Karnataka High Court
M/S Arundathi Laboratories Ltd vs The Karnataka State Industrial on 26 September, 2024
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MFA No. 200119 of 2015
IN THE HIGH COURT OF KARNATAKA,
KALABURAGI BENCH
DATED THIS THE 26TH DAY OF SEPTEMBER, 2024
PRESENT
THE HON'BLE MR. JUSTICE R.NATARAJ
AND
THE HON'BLE MR. JUSTICE RAJESH RAI K
MISCL. FIRST APPEAL NO. 200119 OF 2015 (SFC)
BETWEEN:
1. M/S ARUNDATHI LABORATORIES LTD.,
A PUBLIC LIMITED COMPANY INCORPORATED UNDER
THE INDIAN COMPANIES ACT, 1956
REPRESENTED BY ITS
MANAGING DIRECTOR
SRI. P. ARUN REDDY,
WHICH WAS SITUATED AT
PLOT NO.127, 128 AND 135,
KOLAR INDUSTRIAL AREA,
BIDAR-585 401.
2. SRI ARUN REDDY
Digitally signed
by S/O P.S.REDDY
MARKONAHALLI AGED 54 YEARS,
RAMU PRIYA
Location: HIGH OCC: DIRECTOR
COURT OF RESIDENCE OF PLOT NO.868-A,
KARNATAKA
ROAD NO.45, JUBLI HILLS,
HYDERABAD.
3. SRI SALEEM MURALI
S/O NARAYANA
AGED: MAJOR
R/O PLOT NO.8,
SREENAGAR COLONY,
HYDERABAD.
...APPELLANTS
(BY SRI. MANVENDRA REDDY, ADVOCATE)
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MFA No. 200119 of 2015
AND:
THE KARNATAKA STATE INDUSTRIAL
INVESTMENT AND DEVELOPMENT
CORPORATION LIMITED (KSIIDC)
KHANIJA BHAVAN, NO.49, 4TH FLOOR,
EAST WING, RACE COURSE ROAD,
BANGALORE-560 001
AND HAVING ITS BRANCH OFFICE AT
2ND FLOOR, G.K. COMPLEX,
OPPOSITE MOHAN LODGE,
MSK MILL ROAD, STATION AREA,
GULBARGA-585 102.
REPRESENTED BY ITS DULY AUTHORIZED OFFICER
SRI. VISHWANANTHA, AGM
...RESPONDENT
(BY SRI. R.V.NADAGOUDA, ADVOCATE)
THIS MFA IS FILED UNDER SECTION 32(9) OF THE STATE
FINANCIAL CORPORATIONS ACT, 1951 PRAYING TO ALLOW THE
APPEAL AND SET ASIDE THE ORDER AND AWARD AND DECREE
PASSED IN MISCELLANEOUS CASE NO.23/2008 DATED 27.09.2014
PASSED BY PRINCIPAL DISTRICT AND SESSIONS JUDGE AT BIDAR
AND TO DISMISS THE MISCELLANEOUS CASE NO.23/2008 FILED BY
THE RESPONDENT CORPORATION IN ITS ENTIRETY.
THIS APPEAL HAVING BEEN HEARD AND RESERVED FOR
JUDGMENT ON 12.07.2024, COMING ON FOR PRONOUNCEMENT OF
JUDGMENT THROUGH VIDEO CONFERENCE THIS DAY, R. NATARAJ
J., DELIVERED THE FOLLOWING:
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MFA No. 200119 of 2015
CORAM: HON'BLE MR. JUSTICE R.NATARAJ
AND
HON'BLE MR. JUSTICE RAJESH RAI K
CAV JUDGMENT
(PER: HON'BLE MR. JUSTICE R.NATARAJ) The appellants have challenged the order dated 27.09.2014 passed by the Principal District and Sessions Judge, Bidar, (for short, 'the District Court') in Miscellaneous Case No.23/2008, by which, it allowed a petition filed under Section 31(1)(aa) read with Section 32 of the State Financial Corporations Act, 1951 (hereinafter referred to as 'the SFC Act' for brevity). The District Court declared that the respondent was entitled to recover from appellant No.1 herein a sum of Rs.16,76,85,967/- with future interest at the rate of 22.5% per annum compounded with quarterly rests from 21.05.2006 till the date of realization. It further held that appellant Nos.2 and 3 herein are jointly and severally liable to pay the aforesaid amount to the respondent herein.
