maintainable in view of alleged embezzlement.

On January 6, 2020, the trial court rejected the application. It observed that the outstanding amounts continued to be reflected in the society’s balance sheets from 2004 and 2005 through 2013.

According to the trial court, those entries amounted to acknowledgment of debt, giving rise to a fresh limitation period. Questions concerning the genuineness of the bills and other objections to maintainability required evidence.

The society challenged that order through a revision petition before the Delhi High Court.

Allowing the revision, the High Court rejected the plaint as barred by limitation. It considered that the material relied upon did not establish an acknowledgment of liability extending beyond 2005.

The High Court also found that the subsequent balance-sheet entries did not sufficiently indicate that the amounts reflected were payable to the original plaintiff.

The original plaintiff’s legal heir approached the Supreme Court against that decision.

The Supreme Court examined whether the suit could have been rejected at the threshold despite the society’s balance-sheet entries extending up to 2013.

The Bench noted that the bank reconciliation statements for 2004–05 expressly recorded three cheques issued in favour of “Wazir Hussain Contractor”. These entries directly connected the original plaintiff with the society’s financial records and the transactions underlying the suit.

The plaintiff also relied on balances carried forward in subsequent financial years under the head relating to balances pertaining to 2004–05. His contention was that the amount claimed in the suit formed part of those balances when read cumulatively with the cheques and reconciliation statements.

The Supreme Court found that the surrounding circumstances supported the plaintiff’s case that a liability existed, was reflected in the defendant’s own balance sheets and continued to be carried forward until 2013, renewing the limitation period each year.

Explaining Section 18 of the Limitation Act, the Court held that an acknowledgment need not specifically name the creditor or be drawn up in a fixed format.

The relevant consideration is whether the acknowledgment, read with the circumstances surrounding the transaction, indicates a subsisting legal relationship and liability.

Section 18 provides for a fresh limitation period where a written and signed acknowledgment is made before expiry of the prescribed period. The fresh period is computed from the time the acknowledgment was signed.

The Bench relied on Asset Reconstruction Company (India) Ltd. v. Bishal Jaiswal, 2021 INSC 254, which recognised that entries in books of account, including balance sheets, may constitute acknowledgment under Section 18.

However, such entries must be examined in the context of the balance sheet as a whole, including qualifications or explanations contained in accompanying notes or the auditor’s report.

The Court also referred to Axis Bank Ltd. v. Naren Sheth, 2023 INSC 820, reiterating the application of Section 18 to balance sheets acknowledging debt.

The Supreme Court clarified that its reasoning did not conclusively establish that the entire amount claimed in the suit was owed to the original plaintiff.

The precise relationship between the cheques issued, the amounts carried forward and the sum claimed required examination of evidence. Those questions belonged at trial.

The Bench observed that, while considering an application under Order VII Rule 11 CPC, the High Court ought not to have examined the evidence in depth and conclusively determined the non-existence of liability.

At that stage, the Court was required to assess whether the plaint disclosed a prima facie case on the available material.

The society argued that a time-barred debt could not be revived indefinitely, particularly without an application seeking condonation of delay.

The Supreme Court rejected that contention in the circumstances of the case. Since the entries constituted acknowledgment under Section 18, a fresh limitation period ran from each subsequent acknowledgment. Consequently, no application for condonation of delay was required.

The ruling concerns continuing acknowledgments satisfying Section 18. It does not mean that every balance-sheet entry automatically proves the creditor’s entire claim.

The Supreme Court set aside the Delhi High Court’s order and restored the recovery suit before the trial court.

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