Karnataka High Court
Pramod Mehra vs Karnataka State Financial Corporation on 25 July, 2024
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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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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
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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
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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
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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
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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
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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
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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
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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
(2006) 11 SCC 506
(2015) 5 SCC 518
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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
(1979) 1 SCC 193
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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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