2. The respondent had sanctioned and released a term loan of Rs.3,00,00,000/- to the appellant No.1 on 12.01.1996 for revamping its existing facilities at No.135F, Kolhar Industrial -4- NC: 2024:KHC-K:7510-DB MFA No. 200119 of 2015 Area, Bidar. The appellant No.1 executed and delivered a loan agreement dated 31.05.1996 agreeing and undertaking to repay the loan in installments in the manner indicated therein. The appellant No.2 being the Managing Director of the appellant No.1 had executed a deed dated 31.05.1996 hypothecating the plant and machinery in favour of the respondent. In addition to the loan agreement and deed of hypothecation, the appellant No.2 and Mr. Y. Shiva Linga Prasad had executed a joint deed of personal guarantee on 31.05.1996 assuring the repayment of the loan in the event of the appellant No.1 failing to do so. The appellant No.3 was inducted as a Director of the Board of the appellant No.1 in place of Sri Y. Shiva Linga Prasad, who had retired as a Director of the appellant No.1. On the request of the appellant No.1, the respondent accepted for replacement of the personal guarantee of Mr. Y. Shiva Linga Prasad with that of the appellant No.3. Consequently, an unconditional personal guarantee of appellant No.3 was executed in favour of the respondent agreeing to repay the loan with interest.
2.1 It is claimed that the appellant No.1 failed and neglected to pay installments of not only the principal but also -5- NC: 2024:KHC-K:7510-DB MFA No. 200119 of 2015 the interest to the respondent. Therefore, the respondent was constrained to take over the assets of the appellant No.1 under Section 29 of the SFC Act on 08.02.2000. The assets were sold by the respondent on 10.07.2002 to M/s. Shiva Bio Medicore Pvt. Ltd., Bidar, for a total sale consideration of Rs.30,00,000/- and a sum of Rs.30,17,961/- was realized. However, at the request of the purchaser, the assets were transferred to M/s.Sreevan Pharma Pvt. Ltd. vide letter dated 14.05.2004. The sale proceeds were appropriated against the dues of the appellant No.1.
2.2 Thereafter, the respondent issued a notice dated 01.12.2006 to the appellants demanding a sum of Rs.16,76,85,967/- as on 20.05.2006 along with interest at 22.5% per annum. The notices issued to the appellants were returned unserved. The respondent therefore initiated proceedings under Sections 31(1)(aa) and 32 of the SFC Act on 23.02.2008.
3. The petition was contested by the appellant No.2 herein contending primarily that it was barred by time as proceedings had to be initiated within a period of three years -6- NC: 2024:KHC-K:7510-DB MFA No. 200119 of 2015 from the date the properties of the appellant No.1 herein were sold. He contended that the last tranche of the loan was released on 27.06.1997 and had to be repaid in 24 quarterly installments. Therefore, he contended that the petition filed after eleven years from the date of release of the last installment of loan was barred by time. He also contended that the Unit was taken over under section 29 of the SFC Act on 08.02.2000 by the respondent herein and was sold on 10.07.2002. Hence, the petition filed under Sections 31(1)(aa) and 32 of the SFC Act on 23.02.2008 was barred by time. He also contended that the claim made by the respondent herein against the guarantors, namely, appellant Nos.2 and 3 was also barred by time. He contended that as the respondent herein did not invoke the personal guarantee of appellant Nos.2 and 3 herein within three years from 10.07.2002, but did so only on 01.12.2006, the claim against the appellant Nos.2 and 3 being stale was unenforceable.
4. Based on these contentions, the District Court in Miscellaneous Case No.23/2008 framed the following points for consideration:
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NC: 2024:KHC-K:7510-DB MFA No. 200119 of 2015 "1) Whether the respondents prove that the claim of the petitioner corporation is barred by limitation?
2) Whether the Petitioner Corporation is entitled for determination of sum of `.16,76,85,967/- that respondents are liable to pay the above amount to petitioner corporation?
3) Whether the Petitioner Corporation is entitled for enforcement of liability as against the respondents no.2 and 3 to pay sum of `.16,76,85,967/-?
4) Whether the petitioner corporation is entitled to obtain order to proceed against the personal property of the respondents no.2 and 3 on both movable and immovable properties for realization of the dues of the petitioner corporation as stated above?
5) What order?"
5. The respondent herein examined one of its officers as PW.1 and marked documents - Exs.P1 to P14. The appellant No.2 herein was examined as RW.1 but no documentary evidence was produced on behalf of the appellants herein.
6. The District Court held that the documents marked by the respondent herein such as the loan agreement, the hypothecation deed and the personal guarantee were all admitted by the appellants herein.
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NC: 2024:KHC-K:7510-DB MFA No. 200119 of 2015 6.1 While considering the contention that the claim made by the respondent herein was barred by time, it relied upon the judgment of a Division Bench of this Court in the case of Gulhati and another v. Karnataka State Financial Corporation and others [ILR 2007 KAR 44] which defined the scope of enquiry in a petition under Sections 31 and 32 of the SFC Act and held that a petition under Section 31 of the SFC Act was akin to an application for attachment of property in execution of a decree before judgment and therefore cannot be treated as a plaint and thus, Article 137 of the Limitation Act, 1963 (for short, 'the Act, 1963') is inapplicable.
