Karnataka High Court
Pramod Mehra vs Karnataka State Financial Corporation on 25 July, 2024
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NC: 2024:KHC:29204-DB
MFA No.2489/2016
IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 25TH DAY OF JULY, 2024
PRESENT
THE HON'BLE MRS. JUSTICE K.S.MUDAGAL
AND
THE HON'BLE MR. JUSTICE VIJAYKUMAR A. PATIL
MISCELLANEOUS FIRST APPEAL NO.2489/2016 (SFC)
BETWEEN:
PRAMOD MEHRA
S/O N.K. MEHRA
MAJOR
Digitally signed NO.2, BEACH CROFT
by RUPA V S.V. SAVARKAR MARG
Location: HIGH BOMBAY - 400 028
COURT OF ALSO R/AT NO. 11/14A
KARNATAKA NANDIDURG ROAD, JAYAMHAL EXTENSION
BANGALORE - 560 046.
...APPELLANT
(BY SRI. MANIAN K.B.S. ADV.,)
AND:
1. KARNATAKA STATE FINANCIAL CORPORATION
NO.25, MAHATAMA GANDHI ROAD
BANGALORE - 560 001
REP. BY ITS DEPUTY GENERAL MANAGER.
2. M/S. VIVEK TEXTILE MILLS PVT. LTD.,
11/14A, NANDIDURG ROAD
JAYAMAHAL EXTENSION , BANGALORE - 560 046.
3. N.K. MEHRA, MAJOR NO.2
NO.2, BEACH CROFT
S.V. SAVARKAR MARG
BOMBAY - 400 028
ALSO R/AT NO. 11/14A
NANDIDURG ROAD
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NC: 2024:KHC:29204-DB
MFA No.2489/2016
JAYAMAHAL EXTENSION
BANGALORE - 560 046.
...RESPONDENTS
(BY SRI. BIPIN HEGDE, ADV., FOR R1
V/O DTD:23.06.2021 NOTICE TO R2 & R3 ARE D/W)
---
THIS M.F.A. IS FILED U/S.32(9) OF THE STATE FINANCIAL
CORPORATIONS ACT, AGAINST THE ORDER DATED:22.02.2016
PASSED ON MISC.NO.944/1994 ON THE FILE OF THE 37TH
ADDITIONAL CITY CIVIL & SESSIONS JUDGE, BENGALURU CITY,
ALLOWING THE PETITION FILED U/S.31(1)(aa) OF SFC ACT.
THIS M.F.A. HAVING BEEN HEARD AND RESERVED ON
04.07.2024, COMING ON FOR PRONOUNCEMENT OF JUDGMENT,
THIS DAY VIJAYKUMAR A. PATIL J., DELIVERED THE FOLLOWING:
CORAM: HON'BLE MRS. JUSTICE K.S.MUDAGAL
AND
HON'BLE MR. JUSTICE VIJAYKUMAR A. PATIL
CAV JUDGMENT
(PER: HON'BLE MR. JUSTICE VIJAYKUMAR A. PATIL) This appeal is filed by the guarantor under Section 32(9) of the State Financial Corporation Act, 1951 (hereinafter referred to as 'the SFC Act') assailing the order dated 22.02.2016 passed in Misc.No.944/1994 on the file of the XXXVII Additional City Civil & Sessions Judge, Bengaluru. By the said order, the petition filed by respondent No.1 under -3- NC: 2024:KHC:29204-DB MFA No.2489/2016 Section 31(1)(aa) of the SFC Act is allowed and the appellant and respondent No.3 are directed to pay jointly and severally a sum of Rs.1,34,26,588.90 (Rupees One Crore Thirty Four Lakhs Twenty Six Thousand Five Hundred Eighty Eight and Ninety paise only) as on 10.06.1994 with future interest at 17% on Rs.1,31,14,360.74 and compound interest at 15.5% on Rs.3,12,228.16 from 10.06.1994 till the date of payment on quarterly rests.
2. The appellant was respondent No.2, respondent No.1 was the petitioner, respondent Nos.2 & 3 were respondent Nos.1 & 3, respectively before the trial Court. For the purpose of convenience, the parties are referred to henceforth according to their ranks before the trial Court.
