Karnataka High Court
Karnataka State Financial Corporation vs M/S Shankar Rice Mill on 26 February, 2020
Author: B.M.Shyam Prasad
Bench: B.M.Shyam Prasad
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IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 26TH DAY OF FEBRUARY, 2020
BEFORE
THE HON'BLE MR.JUSTICE B.M.SHYAM PRASAD
MISCELLANEOUS FIRST APPEAL NO. 9297 OF 2010
BETWEEN:
KARNATAKA STATE FINANCIAL CORPORATION
KSFC BHAVAN NO.1/1
THIMMIAH ROAD, NEAR CONTONMENT
RAILWAY STATION BENGALURU - 52
HAVING ONE OF ITS BRANCH OFFICE AT
(EARLIER SUBBAIAH COMPLEX, JAIL ROAD)
NOW AT:DEVARAJ URS COMMERCIALCOMPLEX,
NEHRU ROAD, SHIMOGA- 577 201
REPRESENTED BY AUTHORISED OFFICER.
... APPELLANT
(BY SRI. GURURAJ JOSHI, ADVOCATE)
AND:
1. M/S SHANKAR RICE MILL
MANDLI, N. T. ROAD
SHIMOGA.
2. CHIDANANDAPPA
SON OF LATE N. G. SHANKRAPPA
AGED ABOUT 79 YEARS
PARTNER OF M/S SHANKAR RICE MILL
RESIDENT OF "SOWBHAGYA"
KUVEMPU ROAD
OPP TO GRADUATE CO-OPERATIVE SOCIETY
SHIMOGA.
... RESPONDENTS
(BY SRI. T.S. MAHABALESHWARA, ADVOCATE FOR R2;
VIDE ORDER DATED 05.06.2013 APPEAL DISMISSED AS
AGAINST R1)
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THIS MISCELLENEOUS FIRST APPEAL IS FILED UNDER
SECTION 32-(9) OF THE STATE FINANCIAL CORPORATIONS ACT,
AGAINST THE ORDER DATED 29.07.2010 PASSED IN CIVIL MISC.
NO. 19/2003 ON THE FILE OF THE PRINCIPAL DISTRICT JUDGE,
SHIMOGA DISMISSING THE PETITION FILED UNDER SECTION
31(1)(aa) OF S.F.C ACT.
THIS MISCELLENEOUS FIRST APPEAL COMING ON FOR
HEARING THIS DAY, THE COURT DELIVERED THE FOLLOWING:
JUDGMENT
This appeal is filed by the Karnataka State Financial Corporation impugning the judgment dated 29.7.2010 in Civil Misc.No.19/2003 on the file of the Principal District Judge, Shivamogga (for short, 'the District Court'). The District Court by the impugned order has dismissed the appellant's petition under Section 31 (1) (aa) of the State Financial Corporation Act, 1951 (for short, 'the SFC Act') as against the respondents seeking enforcement of the liability to pay a sum of Rs.3,33,944/- with interest at the rate of 21% per annum at quarterly rest.
2. The appellant lent financial assistance to the first respondent, a Partnership Firm constituted by the deceased Sri.Nagarajappa and the second respondent. The -3- Firm repaid substantial part of the loan. However, according to the appellant, certain amount remained outstanding. The appellant did not initiate proceedings under Section 29 of the SFC Act to bring the primary assets for sale, however issued legal notice dated 13/17.2.2003 calling upon the respondents to 'jointly and severally' pay a sum of Rs.3,33,944/-. The second respondent by this notice is put on notice that the failure to tender such amount would compel the appellant to recover the amount under Section 31(1)(aa) of the SFC Act. The respondents did not respond to the legal notice dated 13/17.2.2003. The appellant filed the petition in Civil Misc.No.19/2003 under Section 31(1)(aa) of the SFC Act before the District Court for a direction to the respondents to pay the amount of Rs.3,33,944/- along with interest as stated above.