6.2 It also held that the liability of the surety is coextensive with that of the principal borrower. The District Court further relied upon a judgment of a Division Bench of this Court in M.F.A No.30091/2008 [Sharad V. Sampath v. Karnataka State Financial Corporation] where it was held that when a principal debtor commits default in payment of the amounts due and a demand is made by the creditor for payment of the said amount, as a rule the starting point of limitation against both principal debtor and the guarantor is the same but is subject to the contract between the parties. It was -9- NC: 2024:KHC-K:7510-DB MFA No. 200119 of 2015 held that if the loan was barred by time on the date of demand, it would not revive against the guarantors. However, if the loan was alive when the demand was made, then even if the limitation prescribed for proceeding against the principal debtor is time barred that would not come in the way of enforcing the claim against the guarantor. It was thus held that what has to be seen was the contract between the parties based upon which the period of limitation is to be computed under Article 137 of the Act, 1963.
6.3 The District Court relied upon the deeds of guarantee at Exs.P5, P6 and P7, where it was stipulated as follows:
"The guarantor agree that all the communications including a notice of demand posted under certificate of posting/Registered post acknowledgement due at the above stated or last known address of the guarantors shall be a sufficient service of such communication or notice on him and the Corporation shall be entitled to proceed on the basis that the said communication or notice of demand posted under the certificate of posting/registered post acknowledgment due has been duly received by the guarantors at the end of the normal period after which such communication or notice of demand be ordinarily delivered by the postal authorities."
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NC: 2024:KHC-K:7510-DB MFA No. 200119 of 2015 6.4 The District Court therefore held that when respondent made a demand with the appellant No.1 herein on 01.12.2006 and filed a petition on 25.02.2008, it was not barred by limitation as it was filed within a period of three years under Article 137 of the Act, 1963. The District Court thus allowed the petition and declared that the petitioner/respondent herein is entitled to recover Rs.16,76,85,967/- along with future interest at 22.5% per annum, compounded quarterly from 21.05.2006 till the date of realization, from the appellants herein jointly and severally by proceeding against the personal properties of the appellant Nos.2 and 3.
7. Being aggrieved by the said order, the appellants are before this Court.
8. Learned counsel for the appellants contended that the claim of the respondent was barred by limitation in as much as the first attempt to recover the loan mount was on 08.02.2000 when the Unit was taken over by the respondent under Section 29 of the SFC Act. The second attempt was on 10.07.2002 when the Unit was sold by the respondent and the
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NC: 2024:KHC-K:7510-DB MFA No. 200119 of 2015 sale proceeds were adjusted against the overdue. He contended that the amount outstanding in the loan account was crystallized on that date. Therefore, proceedings for the balance outstanding in the loan account must have been initiated within three years from 10.07.2002. Therefore, he contended it was incumbent upon the respondent to have initiated proceedings under Section 31 of the SFC Act within three years from 10.07.2002. However, the respondent initiated proceedings on 23.02.2008 and hence, was barred by the law of limitation. In support of his contention, he relied upon the judgments of the Hon'ble Apex Court in the case of:
1) Karnataka State Financial Corporation v. Smt. Jaya Menon and Another [AIR 2004 KARNATAKA 370];
2) Maharashtra State Financial Corporation v. Ashok K. Agarwal and Ors. [AIR 2006 SUPREME COURT 1584];
3) Syndicate Bank v. Channaveerappa Beleri and Ors.
[AIR 2006 SUPREME COURT 1874];
4) Deepak Bhandari v. Himachal Pradesh State Industrial Development Corporation Ltd., [AIR 2014 SUPREME COURT 961: 2014 AIR SCW 865]; and
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5) Karnataka State Financial Corporation, Bengaluru v. K.Prabhakar Kamath [AIRONLINE 2021 KAR 3199].
8.1 He also relied upon the judgment of a Division Bench of this Court in Munivenkata Swamy @ M.V. Swamy v. M/s.Cham Lukking Pvt. Ltd., Gujarat [AIRONLINE 2021 KAR 1654], where it was held as follows:
"(x) To put the above succinctly where the lender in exercise of power u/S. 29 of the SFC Act has taken over the possession of the mortgaged property and has realized the auction/sale proceeds thereof, the same have to be appropriated to the repayment of the loan;
thereafter what amount still remains as due, has to be ascertained; from the date of such ascertainment the limitation period of three years as provided under Article 55 has to be reckoned; thus in the fact matrix of this case there is no scope for invoking residuary Article 137 as rightly contended by learned Sr. Adv. Mr.Kannur;..." 8.2 He also referred to the judgment of a Division Bench of this Court in Karnataka State Financial Corporation v. Smt.Vimala Kedia and Others [MFA No.221/2012 : decided on 04.02.2014] where it was held as follows:
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NC: 2024:KHC-K:7510-DB MFA No. 200119 of 2015 "(b) ... According to us the date of selling the primary assets has to be considered as the date of cause of action in the absence of any acknowledgement of debt by the respondents on subsequent dates.