3. Brief facts leading to filing of this appeal are as follows:-
i. The petitioner-KSFC sanctioned loan of Rs.24,00,000/- in favour of respondent No.1-Company, the same was availed. Again the petitioner sanctioned Rs.5,70,000/- in favour of respondent No.1. Respondent Nos.2 & 3 executed the deed of continuing guarantee on 20.05.1977 -4- NC: 2024:KHC:29204-DB MFA No.2489/2016 and 19.04.1979 respectively undertaking to pay the amounts borrowed by respondent No.1 with interest.
ii. The petitioner-KSFC issued notice of demand to the respondent No.1-Company and marked the copy of the notice to other respondents notifying that the respondent No.1 failed to pay the dues.
iii. Respondent No.1-Company committed default and its secured assets were auctioned. Petitioner-KSFC purchased the entire unit in the auction conducted by the revenue authorities on 15.11.1984 for a sum of Rs.81,00,000/-.
Thereafter, the petitioner-KSFC sold the said unit in favour of M/s.Gemini Dyeing & Printing Mills Pvt. Ltd., for a sum of Rs.1,05,00,000/-.
iv. It is pleaded that respondent No.1-Company was liable to pay certain amounts to KIADB, KSIIDC, KEB, etc. As per pari-passu agreement with KSIIDC and others, the payment of Rs.24,69,000/- made to KIADB & KEB, balance amounts were adjusted towards the loan account of respondent No.1-Company. Even after adjusting that amount there was -5- NC: 2024:KHC:29204-DB MFA No.2489/2016 outstanding debt in the account of respondent No.1 - Company payable to the petitioner-KSFC.
v. It is further pleaded that despite demand, the dues of the petitioner were not cleared, hence the petitioner invoked the deeds of guarantee on 22.09.1992 calling upon respondent Nos.2 & 3 to pay a sum of Rs.1,48,60,000/- with interest at 16.5% from 20.06.1992 till the amount is realised.
vi. The petitioner on paying the dues of KSIIDC as per pari-passu, a sum of Rs.1,34,26,588.90 as on 10.06.1994 is still due from respondent No.1. It is also pleaded that inspite of invoking the deeds of guarantee executed by respondent Nos.2 and 3, they have failed to pay the dues of the petitioner-KSFC. Hence, the petitioner filed the petition under Section 31(1)(aa) of the SFC Act.
4. (i). Respondent Nos.2 & 3 filed written statement denying the claim of the petitioner. They contended that petitioner itself auctioned the unit of respondent and realised the amount in the year 1984, cause of action has arisen in the -6- NC: 2024:KHC:29204-DB MFA No.2489/2016 year 1984 itself, the petition filed after the lapse of 9 years is hopelessly barred by time.
(ii). They contended that in the year 1984 itself amount of Rs.1,05,00,000/- has been realised by the petitioner and they should have initiated the proceedings within 3 years if there were any dues. It was further contended that on 15.11.1984, the unit was auctioned, wherein the petitioner itself purchased it for Rs.81,00,000/- and thereafter unit was resold by the petitioner to M/s. Gemini Dyeing & Printing Mills Pvt. Ltd., for Rs.1,05,00,000/-, however, the petitioner has shown the sale price of Rs.24,69,000/- only which is contrary to the stand taken by them in W.P.No.26601/1998, wherein it was admitted that amount of Rs.38,85,570/- was realised, hence there is no question of further amount being due. It was also pleaded that the amount realised is surplus amount, hence the petitioner is required to refund the surplus amount to the respondents account.
(iii). It was contended that only to avoid payment of surplus amount to the respondents, the petitioner has waited for 10 years to claim alleged accumulated interest and only to -7- NC: 2024:KHC:29204-DB MFA No.2489/2016 harass the respondents. Hence, they sought for dismissal of the petition.
5. The trial Court recorded the evidence of the parties. The petitioner examined PWs-1 and 2 and on its behalf Exs.P-1 to P-9 were marked. The respondents examined RW-1 and for them no documents were marked.
6. The trial Court, on hearing the parties held that the respondents have borrowed loan from the petitioner in the year 1977 and there was a default in payment of loan along with interest, hence the petitioner invoked the guarantees on 22.09.1992 and the petition was filed on 05.11.1994 therefore, the petition is within time and the respondents are liable to pay decreetal amount with interest. Being aggrieved by the impugned order, the respondent No.2 has preferred this appeal.
