Karnataka High Court
Sri K V G Rajan vs Karnataka State Financial Corporation on 3 March, 2017
Author: B.Veerappa
Bench: B. Veerappa
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IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 03RD DAY OF MARCH, 2017
BEFORE
THE HON' BLE MR. JUSTICE B. VEERAPPA
MISCELLANEOUS FIRST APPEAL No.1848/2010 (KSFC)
BETWEEN:
SRI K. V. G. RAJAN,
S/O VENKATAKRISHNA IYENGAR,
AGED ABOUT 51 YEARS,
OCCUPATION: LEGAL PRACTITIONER,
R/O GURUDEVA STREET,
JAYACHAMARAJA NAGAR,
SHIMOGA.
... APPELLANT
(BY SRI S. V. PRAKASH, ADVOCATE)
AND:
1. KARNATAKA STATE FINANCIAL
CORPORATION, ESTABLISHED
UNDER THE PROVISIONS OF THE
STATE FINANCIAL CORPORATIONS ACT,
1951 WITH ITS HEAD OFFICE SITUATED
AT NO.1/1, THIMMAIAH ROAD,
NEAR CONTONMENT RAILWAY STATION,
BANGALORE-560 001.
HAVING ITS BRANCH OFFICE
AT SUBBAIAH COMPLEX,
JAIL ROAD, SHIMOGA.
REPRESENTED BY ITS BRANCH MANAGER.
2. SRI H. S. SIDDESHI,
SON OF H. M. SHIVAMURTHY,
AGED ABOUT 46 YEARS.
3. SRI H. S. MAHESH,
SON OF H. M. SHIVAMURTHY,
AGED ABOUT 45 YEARS
2
4. SRI H. S. NANDISH,
S/O H M SHIVAMURTHY
AGED ABOUT 42 YEARS
5. SRI H. S. GIRISH,
S/O H. M. SHIVAMURTHY,
AGED ABOUT 38 YEARS
RESPONDENTS 2 TO 5
ALL ARE RESIDENTS OF
"SHARADA NILAYA"
MISSION COMPOUND,
SHIMOGA.
(R2 TO R5 HAS BEEN DELETED
AS PER THE COURT ORDER
DATED 21.11.2012)
... RESPONDENTS
(BY SRI S. G. PANDIT, ADVOCATE FOR R1:
R2 TO R5 ARE DELETED V/O/D 21.11.2012)
.........
THIS MISCELLANEOUS FIRST APPEAL IS FILED UNDER
SECTION 32(9) OF THE STATE FINANCIAL CORPORATION ACT,
AGAINST THE JUDGMENT AND DECREE DATED:27.11.2009
PASSED IN MISCELLANEOUS NO.2/1999 ON THE FILE OF THE
ADDITIONAL DISTRICT JUDGE, SHIMOGA, ALLOWING THE
PETITION U/S 31(1)(aa) OF KARNATAKA STATE FINANCIAL
CORPORATION ACT, SEEKING FOR AN ORDER TO ENFORCE
THE LIABILITY .
THIS MISCELLANEOUS FIRST APPEAL COMING ON FOR
HEARING THIS DAY, THE COURT DELIVERED THE FOLLOWING:
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JUDGMENT
The appellant who was the guarantor is before this Court challenging the order dated 27.11.2009 made in Misc.No.2/1999 on the file of the Addl. District Judge, Shivamogga, allowing the petition directing the appellant and another who are guarantors to pay a sum of `2,60,738/- with future interest at the rate of 16% per annum compounded quarterly. The appellant has filed the present appeal only insofar as the direction issued against him.