Therefore the appellant could not have proceeded against the principal borrower after 14-3-2005 onwards. Therefore we are of the view that when the appellant cannot proceed against the principal borrower, the appellant could not have filed the petition for recovery of dues from the guarantors beyond 3 years from the date of cause of action. In the circumstances we are of the view that no error is committed by the trial Judge in dismissing the petition."
9. Per contra, the learned counsel for the respondent submitted that the guarantees furnished by the appellant Nos.2 and 3 were continuing guarantees and that they were liable to pay the amount on demand. He submits that the limitation against appellant Nos.2 and 3 commenced only after a demand was made by the respondent and refused by them. He contends that when a guarantor is proceeded against, the only pre-requisite is that the demand against the principal debtor should be a live claim. In support of his contention, he relied upon the judgment of the Hon'ble Apex Court in Syndicate Bank v. Channaveerappa Beleri (supra). In support of his contention that the guarantors were liable till the loan was
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NC: 2024:KHC-K:7510-DB MFA No. 200119 of 2015 repaid by the appellant No.1, he relied upon the judgment of the Hon'ble Apex Court in the case of Sita Ram Gupta v. Punjab National Bank and Others [(2008) 5 Supreme Court Cases 711], where it was held as follows:
"7. ... The agreement of guarantee clearly provides that the guarantee shall be a continuing guarantee and shall not be considered as cancelled or in any way affected by the fact that at any time, the said accounts may show no liability against the borrower or may even show a credit in his favour but shall continue to be a guarantee and remain in operation in respect of all subsequent transactions. This was an agreement entered into by the appellant with the Bank, which is binding on him...."
9.1 He contended that the guarantee offered by the appellant Nos.2 and 3 was a continuing guarantee till the loan was fully repaid by the appellant No.1 and therefore, the claim made against them was not barred by limitation since the claim against the appellant No.1 was still ticking. In this regard, he relied upon the judgment of the Hon'ble Apex Court in the case of Margaret Lalita Samuel v. The Indo Commercial Bank Ltd. [(1979) 2 Supreme Court Cases 396], where it was held as follows:
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"10. ... The guarantee is seen to be a continuing guarantee and the undertaking by the defendant is to pay any amount that may be due by the company at the foot of the general balance of its account or any other account whatever. In the case of such a continuing guarantee, so long as the account is a live account in the sense that it is not settled and there is no refusal on the part of the guarantor to carry out the obligation, we do not see how the period of limitation could be said to have commenced running. Limitation would only run from the date of breach under Article 115 of the schedule to the Limitation Act, 1908. When the Bombay High Court considered the matter in the first instance and held that the suit was not barred by limitation, J.C. Shah, J., speaking for the Court said:
"On the plain words of the letters of guarantee it is clear that the defendant undertook to pay any amount which may be due by the Company at the foot of the general balance of its account or any other account whatever .... We are not concerned in this case with the period of limitation for the amount repayable by the Company to the bank. We are concerned with the period of limitation for enforcing the liability of the defendant under the surety bond .... We hold that the suit to enforce the liability is governed by Article 115 and the cause of action arises when the contract of continuing guarantee is broken, and in the present case we are of the view that so long as the account remained live account, and there was no refusal on the part of defendant to carry out her obligation, the
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NC: 2024:KHC-K:7510-DB MFA No. 200119 of 2015 period of limitation did not commence to run."
11. We agree with the view expressed by Shah, J. The intention and effect of a continuing guarantee such as the one with which we are concerned in this case was considered by the Judicial Committee of the Privy Council in Wright v. New Zealand Farmers Co-operative Association of Canterbury Ltd. [(1939) AC 439 : (1939) 2 All ER 701 (PC)]. The second clause of the guarantee bond in that case was in the following terms:
"This guarantee shall be a continuing guarantee and shall apply to the balance that is now or may at any time hereafter be owing to you by the William Nosworthy and Robert Nosworthy on their current account with you for goods supplied and advances made by you as aforesaid and interest and other charges as aforesaid."