3. The second respondent resisted the petition asserting that the loans are repaid as of 10.09.2002 and the appellant's claim is only because abnormal interest is -4- charged. The second respondent further asserted that he paid a sum of Rs.1,50,000/- on 21.3.2003 i.e., after institution of the present petition. The appellant induced the second respondent to pay this amount of Rs.1,50,000/- for reopening the accounts that were closed after the demise of Sri Nagarajappa. The appellant's claim is vague and contradictory. The Firm stood dissolved with the demise of Sri Nagarajappa and the appellant, which had to file its petition within three years from the date of such dissolution of the Firm, has filed the petition beyond three years from such date. Therefore, the petition is barred.
4. The District Court has framed points for consideration on whether the appellant has established the disbursement of loan to the Firm and the surety offered by the second respondent for repayment of the loan and every amount connected thereto. As regards the second respondent, the points for consideration are whether he is able to establish that his liability to repay the amount due -5- to the appellant stood discharged with the dissolution of the Firm on the demise of one of its partner and the appellant's claim is because of abnormal charging of interest, and such claim is vague, contradictory and otherwise impermissible in law.
5. The District Court has opined that the appellant had to file the petition under Section 31(1)(aa) of the SFC Act within three years from the date of demise of Sri.Nagarajappa, one of the partners of the Firm, as contemplated under Article 137 of the Limitation Act, 1963. One of the partners, Sri Nagarajappa admittedly died on 30.11.1999 and the petition is filed on 10.3.2003 i.e., after a lapse of more than three years. Therefore, the appellant's petition is barred by limitation.
6. The District Court has also opined that the appellant is not entitled for the enforcement of liability against the second respondent because the appellant's -6- claim is vague and contradictory. The District Court has concluded that the appellant's claim is contradictory because of an obvious difference in the account statements marked as Ex.P.9 and Ex.P.10 by the appellant and the Chartered Accountant's Report relied upon by the respondents. Thus, the District Court has dismissed the appellant's petition both on merits and on the ground of limitation.
7. The learned counsel for the appellant submits that the District Court could not have dismissed the appellant's petition under Section 31(1) (aa) of the SFC Act either on the ground of limitation or on merits. The District Court has rightly held that the period of limitation for the purposes of an application under Section 31 of the SFC Act would begin from the date of demand by the State Finance Corporation and the denial thereof by the Borrower and that the appropriate applicable provision would be Article 137 of the Limitation Act, 1963. But, the District Court -7- has erred in concluding that the three year period of limitation commenced from 30.11.1999 (the date of demise of one of the partners, Sri.Nagarajappa).
8. The learned counsel for the appellant emphasizes that the appellant has issued notice dated 13/17.2.2003 (Ex.P.11) which is served on the respondents on 19.2.2003 and the petition is filed on 10.3.2003. The petition which is filed within the first two months from the date of demand undeniably would be within the limitation period of three years as contemplated under Article 137 of the Limitation Act, 1963. The learned counsel relies upon the decision of the Division Bench of this Court in Gulhati and another vs. Karnataka State Financial Corporation and Others1 in support of the proposition that the Limitation period of three years as contemplated under Article 137 of 1 ILR 2007 KAR 44 -8- the Limitation Act, 1963 commences from the date of demand.