2. The parties are referred to as per their ranking before the Court below.
3. The respondent No.1 herein filed a petition under Section 31(1)(aa) of the State Financial Corporations Act, 1951, before the Addl. District Judge, Shivamogga, contending that respondent Nos.1 to 5 being the Directors of M/s Malnad Fasteners Private Limited Company incorporated and registered under the 4 Companies Act, 1956, approached the petitioner Corporation and got sanctioned and obtained a term of loan of `4,80,000/- on 27.07.1998 for establishing M/s Malnad Fasteners Private Limited Company. The said loan amount was to be repaid to the Corporation with interest at 14.5% per annum. The Company was established for manufacturing bolts, nuts and screws. Respondents 6 and 7 agreed to become the guarantors for the loan borrowed by respondents 1 to 5 for the bridge loan, accepting all the terms and conditions incorporated in the guarantee deed executed on 11.01.1990. The bridge loan was `61,000/- borrowed by respondents 1 to 5. They hypothecated all the assets of their industry concern by executing a hypothecation deed dated 06.04.1989 and 06.01.1990. They also personally guaranteed the repayment of the loan with interest. Petitioner allowed a rebate with interest at 1% per annum for regular repayment of principal and interest and in case of default, respondents agreed to 5 repay the interest at the enhanced rate of 16% per annum for the loan. The loan was repayable in 24 quarterly installments of `20,000/- each. The soft loan of `50,000/- was to be paid in 10 half yearly installments of `5,000/- each from the date of first release and bridge loan of `61,000/- in 16 quarterly installments of `3,800/- for the first 15 quarterly installments and `4,000/- for the last installment. But the respondents failed to repay the loan in terms of the agreement and they became defaulters. Accordingly, under Section 29 of the State Financial Corporations Act, 1951, the petitioner took possession of industrial unit and its assets on 05.02.1992. The machineries were sold and the sale price of `2,85,000/- was adjusted towards the loan amount. Respondents 6 and 7 were due to pay a sum of `2,60,738/- and respondents 1 to 5 were liable to pay `8,47,721/- with future interest, etc. 6
4. The respondent Nos.1, 4, 5 and 6 appeared through their counsel. Respondent Nos.2, 3 and 7 remained absent. Respondent No.6 alone filed objections contending that he has no knowledge of the averments made in paragraphs 2 and 3 of the petition. The allegation that he himself offered as a guarantor to the loan borrowed by respondents 1 to 5 was denied as false. It was contended that his liability was limited to an additional security of `50,000/- only and for that, he had offered security of his industrial site measuring 20 guntas situated at Uragadur village and that land has been taken away by the petitioner. He was not accountable for any of the loan availed by the respondents 1 to 5. For bridge loan of `61,000/- he is jointly liable along with the seventh respondent and his liability, if any, is restricted only against the collateral security offered by him. Therefore, he sought for dismissal of the petition.
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5. Based on the pleadings, the District Court framed the following issues:
(i) Whether the petitioner is entitled to enforce the liability with interest against the respondents as claimed?
(ii) What order?
6. The petitioner examined one witness as P.W.1 and produced documents Exs.P.1 to P.17. Though the respondents did not lead any oral evidence, the respondent No.6 got marked Exs.D.1 and D.2 from P.W.1 in his cross examination.
7. After considering the entire material on record, the District Court recorded a finding that the Corporation is entitled to enforce liability with interest against the respondents, and accordingly, by the impugned order, allowed the petition and held that the petitioner is entitled to enforce the liability of respondents 1 to 5 to repay the due amount of `8,47,721/- with future interest at the rate of 14.5% per annum compounded 8 quarterly and as the liability of respondents 6 and 7 to pay the sum of `2,60,738/- with future interest at the rate of 16% per annum compounded quarterly. Hence, the present appeal is filed by the appellant/ guarantor who was 6th respondent before the District Court only insofar as his liability is concerned.
8. I have heard the learned counsel for the parties to the lis.
9. Sri S.V.Prakash, learned counsel for the appellant contends that the impugned order passed by the Court below is erroneous, contrary to the law and material on record and therefore, is liable to be set-aside. Learned counsel further contended that the very claim made by the respondent Corporation is liable to be dismissed as barred by limitation, as the respondent Corporation sold machineries on 05.02.1992. Therefore, liability of the sureties had crystallized then itself and the petition filed on 18.12.1998 under Section 31(1)(aa) is clearly barred 9 by limitation in view of Article 137 of the Limitation Act. He also contended that, in view of the provisions of Section 3 of the Limitation Act, even in the absence of any objection raised before the court below, it could be raised after the period of limitation if the petition is barred by limitation. In support of his contention he sought to rely upon the judgment of the Hon'ble Supreme Court in the case of Maharashtra State Financial Corporation vs. Ashok K. Agarwal and others reported in AIR 2006 SC 1584 and sought to set-aside the order passed by the Court below.