A contention was raised in that case that the liability of the guarantor was barred in respect of each advance made to the Nosworthys on the expiration of six years from the date of advance. The Judicial Committee of the Privy Council expressed the opinion that the matter had to be determined by the true construction of the guarantee. Proceeding to do so, the Judicial Committee observed (at p. 449):
"It is no doubt a guarantee that the Association will be repaid by the Nosworthys advances made and to be made to them by the Association together with interest and charges; but it specifies in column 2 how that guarantee will operate -- namely, that it will apply to (i.e. the guarantor guarantees repayment of) the
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NC: 2024:KHC-K:7510-DB MFA No. 200119 of 2015 balance which at any time thereafter is owing by the Nosworthys to the Association. It is difficult to see how effect can be given to this provision except by holding that the repayment of every debit balance is guaranteed as it is constituted from time to time, during the continuance of the guarantee, by the excess of the total debits over the total credits. If that be the true construction of this document, as their Lordships think it is, the number of years which have expired since any individual debit was incurred is immaterial. The question of limitation could only arise in regard to the time which had elapsed since the balance guaranteed and sued for had been constituted."
Later it was again observed (at p. 450):
"That document, in their opinion, clearly guarantees the repayment of each debit balance as constituted from time to time, during the continuance of the guarantee, by the surplus of the total debits over the total credits, and accordingly at the date of the counter-claim the Association's claim against the plaintiff for payment of the unpaid balance due from the Nosworthys, with interest, was not statute- barred."
12. This was precisely the view which J.C. Shah, J., expressed in the passage already extracted by us, with which we expressed our agreement. We may add here that in Wright's case the Privy Council appeared not to approve of the decision in Parr's Banking Company Ltd. v. Yates [(1898) 2 KB 460(CA)], where it had been observed that the statute would run from the date of each advance. As noticed in Paget's Law of Banking (8th Edition) at pp. 82-83, the authority
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NC: 2024:KHC-K:7510-DB MFA No. 200119 of 2015 of Parr's case has been overruled so far as the guarantor is concerned by the judgment of the Court of Appeal in Bradford old Bank Ltd. v. Sutcliffe [(1918) 2 KB 833 :
119 LT 727 (CA)].
10. We have considered the submissions made by the learned counsel for the appellants and the learned counsel for the respondent.
11. The questions that arise for consideration in this appeal are as follows:
(i) Whether Article 137 or Article 55 of the Limitation Act, 1963 was applicable to the instant proceedings? and
(ii) Whether the right to apply under Section 31(1)(aa) of the SFC Act arose after crystallization of the liability on 10.07.2002 when the secured assets of the appellant No.1 were brought for sale?
12. If the answer to the second question is in the affirmative, then the claim made by the respondent is definitely belated. If the answer is in the negative, then the impugned order passed by the District Court deserves to be upheld by treating the starting point of limitation as 01.12.2006 when a
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NC: 2024:KHC-K:7510-DB MFA No. 200119 of 2015 notice of demand was caused by the respondent on the appellants.
13. The fact of execution of the loan agreement dated 31.05.1996, the personal guarantees of appellant No.2 and Sri Y.Shivalinga Prasad dated 31.05.1996 and the hypothecation agreement dated 31.05.1996 executed by the appellant Nos.1 and 2 is not in dispute. The appellant No.1 had agreed to repay the loan of Rs.3,00,00,000/- in twenty four quarterly installments commencing after a moratorium of 18 months from the date of first withdrawal and every subsequent installment payable on the corresponding day of each and every succeeding quarter till the entire amount of loan was finally repaid. The deed of guarantee dated 31.05.1996 executed by the appellant No.2 and Sri Y. Shiva Linga Prasad, which is marked as Ex.P6 shows that it was irrevocable and was enforceable against them, notwithstanding any of the securities specified under the security documents, should at the time when the proceedings were taken against them, was outstanding or unrealized. It also specified as follows:
"8. The Guarantee herein contained is a continuing one for all amounts lent and advanced and/or
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NC: 2024:KHC-K:7510-DB MFA No. 200119 of 2015 to be lent and advanced by the Corporation the company under the said security documents as also for all interest, costs charges and expenses and all other moneys which may from time to time become due and payable and remain unpaid for the time being to the Corporation under the said security documents and shall remain in force until the said loan shall be paid off in full with interest and all costs, charges and expenses and all other moneys as aforesaid."
14. It also contemplated that the guarantee shall not in any way be affected by reason of any laches on the part of the respondent - Corporation to recover the amount due from the appellant No.1. It further contemplated that the guarantors would be treated as principal debtors jointly with the appellant No.1 - Company and accordingly, they shall not be entitled to and that they had agreed to waive all rights conferred on them by Sections 133, 134, 135, 139 and 141 of the Indian Contract Act, 1872.