7. Sri.K.B.S.Manian, learned counsel for the appellant, who was respondent No.2 before the trial Court, submits that the Miscellaneous Petition filed by the petitioner-KSFC was hopelessly barred by law of limitation. The petitioner sent the demand notice to respondent No.1 on 15.04.1981 and on -8- NC: 2024:KHC:29204-DB MFA No.2489/2016 default, the assets were sold on 15.11.1984. However, the notice for invoking guarantee was issued on 22.09.1992, which is after more than 7 years, hence on the ground of limitation the trial Court ought to have dismissed the petition. It is submitted that the respondent No.3 has replied to the notice as per Ex.P-5, wherein at paragraph Nos.9 & 11 he clearly stated that the petitioner's intention was not to help the unit but to grab the unit, hence by notice dated 15.04.1981 the petitioner recalled the loan by directing to pay principal amount with interest within 7 days and a malafide mock auction was conducted on 15.11.1984, petitioner-KSFC itself purchased the said property and later the petitioner sold the same assets to M/s.Gemini Dyeing & Printing Mills Pvt. Ltd., for a sum of Rs.1,05,00,000/-, though the market value of the property was much higher. It is further submitted that the entire auction held by the petitioner-KSFC was clandestine and doubtful with regard to dues. He contends that the limitation to file the petition starts from the date of sale of the assets and not from the date of notice of invoking the personal guarantee, hence the proceedings are barred by law of limitation. Therefore, he seeks to allow the appeal by setting aside the impugned order -9- NC: 2024:KHC:29204-DB MFA No.2489/2016 passed by the trial Court. In support of his contentions, he places reliance on the following judgments of the Hon'ble Supreme Court in the case of Syndicate Bank vs. Channaveerappa Beleri and others1, and Deepak Bhandari vs. Himachal Pradesh State Industrial Development Corporation Limited.2
8. Per contra, Sri.Bipin Hegde, learned counsel for respondent No.1, who is the petitioner before the trial Court, supports the impugned order of the trial Court. He submits that the respondent No.2 is a guarantor to the loan in question and the guarantee executed by the respondent No.2 is a continuing guarantee and the same can be invoked so long as the loan account is alive and only after invoking the guarantee by sending notice dated 22.09.1992, the proceedings were initiated before the trial Court i.e., within 3 years from the date of invoking the guarantee. Hence, the trial Court has rightly held that the proceedings were initiated within the period of limitation. It is submitted that the proceedings under Section 31(1)(aa) of the SFC Act are akin to an application for 1 (2006) 11 SCC 506 2 (2015) 5 SCC 518
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NC: 2024:KHC:29204-DB MFA No.2489/2016 attachment of property in execution of the decree, hence the very limited inquiry is contemplated under Section 32(6) of the SFC Act. Hence, this Court cannot go into other aspects of sale of the property of the company in default. The inquiry should be restricted only with regard to invocation of guarantee. He submits that the limitation has to be reckoned from the date of issuance of notice invoking the personal guarantee and not from the auction sale. Hence, he seeks to dismiss the appeal. In support of his submissions, he placed reliance on the following judgment of Hon'ble Supreme Court in the case of Gujarat State Financial Corporation vs. Natson Manufacturing Co. Pvt. Ltd. and others3 and the judgment of this Court in MFA No.6257/2010 (SFC) in the case of Sri.G.C.Lohia and others vs. KSFC and another disposed of on 25.02.2019.
9. On consideration of the arguments of both side and on examination of the records, the point that arises for determination in this appeal is:
"Whether the impugned order of the Trial Court in allowing the miscellaneous petition 3 (1979) 1 SCC 193
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NC: 2024:KHC:29204-DB MFA No.2489/2016 filed by the petitioner-KSFC under Section 31(1)(aa) of the SFC Act is sustainable in law?"