10. Per contra, Sri S.G.Pandit, learned counsel for the KSFC sought to justify the impugned order and contended that in the petition filed under Section 31(1)(aa) of the State Financial Corporations Act it is specifically stated at para 9 that the plant and machineries which were hypothecated to the Corporation were sold by calling tenders and negotiation 10 for `2,85,000/- and the sale price was adjusted towards the balance of loan due from the respondents on 23.12.1992. The hypothecated immovable properties could not be sold in spite of several steps taken by the petitioner and as no bidders are coming forward to purchase the same, it is not possible to sell them. Therefore, Corporation issued notice to the borrowers as well as guarantors on 25.07.1996 for remaining balance of the loan amount including bridge loan. The appellant and others have not replied. Thereafter, petition was filed on 18.12.1998 under Section 31(1)(aa) of the Act within the period of limitation as contemplated under Article 137 of the Limitation Act. He further contended that even though the appellant was sixth respondent, has not raised objections in the petition filed before the District Court and no issue was framed, still petition filed is within the time prescribed. He further contended that when the appellant has not disputed the fact that he stood as guarantor to the respondents 1 to 11 5 for a bridge loan of `61,000/- as per Ex.P.5, the District Court is justified in passing the impugned order.
11. In support of his case, learned counsel for the first respondent relied upon the Division Bench decision of this Court in the case of Gulhati .vs. KSFC reported in ILR 2007 KAR 44 to the effect that the limitation of three years would start from the date of legal notice issued to the guarantor. He also relied upon the judgment of the Hon'ble Supreme Court in the case of Deepak Bhandari vs. Himachal Pradesh State Industrial Development Corporation Ltd., reported in 2014 AIR SCW 865. The right to claim for balance arose on contract of indemnity only when sale proceeds were found to be insufficient. He also relied on the judgment of the Hon'ble Supreme Court in the case of Syndicate Bank vs. Channaveerappa Beleri and others reported in 2006 AIR SCW 2134 to the effect 12 that the limitation starts when the notice of demand was made.
12. In view of the aforesaid rival contentions urged by learned counsel for both the parties, the points that arise for consideration are:
(i) Whether the Trial Court is justified in passing the impugned order fixing the liability on the appellant as a guarantor insofar as bridge loan amount of `61,000/- with interest, in the facts and circumstances of the present case?
(ii) Whether the application filed by the State Financial Corporation under Section 31(1)(aa) of State Financial Corporations Act is within the period of limitation as contemplated under Article 137 of the Limitation Act?
13. I have given my thoughtful consideration to the arguments advanced by the learned counsel for the parties and perused the entire material on record carefully.
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14. The undisputed facts are that Respondent Nos.1 to 5 borrowed the loan of `4,80,000/- from Karnataka State Financial Corporation ('KSFC' for short) on 27.7.1998 agreeing to repay the same with interest at the rate of 14.5% for establishing a small scale industry in the name and style M/s Malnad Fasteners Private Limited. Respondent Nos.1 to 5 have also availed a soft loan of `50,000/- and bridge loan of `61,000/- agreeing to repay the same with interest at the rate of 3% and 16.5% per annum respectively. It is also not in dispute that Respondent Nos.6 and 7 (i.e., present appellant and another) stood as guarantors to the bridge loan of `61,000/- availed by Respondent Nos.1 to 5. It is the specific case of the KSFC that inspite of repeated demand notices issued to the original borrowers i.e., Respondent Nos.1 to 5, they have failed to repay either the loan of `4,80,000/- or bridge loan of `61,000/-. Thereafter KSFC sold the plant and machineries which 14 were hypothecated to KSFC by calling tenders and negotiating for`2,85,000/- and the sale price was adjusted towards the balance of loan due from the respondents. The hypothecated immovable properties could not be sold inspite of several steps taken by the petitioner as no bidders coming forward to purchase the same. Thereafter KSFC has issued demand notices as per Ex.P6 and Ex.P16 on 25.7.1996 and 8.5.1996 respectively to both borrowers as well as the guarantors including the present appellant to pay the balance amount. They neither gave reply to the said notices nor repaid the balance amount. Therefore KSFC filed the present Miscellaneous Petition under Section 31(1)(aa) of the State Financial Corporations Act, 1951 on 18.12.1998.