15. It is not in dispute that the guarantee of Mr. Y.Shiva Linga Prasad was replaced by the guarantee of appellant No.3 which was accepted by the respondent on 22.06.1998. Later, the appellant No.3 furnished a personal guarantee dated 05.08.1998, thereby guaranteeing to ensure the repayment of
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NC: 2024:KHC-K:7510-DB MFA No. 200119 of 2015 the loan amount borrowed by the appellant No.1. It is not in dispute that in view of the default on the part of the appellant No.1 in paying the installments, the respondent initiated proceedings under Section 29 of the SFC Act and took over the plant and machinery of the appellant No.1 on 08.02.2000. The assets so taken over were brought for sale on 10.07.2002 for a sum of Rs.30,17,961/- and the same was adjusted against outstanding due. The respondent issued a notice of demand dated 01.12.2006 and called upon the appellants to repay a sum of Rs.16,76,85,967/- which comprised of principal of Rs.2,26,98,135/- and overdue interest of Rs.14,49,87,832/- as on 20.05.2006. It is also not in dispute that the Miscellaneous petition under Sections 31(1)(aa) and 32 of the SFC Act was filed on 23.02.2008.
16. Before diving into the discussion on the questions framed for our consideration, it is first appropriate to notice that the instant proceeding initiated by the respondent was for enforcing the liability of a surety. Sub-section (2) of Section 31 of the SFC Act mandates that an application under sub-section (1) of the said Act shall state the nature and extent of the liability of the industrial concern to the Financial Corporation,
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NC: 2024:KHC-K:7510-DB MFA No. 200119 of 2015 the ground on which it is made and such other particulars as may be prescribed. There is no provision contained in the SFC Act prescribing the time within which the respondent is bound to enforce the liability against a surety. As a matter of fact, Section 31 of the SFC Act contemplates 'applying to the District Court for one or more of the reliefs'. When an application is filed claiming the reliefs mentioned in Section 31(1)(aa) of the SFC Act, the District Court shall issue a notice calling upon the surety to show cause on a date to be specified in the notice, why his/her liability should not be enforced. If cause is shown, the District Court shall proceed to investigate the claim of the Financial Corporation in accordance with the provisions contained in the Code of Civil Procedure, 1908 in so far as such provisions may be applied thereto. After such "investigation", the District Court may direct the enforcement of the liability of the surety or reject the claim made in that behalf. Therefore, the nature of proceedings under Section 31(1)(aa) of the SFC Act has to be first determined.
17. The Schedule to the Act, 1963 contains three Divisions. The First Division applies to suits while the Second Division applies to Appeals and the third Division applies to
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NC: 2024:KHC-K:7510-DB MFA No. 200119 of 2015 Applications. Part-II of Third Division applies to 'Other Applications'.
18. Under Section 2 of the Act, 1963 an "applicant" includes (i) a petitioner; (ii) any person from or through whom an applicant derives his right to apply; (iii) any person whose estate is represented by the applicant as executor, administrator or other representative. Section 2 (b) of the Act, 1963 defines an "application" as, includes a petition.
19. The Hon'ble Apex Court in Karnataka State Industrial Investment and Development Corporation Limited v. S.K.K. Kulkarni and Others [(2009) 2 Supreme Court Cases 236], held that "The substantive relief in an application under Section 31 (1) is not a plaint... The proceedings under Section 32 of the 1951 Act are, therefore, nothing but execution proceedings". Therefore it can safely be held that a petition under Section 31 of the SFC Act is not a suit, but is an "Other Application" made to a District Court.
20. Under sub-section (2) of Section 29 of the Act, 1963, whenever under any special or local law, a different period of limitation is prescribed for any suit, appeal or
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NC: 2024:KHC-K:7510-DB MFA No. 200119 of 2015 application, other than the one prescribed by the Schedule, then the provisions of Section 3 shall apply as if, such period were the period prescribed by the Schedule and the provisions contained in Sections 4 to 24 (inclusive) shall apply in so far as, and to the extent to which, they are not expressly excluded by such special or local law.
21. Therefore, the Act, 1963 caters to three situations:
(i) when time is fixed under First Division; (ii) when a different time is fixed; and (iii) when no time is fixed. In so far as a contract of guarantee is concerned, it is trite that the liability of a guarantor is co-extensive with the borrower. The creditor may proceed against the borrower individually or include the guarantor/s to make him/her/them jointly and severally liable.
The creditor may proceed against the guarantor individually based on the contract of guarantee, subject however to the condition, that the cause of action against the borrower is subsisting and alive. In such a situation, the cause of action arises soon after the dues payable by the borrower is crystallised. When the creditor invokes the guarantee against gurantor/s and he/she/them refuses to comply with the indemnity offered under the contract of guarantee, it can he
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NC: 2024:KHC-K:7510-DB MFA No. 200119 of 2015 held that the guarantor/s has/have breached the promise to indemnify the creditor. The limitation in such circumstance is determined by Article 55 of the Act, 1963 which reads as follows:
Description of suit Period of Time from which limitation period begins to run
55. For compensation for Three When the contract is the breach of any years broken or (where contract, express there are successive or implied not herein breaches) when the specially provided breach in respect of for. which the suit is instituted occurs or (where the breach is continuing) when it ceases.