9. Further, the learned counsel submits that the District Court has also erred in concluding that the appellant's petition is vague and contradictory because of a mismatch in the amounts mentioned in Ex.P.9 and Ex.P.10 and the evidence of Chartered Accountant examined on behalf of the second respondent. The District Court should have seen that even the second respondent has admitted that after filing of the petition, a sum of Rs.1,50,000/- is paid. This payment of Rs.1,50,000/- explains the differences in two sums in Ex.P.9 and Ex.P.10. The District Court could also have not accepted the Chartered Accountant's report despite the admission by the Chartered Accountant in the cross examination that he had not calculated levy of interest as per the applicable regulations. -9-
10. The learned counsel for the appellant, while fairly conceding that no such defence is taken before the District Court, submits that the appellant's petition cannot be held as time barred in view of the admitted fact that no action is initiated for the sale of the primary assets under Section 29 of the SFC Act. The right to sue based on a guarantee would accrue only after the primary assets are brought to sale and further dues, if any, are ascertained. The right to sue based on a guarantee would not accrue even if the appellant has issued legal notice and initiated proceedings under Section 31(1)(aa) of the SFC Act unless the primary assets are brought to sale and the dues ascertained. The learned counsel for the appellant relies upon the decision of the Hon'ble Supreme Court in Deepak Bhandari v. Himachal Pradesh State Industrial Development Corporation Limited2 in support of this canvass. 2 (2015) 5 SCC Page 518
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11. The learned counsel for the appellant submits that the appeal could be disposed of with liberty to the appellant to initiate appropriate proceedings after the primary assets are brought to sale in accordance with Section 29 of the SFC Act without prejudice to any of the defence that could be available either to the second respondent or to the primary borrower.
12. The learned counsel for the second respondent arguing in support of the appeal contends that the District Court is justified in dismissing the petition holding that the appellant had to file its petition invoking the personal guarantee within three years from the date of demise of the partner, Sri.Nagarajappa. The Firm, on the demise of the partner, would by operation of law, cease to exist. The cause of action for recovery of the loan invoking bank guarantee would accrue on that day. Therefore, the petition had to be filed within three years from such date. The learned counsel further submits, it is indisputable that the
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contract of bank guarantee states that the second respondent would only be liable for paying the amount due including the interest calculated at the rate of 14.5%. But the appellant is claiming on the basis of interest computed at the rate of 25% per annum. As such, the Chartered Accountant's Report is rightly accepted by the District Court.
13. In the light of the rival submissions, the questions that arise for consideration are:
(i) Whether the district Court is justified in dismissing the petition on the ground that the appellant's petition is barred under Article 137 of the Limitation Act, 1963 because the petition is not filed within three years from the date of demise of one of the partners of the principal borrower, the Firm.
(ii) Whether the appellant could be permitted to file another petition under Section 31(1) (aa) of the SFC Act on a possible subsequent cause of action.
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14. After the decision of the Hon'ble Supreme Court in Maharashtra State Financial Corporation v. Ashok K Agarwal and Others3, there cannot be any dispute that the limitation period for a State Financial Corporation to initiate action under Section 31 of the SFC Act would be three years as per the provisions of Article 137 of the Limitation Act, 1963. The Hon'ble Supreme Court in Deepak Bhandari v. Himachal Pradesh State Industrial Development Corporation Ltd., has observed that in Maharashtra State Financial Corporation supra, the question as to from which date the aforesaid period of three years would commence was neither raised nor dealt with.
15. In Deepak Bhandari's case supra, the Himachal Pradesh State Industrial Development Corporation first issued recall notice and later initiated proceedings under Section 29 of the SFC Act for sale of the mortgaged property 3 (2006) 9 SCC 617.
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and adjusted the sale proceeds therefrom. Later, insofar as the outstanding, initiated proceedings against the Guarantor under Section 31 of the SFC Act. In the light of these circumstances, the Hon'ble Supreme Court, while considering the question of commencement of the period of three years as per Article 137 of the Limitation Act, 1963, has held as follows.
"28. It is thus clear that merely because the Corporation acted under Section 29 of the State Financial Corporations Act did not mean that the contract of indemnity came to an end. Section 29 merely enabled the Corporation to take possession and sell the assets for recovery of dues under the main contract. It may be that on the Corporation taking action under Section 29 and on their taking possession they became deemed owners. The mortgage may have come to an end, but the contract of indemnity, which was an independent contract, did not. The right to claim for the balance arose, under the contract of indemnity, only when the sale proceeds were found to be insufficient. The right to sue on the contract of indemnity arose after the
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assets were sold. The present case would fall under Article 55 of the Limitation Act, 1963 which corresponds to old Articles 115 and 116 of the old Limitation Act, 1908. The right to sue on a contract of indemnity/guarantee would arise when the contract is broken."