15. According to Sri Prakash, learned counsel for the appellant, after issuing statutory notice, the KSFC has sold plants and machinery in the auction on 23.12.1992 15 and the present petition filed on 18.12.1998 and therefore it is clearly barred by limitation. He further contended that even in the absence of objections raised with regard to limitation aspect, in view of the provisions of Section 3 of the Limitation Act, the trial Court ought to have decided the limitation before proceeding with the case. The same has not been done. The same is opposed by Sri S.G. Pandit, learned counsel for the first respondent, contending that the notices of demand were issued to the guarantors on 8.5.1996 and 25.7.1996 as per Ex.P16 and Ex.P6 respectively and the petition filed on 18.12.1998 and therefore it is within the time stipulated under the provisions of Article 137 of the Limitation Act. Since no objections were raised before the trial Court with regard to limitation, the District Court has no occasion to frame the issue or discuss the facts and materials with regard to the limitation.
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16. At this juncture, it is useful to refer Section-3 of the Limitation Act, 1963 which reads as under:
3. Bar of Limitation.-
(1) Subject to the provisions contained in sections 4 to 24 (inclusive) every suit instituted, appeal preferred, and application made after the prescribed period shall be dismissed although limitation has not been set up as a defense.
(2). For the purposes of this Act,
(a) a suit is instituted-
(i) in an ordinary case, when the plaint is presented to the proper officer;
(ii) in the case of a pauper, when his application for leave to sue as a pauper is made; and
(iii) in the case of a claim against a company which is being wound up by the court, when the claimant first sends in his claim to the official liquidator;
(b) any claim by way of a set-off or a counter claim, shall be treated as a separate suit and shall be deemed to have been instituted-
(i) in the case of a set-off, on the same date as the suit in which the set off is pleaded;17
(ii) in the case a counter claim, on the date on which the counter claim is made in court;
(c) an application by notice of motion in a High Court is made when the application is presented to the proper officer of that court;
17. There is no dispute that in view of the provisions of Section 3 of the Limitation Act, even in the absence of objections taken with regard to the limitation by the respondents before the District Court, the duty caste upon the District Judge to decide the limitation aspect having regard to the facts and circumstances of the present case.
18. It is clear from the records that there are no pleadings and evidence with regard to the limitation. In the petition filed before the District Court, the KSFC has specifically stated that the plant and machineries which were hypothecated to the KSFC were sold by calling tenders and negotiating for `2,85,000/- and the sale 18 price was adjusted towards the balance of loan due from the respondents and the hypothecated immovable properties could not be sold inspite of several steps taken by the KSFC. Subsequently whether the hypothecated immovable properties were sold or not is not forthcoming from the records. It is the case of the appellant that as soon as the property was sold, the liability of surety ends there. Therefore the limitation starts from that day. Again there is no evidence with regard to the same. In the absence of any material on record, it is not possible for this Court to rely upon the learned counsel for the parties with regard to the dates in the absence of proper evidence.
19. It is an admitted fact that there is no dispute with regard to the provisions of Article 137 of the Limitation Act with regard to the limitation i.e., three years from the date of admission, in view of the dictum of this Court in the case of MAHARASHTRA STATE 19 FINANCIAL CORPORATION .vs. ASHOK K. AGARWAL reported in AIR 2006 SC 1584. The said judgment has been reconsidered by the Apex Court in the case of DEEPAK BHANDARI .vs. HIMACHAL PRADESH STATE INDUSTRIAL DEVELOPMENT CORPORATION LIMITED reported in 2014 AIR SCW 865, wherein at paragraphs 14,15, 21, 22 and 23 it is held as under:
14. We have already taken note of the stand of the parties on either side. It is apparent from the above that the main issue is as to whether the limitation for filing the suit would start on 21.5.1990, when the notice of recall was issued or the starting point would be 31.3.1994, when the assets of the Company were sold and the balance amount payable (for which suit is filed) was ascertained on that date. We have already pointed out in the beginning that there are two judgments of this Court which have dealt with the aforesaid issue. First judgment is known as Maharashtra State Financial Corporation v.