22. When there is no provision in the Act, 1963 prescribing the time within which a claim can be made by an application before the Court, the sublime provision is Article 137 of the Act, 1963 which reads as follows:
Description of suit Period of Time from which limitation period begins to run
137. Any other application Three When the right to for which no period years apply accrues.
of limitation is
provided elsewhere
in this division
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MFA No. 200119 of 2015
23. The Hon'ble Apex Court in Kerala State Electricity Board, Trivandrum v. T.P. Kunhaliumma [(1976) 4 Supreme Court Cases 634] while considering a case of claim for compensation against the Kerala State Electricity Board under Sections 10 and 16(5) of the Indian Telegraph Act, 1885 read with Section 51 of the Indian Electricity Act, 1910 held:
"21. The changed definition of the words "applicant" and "application" contained in Sections 2(a) and 2(b) of the 1963 Limitation Act indicates the object of the Limitation Act to include petitions, original or otherwise, under special laws. The interpretation which was given to Article 181 of the 1908 Limitation Act on the principle of ejusdem generis is not applicable with regard to Article 137 of the 1963 Limitation Act. Article 137 stands in isolation from all other articles in Part I of the third division. This Court in Nityananda Joshi's case has rightly thrown doubt on the two-judge bench decision of this Court in Athani Municipal Council case where this Court construed Article 137 to be referable to applications under the Civil Procedure Code. Article 137 includes petitions within the word "applications". These petitions and applications can be under any special Act as in the present case.
22. The conclusion we reach is that Article 137 of the 1963 Limitation Act will apply to any petition or application filed under any Act to a civil court. With respect we differ from the view taken by the two-judge
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NC: 2024:KHC-K:7510-DB MFA No. 200119 of 2015 bench of this Court in Athani Municipal Council case and hold that Article 137 of the 1963 Limitation Act is not confined to applications contemplated by or under the Code of Civil Procedure. The petition in the present case was to the District Judge as a court. The petition was one contemplated by the Telegraph Act for judicial decision. The petition is an application falling within the scope of Article 137 of the 1963 Limitation Act."
24. A Full Bench of this Court in Karnataka State Financial Corporation v. Smt. Jaya Menon and another [AIR 2004 Karnataka 370] while considering the play of Articles 55 and 137 of the Act, 1963 to a proceeding under Section 31 of the SFC Act held as follows:
"22. In view of the above said decisions of the Supreme Court and the answer given by us to the first question that an application filed to District Judge under S. 31 of the Act is to a Court of ordinary civil jurisdiction and not to District Judge as a persona designata and since no limitation is prescribed under the Act for making any application under S. 31 of the SFC Act it has to be held that the application under S. 31 of the Act is governed by Art. 137 of 1963 Limitation Act. Under the circumstances, there is no merit in the contention of the learned counsel appearing for the Corporation Sri Joshi that in view of the fact that no period of limitation is prescribed by making an application under S. 31, the Court cannot interpret the
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NC: 2024:KHC-K:7510-DB MFA No. 200119 of 2015 section in such a way as to include period of limitation or to infer the period of limitation, as in view of the above said decision of the Supreme Court, and the contention of the learned counsel appearing for the Financial Corporation that in view of S. 46-B of the Financial Corporation Act, Limitation Act would not be applicable is also liable to be rejected in view of the above said two decisions of the Supreme Court which have clearly upheld the applicability of the Limitation Act, 1963 to application filed under Special Act. A reference can also be made of the decision in Collector of Central Excise, Jaipur v. Raghuvar (India) Ltd. ((2005) 5 SCC 299): (AIR 2000 SC 2027), wherein their Lordships observed that generally limitation period for doing or not doing an act has to be enacted and prescribed and cannot be imported by the Courts by implication. In absence of a limitation period of exercise of a power affecting the rights of a citizen the Courts can hold that the same should be exercised within a reasonable period."
25. The Hon'ble Apex Court in Maharashtra State Financial Corporation v. Ashok K. Agarwal & Ors. [AIR 2006 Supreme Court 1584] has held as follows:
"5. ...The application under Sections 31 and 32 of the State Financial Corporation Act is not by way of execution of a decree or order of any civil court.
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NC: 2024:KHC-K:7510-DB MFA No. 200119 of 2015
6. Article 137 of the Limitation Act applies in the facts of the present case. When Article 137 is applied, the application moved by the appellant- Corporation on 2nd January, 1992 for proceeding against the sureties i.e. the respondents herein, was clearly barred by time and the courts below were correct in holding so."