29. Therefore, the period of limitation is to be counted from the date when the assets of the Company were sold and not when the recall notice was given.
16. It follows from this decision that a contract of indemnity/guarantee is an independent contract, and if a State Finance Corporation is able to establish that certain amount remains even after the primary assets are brought to sale and such amount is not paid by the principal borrower, there would be another breach of contract. Thus, another accrual of cause of action against the guarantor. In the present case, it is undisputed that the primary assets have not been brought to sale under Section 29 of
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the SFC Act. The respondents have repaid substantial amounts, and the appellant has initiated proceedings under Section 31(1)(aa) of the SFC Act based on the guarantor's liability to pay on demand certain remaining amount.
17. The Hon'ble Supreme Court in Syndicate Bank vs Channaveerappa Beleri4 and others while considering the question of limitation for initiation of proceedings based on invocation of the Bonds of guarantee has considered the meaning of the phrase "on demand" in a contract for guarantee and held that when a contract of guarantee is clear that the guarantor's liability would arise when the demand is made, the right to sue to the creditor accrues only when a demand for payment is made by the creditor and is refused by the guarantors. When a demand is made requiring payment within a stipulated period, the breach 4 (2006) 11 SCC 506
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occurs or the right to sue accrues, if payment is not made within the stipulated period. If while making the demand for payment, no period is stipulated within which the payment should be made, the breach occurs or the right to sue accrues when the demand is served on the guarantor.
18. The District Court has concluded that the appellant's petition is time barred on the ground that the Firm stood dissolved by operation of law on the demise of one of its partners, Sri Nagarajappa in the year 1999 and the appellant, which had to file its claim within three years from such date in the year 1999, has belatedly filed its petition. However, this conclusion by the District Court is not based on any reference to the terms of the Agreement of guarantee executed by the second respondent. Unless the second respondent establishes that it is so agreed with the appellant as part of the contract of guarantee, it cannot be reasonably concluded, especially in view of the Scheme of the SFC Act, that the cause of action for the appellant
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accrued on the demise of one of the partners of the Firm. The appellant's petition, undisputedly commenced based on demand for payment and failure to pay by the second respondent, would be within the prescribed period of limitation.
19. On the merits of the appellant's claim for a sum of Rs.3,33,944/-, it is undisputed that the appellant has not led any evidence to explain the differences in the statement of accounts produced in evidence. The learned counsel for the appellant could be justified in his submissions that the difference in the amounts in Ex.P.9 and Ex.P.10 is explained by the subsequent payment of Rs.1,50,000/-. But, the appellant has not led in evidence to explain the impact of the payment of Rs.1,50,000/- made during the pendency of the proceedings to establish in definite terms the amount due. Insofar as the evidence led in by the second respondent, he relies upon the evidence of a Chartered Accountant to assert that the amount claimed
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is because of impermissible levy of interest. However, the Chartered Accountant has admitted in his cross- examination that he has not taken note of the regulations applicable to the appellant in arriving at his conclusion that the appellant's claim is untenable because excess interest rate is charged.
20. In the light of these circumstances, and the undisputed fact that the appellant has not initiated any proceedings under Section 29 of the SFC Act for sale of the primary assets, and the law declared by the Hon'ble Supreme Court in Deepak Bhandari's case supra that a State Financial Corporation Act would be entitled to initiate proceedings under Section 31 (1) (aa) of the SFC Act after the primary assets are sold and if any amount remains due after adjusting the amount recovered by the sale of such primary assets, this Court is of the considered view that to serve the interests of justice, the appeal could be disposed of reserving liberty to the appellant to initiate proceedings
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under Section 31 (1) (aa) of the SFC Act after the primary assets are brought to sale under Section 29 of the SFC Act with liberty to the respondents to contest such claim on all available grounds. The appeal is accordingly disposed of.
SD/-
JUDGE SA Ct:sr