ANALYSIS
10. The primary contention of respondent No.2 is that the proceedings initiated by the petitioner - KSFC under Section 31(1)(aa) of the SFC Act is time barred and there is no legally recoverable debt from the guarantors. The undisputed facts are that in the year 1977 and 1979, respondent No.1 - Company borrowed loan of Rs.24,00,000/- and Rs.5,70,000/-, respectively. Respondent Nos.2 and 3 executed the deeds of guarantee to the aforesaid loans on 20.05.1977 and 19.04.1979 in addition to the deed of mortgage and hypothecation. The KSFC issued demand notice dated 15.04.1981 demanding a sum of Rs.44,20,675/- from respondent No.1 - Company for its default in payment of installments due to the KSFC. Entire assets of the Company were auctioned on 15.11.1984 and in the said auction, KSFC itself purchased the said assets for a sum of Rs.81,00,000/- and later sold the said assets to M/s. Gemini Dyeing & Printing Mills Pvt. Ltd., for a sum of Rs.1,05,00,000/-. KSFC issued
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NC: 2024:KHC:29204-DB MFA No.2489/2016 demand notice to the guarantors on 22.09.1992 invoking guarantee deeds Exs.P1 and P2 dated 20.05.1977 and 19.04.1979. Respondent No.3 issued Ex.P5 reply to the said demand notice Ex.P3. The KSFC initiated proceedings under Section 31(1)(aa) of the SFC Act to recover the outstanding dues as claimed in the petition.
11. Admittedly, the initiation of proceedings under Section 31(1)(aa) of the SFC Act by the KSFC is nearly after a lapse of nine years from the date of sale of assets of the defaulting company in exercise of the power under Section 29 of the Act. Before considering the issue of limitation, it would be useful to refer to the relevant paragraphs of the judgment of the Hon'ble Supreme Court in the case of Syndicate Bank, supra.
"12. We will examine the meaning of the words "on demand". As noticed above, the High Court was of the view that the words "on demand" in law have a special meaning and when an agreement states that an amount is payable on demand, it implies that it is always payable, that is payable forthwith and a demand is not a condition precedent for the amount to become payable. The meaning attached to the expression "on demand" as "always payable" or "payable forthwith without demand" is not one of universal application. The
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NC: 2024:KHC:29204-DB MFA No.2489/2016 said meaning applies only in certain circumstances. The said meaning is normally applied to promissory notes or bills of exchange payable on demand. We may refer to Articles 21 and 22 in this behalf. Article 21 provides that for money lent under an agreement that it shall be payable on demand, the period of limitation (3 years) begins to run when the loan is made. On the other hand, the very same words "payable on demand" have a different meaning in Article 22 which provides that for money deposited under an agreement that it shall be payable on demand, the period of limitation (3 years) will begin to run when the demand is made. Thus, the words "payable on demand" have been given different meanings when applied with reference to "money lent"
and "money deposited". In the context of Article 21, the meaning and effect of those words is "always payable"
or payable from the moment when the loan is made, whereas in the context of Article 22, the meaning is "payable when actually a demand for payment is made".
13. What then is the meaning of the said words used in the guarantee bonds in question? The guarantee bond states that the guarantors agree to pay and satisfy the Bank "on demand". It specifically provides that the liability to pay interest would arise upon the guarantor only from the date of demand by the Bank for payment. It also provides that the guarantee shall be a continuing guarantee for payment of the ultimate balance to become due to the Bank by the borrower. The terms of guarantee, thus, make it clear that the liability to pay would arise on the guarantors only when a demand is
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NC: 2024:KHC:29204-DB MFA No.2489/2016 made. Article 55 provides that the time will begin to run when the contract is "broken". Even if Article 113 is to be applied, the time begins to run only when the right to sue accrues. In this case, the contract was broken and the right to sue accrued only when a demand for payment was made by the Bank and it was refused by the guarantors. When a demand is made requiring payment within a stipulated period, say 15 days, the breach occurs or right to sue accrues, if payment is not made or is refused within 15 days. If while making the demand for payment, no period is stipulated within which the payment should be made, the breach occurs or right to sue accrues, when the demand is served on the guarantor.