26. The last word on the first question framed by us is the judgment of the Hon'ble Supreme Court in Deepak Bhandari (supra), where it was held as follows:
"21. We thus, hold that when the Corporation takes steps for recovery of the amount by resorting to the provisions of Section 29 of the Act, the limitation period for recovery of the balance amount would start only after adjusting the proceeds from the sale of assets of the industrial concern. As the Corporation would be in a position to know as to whether there is a shortfall or there is excess amount realised, only after the sale of the mortgage/ hypothecated assets. This is clear from the language of sub-Section (1) of Section 29 which makes the position abundantly clear and is quoted below:
"Where any industrial concern, which is under a liability to the Financial Corporation under an agreement, makes any default in repayment of any loan or advance or any installment thereof or in meeting its obligations in relation to any guarantee given by the Corporation or otherwise fails to comply with the terms of its agreement with the Financial Corporation, the
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NC: 2024:KHC-K:7510-DB MFA No. 200119 of 2015 Financial Corporation shall have the right to take over the management or possession or both of the industrial concern, as well as the right to transfer by way of lease or sale and realise the property pledged, mortgaged, hypothecated or assigned to the Financial Corporation."
22. 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 the dues under the main contract. It may be that only 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 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."
27. Therefore, the answer to the first question framed by us is that the limitation prescribed for applications under
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NC: 2024:KHC-K:7510-DB MFA No. 200119 of 2015 Section 31(1)(aa) of the SFC Act is governed by Article 55 of the Act, 1963.
28. Now coming to the question as to when the "right to apply accrued to the respondent", the Hon'ble Apex Court in Deepak Bhandari (supra) has held as follows:
"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 assets were sold."
29. In the case on hand, the mortgaged assets were taken over by the respondent under Section 29 of the SFC Act on 08.02.2000 and thereafter sold on 10.07.2002 and the sale proceeds was adjusted against the outstanding. Therefore, the due payable by the borrower / appellant No.1 was crystallised on 10.07.2002. The respondent had a continuing right to recover the balance from the borrower/guarantors, which must have been done within three years from the date of sale of the mortgaged assets. It is not that the borrower or the guarantors had acknowledged their liability after 10.07.2002, thereby extending the time to apply. Therefore, it can be safely be held that the "right to apply" against the guarantors arose to the
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NC: 2024:KHC-K:7510-DB MFA No. 200119 of 2015 respondent on 10.07.2002. However, the notice demanding the balance was issued to the borrower and guarantors on 01.12.2006 and the application under Section 31(1)(aa) of the SFC Act was filed before the District Court against the guarantors on 23.02.2008 and at that point of time, the liability against the borrower was not alive. Consequently, the proceeding initiated against the guarantors was not maintainable.
30. The contention of the learned counsel for the appellants that appellant Nos.2 and 3 had executed a continuing guarantee and therefore were liable until the due was recovered, is to our mind an incorrect proposition of law. A "continuing guarantee" as defined under Section 129 of the Indian Contract Act, 1872 is different from an ordinary guarantee. A guarantee which extends to a series of transactions is called a "continuing guarantee". Such guarantee makes the guarantor liable for all transactions subsequent to the initial transaction brought about by the principal borrower. In the case on hand, though the guarantee is continuing one, there are no transactions apart from the loan that was sanctioned to the principal borrower on 12.01.1996 which was
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NC: 2024:KHC-K:7510-DB MFA No. 200119 of 2015 released in five installments on 15.06.1996, 04.09.2006 07.12.1996 14.05.1997 and 27.06.1997. There are no transactions apart from the loan transaction which was evidenced by an agreement dated 31.05.1996. Therefore, even if the guarantors had offered to be continuously liable, that cannot be construed as extending the date when the respondent could have "applied for recovery" against the guarantors. Hence the second question is answered accordingly.
31. The reliance placed on the Judgment of the Hon'ble Apex Court in Margaret Lalita Samuel (supra) by the learned counsel for the respondent is misconceived as in that case, the Hon'ble Apex Court was considering the liability of sureties not in respect of a standalone transaction but a series of transactions brought about by the principal borrower and it was held that Article 115 of the Limitation Act, 1908, which corresponds to Article 55 of the Limitation Act, 1963, was applicable.
In view of the above, the appeal is allowed. The impugned order dated 27.09.2014 passed by the Principal
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NC: 2024:KHC-K:7510-DB MFA No. 200119 of 2015 District and Sessions Judge, Bidar, in Miscellaneous Case No.23/2008 is set aside and Miscellaneous Case No.23/2008 filed by the respondent is dismissed.
Sd/-
(R.NATARAJ) JUDGE Sd/-
(RAJESH RAI K) JUDGE SMA List No.: 19 Sl No.: 1