Ashok K. Agarwal & Ors. 2006 (9) SCC 617 : 20
(AIR 2006 SC 1584 : 2006 AIR SCW 1794). In that case the appellant Maharashtra State Financial Corporation had sanctioned Rs. 5 lakhs in favour of a Company. The Respondents were directors of the said borrower company and stood sureties for the loan. When the company failed to repay the loan, a notice dated 8.3.1983 was issued calling upon the borrower to repay its due. On 25.10.1983, an application under Ss. 31 and 32 of the State Financial Corporations Act, 1951 was filed by the Corporation. On 11.6.1990 the attached properties of the borrower company were put to sale. There was a shortfall in the amount realized and hence notices dated 27.1.1991 were sent to respondent sureties claiming Rs. 16,79,033 together with interest at the rate of 14.5.% p.a. On 2.1.1992 the appellant Corporation filed an application under Section 31(1)(aa) of the Act for recovery of the said balance amount. The respondent took various objections including that of limitation, contending that Article 137 of the Limitation Act was applicable and not Article 136. According to the respondents, 21 Article 137 of the Limitation Act was applicable and as per that provision such an application could be made within a period of three years. Article 137 applies in cases where no period of limitation is specifically prescribed. It was submitted that as no period of limitation is prescribed for an application under Sections 31 and 32 of the Act, Article 137 would apply. The additional District Judge upheld the contention of the respondents and the application of the Corporation was dismissed as barred by limitation. The appellant Corporation filed an appeal against the said order in the High Court of Judicature at Bombay, Bench at Panaji. The appeal was dismissed by the High Court by the impugned order dated 22.7.1998.
The High Court upheld the reasoning of the Additional District Judge. This Court affirmed the order of the High Court holding that Article 137 of the Limitation Act would apply and the suit was to be filed within a period of three years. Contention of the Financial Corporation predicating its case on Article 136 of the Limitation Act on the ground that application 22 under Section 138(31) was in the nature of execution proceedings and, therefore, period of 12 years for execution of the decrees is available to the Financial Corporation, was repelled by the Court. The Court categorically held that Section 31 of the Act only contains a legal fiction and at best refer to the procedure to be followed, but that would not mean that there is a decree or order of a Civil Court, stricto sensu, which is to be executed, in as much as there is no decree or order of the Civil Court being executed.
15. From the reading of the aforesaid judgment, one thing is clear. The Court was concerned with the proceedings under Section 31 of the Act and the issue was as to whether limitation period would 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 23 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 or dealt with. Obviously, therefore, there is no discussion or decision on this aspect in the said judgment.
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:
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"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 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 Corporation 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 25 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.
23. 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.
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20. Further, the Hon'ble Supreme Court in the case of SYNDICATE BANK .vs. CHANNAVEERAPPA BELERI reported in AIR 2006 SCW 2134 has held as under:
9. A guarantor's liability depends upon the terms of his contract. A 'continuing guarantee' is different from an ordinary guarantee. There is also a difference between a guarantee which stipulates that the guarantor is liable to pay only on a demand by the creditor, and a guarantee which does not contain such a condition. Further, depending on the terms of guarantee, the liability of a guarantor may be limited to a particular sum, instead of the liability being to the same extent as that of the principal debtor. The liability to pay may arise, on the principal debtor and guarantor, at the same time or at different points of time.
A claim may be even time-barred against the principal debtor, but still enforceable against the guarantor. The parties may agree that the liability of a guarantor shall arise at a later point of time than that of the principal debtor. We have referred to these aspects only to underline the fact that the extent of liability 27 under a guarantee as also the question as to when the liability of a guarantor will arise, would depend purely on the terms of the contract.
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 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 28 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 meaning 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'.
21. In view of the above, without adverting to the merits and demerits of the case, this Court is of the opinion that the matter requires reconsideration by the Court below with regard to point No.2 raised in the present appeal pertaining to limitation. In view of the same, there is no need to answer point No.1. 29
22. In view of the aforesaid reasons, the impugned order dated 27.11.2009 made in Miscellaneous No.2/1999 on the file of the Additional District Judge, Shivamogga, is set aside only insofar as the liability of the appellant is concerned with regard to the bridge loan of `61,000/- including the interest. The matter is remanded to the Additional District Judge, Shivamogga, for reconsideration with regard point No.2 raised in the present appeal with regard to the limitation after giving opportunity to both the appellant herein and the KSFC to adduce or produce material documents. The District Court shall reconsider and pass orders only insofar as the appellant is concerned with regard to bridge loan since he stood guarantee to the said loan, in accordance with law.
Appeal is allowed in part accordingly.
Sd/-
JUDGE kcm/gss