14. We have to, however, enter a caveat here. When the demand is made by the creditor on the guarantor, under a guarantee which requires a demand, as a condition precedent for the liability of the guarantor, such demand should be for payment of a sum which is legally due and recoverable from the principal debtor. If the debt had already become time-barred against the principal debtor, the question of creditor demanding payment thereafter, for the first time, against the guarantor would not arise. When the demand is made against the guarantor, if the claim is a live claim (that is, a claim which is not barred) against the principal debtor, limitation in respect of the guarantor will run from the date of such demand and refusal/non-compliance. Where guarantor becomes
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NC: 2024:KHC:29204-DB MFA No.2489/2016 liable in pursuance of a demand validly made in time, the creditor can sue the guarantor within three years, even if the claim against the principal debtor gets subsequently time-barred. To clarify the above, the following illustration may be useful:
Let us say that a creditor makes some advances to a borrower between 10-4-1991 and 1-6-1991 and the repayment thereof is guaranteed by the guarantor undertaking to pay on demand by the creditor, under a continuing guarantee dated 1-4-1991. Let us further say a demand is made by the creditor against the guarantor for payment on 1-3-1993. Though the limitation against the principal debtor may expire on 1-6-1994, as the demand was made on 1-3-1993 when the claim was "live" against the principal debtor, the limitation as against the guarantor would be 3 years from 1-3-1993. On the other hand, if the creditor does not make a demand at all against the guarantor till 1-6-1994 when the claims against the principal debtor get time-barred, any demand against the guarantor made thereafter say on 15-9-1994 would not be valid or enforceable.
Be that as it may.
15. The respondents have tried to contend that when the operations ceased and the accounts became dormant, the very cessation of operation of accounts should be treated as a refusal to pay by the principal debtor, as also by the guarantors and, therefore, the limitation would begin to run, not when there is a refusal to meet the demand, but when the accounts became
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NC: 2024:KHC:29204-DB MFA No.2489/2016 dormant. By no logical process, we can hold that ceasing of operation of accounts by the borrower for some reason, would amount to a demand by the Bank on the guarantor to pay the amount due in the account or refusal by the principal debtor and guarantor to pay the amount due in the accounts.
16. In view of the above, we hold that the time began to run not when the operations ceased in the accounts in mid-1986, but on the expiry of 15 days from 12-10- 1987 when the demand was made by the Bank and there was refusal to pay by the guarantors. The suit filed within three years therefrom is, therefore, in time.
17. In the view we have taken, it is not necessary to consider the meaning of the words "live account" used and referred to in Samuel [(1979) 2 SCC 396 : AIR 1979 SC 102] . Suffice it to say that the interpretation by the courts below placed on the words "live account", that they refer to an account which is operational and not dormant, may not be sound. This Court itself had indicated that "live account" means an account that is not settled. The use of the term "settled" gives an indication that a "live account" refers to an account where the balance has not been struck by an "account stated" or "account settled". We may in this behalf, refer to the following observations in Bishun Chand v. Girdhari Lal [(1933-34) 61 IA 273 : AIR 1934 PC 147] : (AIR pp. 147-48):
"The essence of an account stated is not the character of the items on one side or the other but the fact that
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NC: 2024:KHC:29204-DB MFA No.2489/2016 there are cross items of account and that the parties mutually agree the several amounts of each and, by treating the items so agreed on the one side as discharging the items on the other side pro tanto, go on to agree that the balance only is payable. Such a transaction is in truth bilateral, and creates a new debt and a new cause of action.
*** There can be account stated although the balance of indebtedness is not throughout in favour of one side. It is irrelevant whether the debt in favour of the final creditor is created at the outset by one large payment or consists of several sums of principal and several sums of interest. Nor is it material whether the only payments made on the other side were simply payments in reduction of such indebtedness or were payments made in respect of other dealings. In any event items must be ascertained and agreed on each side before the balance can be struck and settled."
(IA pp. 282 and 283-84) [Emphasis supplied]
12. The Hon'ble Supreme Court in the case of Deepak Bhandari, referred supra has held as under:
"19. From the reading of the aforesaid judgment, one thing is clear. The Court in Maharashtra State Financial Corpn. case [Maharashtra State Financial Corpn. v. Ashok K. Agarwal, (2006) 9 SCC 617] was concerned with the proceedings under Section 31 of the Act and the issue was as to whether the limitation period would
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NC: 2024:KHC:29204-DB MFA No.2489/2016 be 3 years as per Article 137 of the Limitation Act or it would be 12 years as provided under Article 136 of the Limitation Act. While dealing with that issue the Court, in the process also dealt with the nature of proceedings under Section 31 of the Act, namely, whether this would be in the nature of a suit or execution of decree. The Court answered by holding that for such proceedings Article 137 of the Limitation Act would apply meaning thereby, period of limitation is 3 years. From the reading of this judgment, it becomes abundantly clear that the issue to which would be the starting date for counting the period of limitation, was neither raised nor dealt with. Obviously, therefore, there is no discussion or decision on this aspect in the said judgment.
26. The following discussion in H.P. Financial Corpn. case [H.P. Financial Corpn. v. Pawna, (2015) 5 SCC 617] on this aspect squarely answers the contention of the learned Senior Counsel for the appellant : (SCC pp. 620-21, paras 10-12) "10. Whilst considering the question of limitation the Division Bench has given a very lengthy judgment running into approximately 50 pages. However, they appear to have not noticed the fact that under Clause 7 an indemnity had been given. Therefore, the premise on which the judgment proceeds i.e. that the loan transaction and the mortgage deed are one composite transaction which was inseparable is entirely erroneous. It is settled law that a contract of indemnity and/or guarantee is an independent and separate contract from the main contract. Thus, the question which they required to address themselves, which unfortunately they did not, was when does the right to sue on the indemnity arose. In
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NC: 2024:KHC:29204-DB MFA No.2489/2016 our view, there can be only one answer to this question. The right to sue on the contract of indemnity arose only after the assets were sold off. It is only at that stage that the balance due became ascertained. It is at that stage only that a suit for recovery of the balance could have been filed. Merely because the Corporation acted under Section 29 of the 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 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.
11. In this case, it is an admitted position that the sale took place on 28-1-1984 and 14-3-1985. It is only after this date that the question of right to sue on the indemnity (contained in Clause 7) arose. The suit having been filed on 15-9-1985 was well within limitation. Therefore, it was erroneous to hold that the suit was barred by the law of limitation.
12. Even otherwise, it must be mentioned that the Division Bench was in error in stating that the right to personally recover the balance terminates after the expiry of three years. It must be remembered that the question of recovery of balance will only arise after the remedy in respect of the mortgage deed has first been exhaustive (sic exhausted). If a mortgage suit was to be filed, the period of limitation would be 12 years. Of course, in such a suit, a prayer can also be made for a personal decree on the sale proceeds being insufficient. Even though such prayer may be made, the suit remains a
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NC: 2024:KHC:29204-DB MFA No.2489/2016 mortgage suit. Therefore, the period of limitation in such cases will remain 12 years."
27. 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 mortgaged/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:
"29. Rights of Financial Corporation in case of default.--(1) 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 instalment 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 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."
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
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NC: 2024:KHC:29204-DB MFA No.2489/2016 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 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 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."
[Emphasis supplied]
13. The Hon'ble Supreme Court in the case of Syndicate Bank, referred to supra, while considering the question of limitation for initiation of proceedings based on invocation of guarantee deed, held that the liability to pay would arise on the guarantors when a demand is made by the creditor on the guarantor under a guarantee deed. The demand is a condition precedent for the liability of the guarantor, such demand would be for payment of sum which is legally due and recoverable from the principal debtor and if the
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NC: 2024:KHC:29204-DB MFA No.2489/2016 debt has already become time barred against the principal debtor, the creditor demanding payment thereafter for the first time against the guarantor would not save the limitation. In other words, the demand can be made against the guarantor only if the claim is a live claim against the principal debtor. The limitation runs against the guarantors on such demand and it would run for three years as provided under Article 137 of the Limitation Act.
14. In the instant case, admittedly the demand for repayment of loan was made against the Company and the assets of the Company were sold on 15.11.1984. Hence, the KSFC could have been justified if the demand against the guarantor was within three years from the date of auction of the assets of the property. It was also open for the KSFC to establish before the Trial Court that even after the sale of the assets of the Company, the account of the Company was 'live'. In the instant case, there is nothing to show that the account was live from 15.11.1984 the date of sale of assets of the defaulting Company till invocation of guarantee. Hence, initiation of proceedings by the KSFC under Section 31(1)(aa) of the SFC Act on 22.09.1992 is hopelessly time barred.
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NC: 2024:KHC:29204-DB MFA No.2489/2016 Another contention of the learned counsel for the petitioner - KSFC that the limitation would start from the date of demand is required to be rejected. Such a contention of the KSFC is contrary to the law laid down by the Hon'ble Supreme Court in the cases of Syndicate Bank and Deepak Bhandari, referred to supra and also contrary to the object and spirit of the Limitation Act.
15. The law of limitation being a substantive law of mandatory nature, has to be interpreted in a strict sense keeping in mind its intent and object. The law of limitation is enacted based on the public policy. The material available on record clearly indicates that the assets of the Company were auctioned on 15.11.1984 and the amounts were realized. Before auctioning the property of the Company, the KSFC had issued demand notice on 15.04.1981. If these two events are taken note of, the KSFC ought to have initiated the proceedings under Section 31(1)(aa) of the SFC Act within three years from the date of realization of their part dues by the sale of the assets of the respondent No.1 - Company. There is neither any justification nor any legal evidence placed on record to show that the account of the defaulting company was a live account.
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NC: 2024:KHC:29204-DB MFA No.2489/2016 Hence, they have issued notice on 22.09.1992 for invoking the guarantee deeds dated 20.05.1977 and 19.04.1979 at Exs.P1 and P2.
16. This Court is of the considered view that though the guarantee deeds executed by the respondent Nos.2 and 3 were continuing guarantees to discharge the loan obtained by the respondent No.1 - Company, however, the debt as on 22.09.1992 was not a legally recoverable debt. In other words, the debt was time barred against the principal borrower as well as the guarantors as held by the Hon'ble Supreme Court in the judgments referred to supra.
17. Learned counsel for the petitioner - KSFC heavily placed reliance on the judgment of the co-ordinate Bench of this Court in the case of G.C.Lohia, referred to supra. The said case has no application to the facts of the case on hand. In paragraph 19 of the said judgment, the Division Bench has clearly observed that debt against the principal borrower was not time barred. In the instant case, the debt against the principal borrower as well as the guarantors was time barred. Hence, the judgment relied by the learned counsel for the
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NC: 2024:KHC:29204-DB MFA No.2489/2016 petitioner - KSFC would not come to their aid. He also placed reliance on the judgment of the Hon'ble Supreme Court in the case of Gujarat State Finance Corporation, referred to supra. In the said judgment, the issue was not pertaining to the limitation. Admittedly, Section 31(1)(aa) of the SFC Act was inserted by Act 43 of 1985 w.e.f. 21.08.1985 which is subsequent to the judgment in Gujarat State Finance Corporation, referred to supra. Hence, the said judgment has no application to the facts and circumstances of the present case.
18. Learned counsel for respondent No.2 raised another contention that the assets of the defaulting company were auctioned on 15.11.1984 and the petitioner - KSFC itself purchased the assets at Rs.81,00,000/- and immediately sold the same assets to M/s. Gemini Dyeing & Printing Mills Pvt. Ltd. and realised Rs.1,05,00,000/- and no accounts were placed before the Trial Court with regard to realisation of the amount. Hence, claim by the petitioner - KSFC before the Trial Court itself is not established by cogent and acceptable evidence. The petitioner - KSFC, in order to prove the case, examined two witnesses and got marked 9 documents. The evidence of
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NC: 2024:KHC:29204-DB MFA No.2489/2016 PW-1 is not clear as to why and how the KSFC has purchased the property in public auction when they themselves are the creditors and immediately sold the same to M/s. Gemini Dyeing & Printing Mills Pvt. Ltd. at Rs.1,05,00,000/-. The statement of accounts at Ex.P8 do not clearly indicate with regard to realisation of assets and balance dues. However, this Court does not intend to give a finding with regard to the aforesaid contentions urged by the learned counsel for the respondent No.2 as this Court has already recorded the finding supra that the initiation of the proceedings by the KSFC is time barred.
19. The Trial Court failed to appreciate the fact that the petitioner - KSFC has kept quite from 15.11.1984 i.e. the sale of assets of the defaulting company and only on 22.09.1992 the demand notice / invocation of guarantee deed was issued and on 05.11.1994 petition under Section 31(1)(aa) of the SFC Act was filed which was hopelessly barred by time as per Article 137 of the Limitation Act.
20. For the aforementioned reasons, this Court is of the considered view that the Trial Court has committed grave error in allowing the petition filed by the petitioner - KSFC under
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NC: 2024:KHC:29204-DB MFA No.2489/2016 Section 31(1)(aa) of the SFC Act. Hence, we proceed to pass the following:
ORDER The appeal is allowed. Impugned judgment and order dated 22.02.2016 in Misc.No.944/1994 passed by the XXXVII Additional City Civil & Sessions Judge, Bengaluru, is hereby set aside.
Misc.No.944/1994 is hereby dismissed.
Sd/-
JUDGE Sd/-
JUDGE BSR/RV List No.: 1 Sl No.: 1