The Supreme Court has in this case dealt with the issue of how the ‘limitation period’ in a contract of indemnity and guarantee is to be computed.
FACTS
In this case, a company (“Borrower”) had defaulted in repayment of a loan availed from the Himachal Pradesh State Industrial Development Corporation Limited (“Respondent”) and accordingly the Respondent issued a recall notice (“Recall Notice”) to the Borrower directing it to repay the outstanding amounts due to the Respondent. Upon failure of the Borrower to repay such amounts, the Respondent sold the properties furnished by the Borrower to secure such loan and set-off a part of its outstandings against the sale proceeds thereof.
The Respondent then called upon the promoter of the Borrower (“Appellant”) being a guarantor to the said loan to repay the balance amounts due to the Respondent. Since the Appellant failed to repay such amount, the Respondent filed a suit for recovery against the appellant which was decreed in favour of the Respondent by a single judge of the High Court of Himachal Pradesh (“High Court”). Being aggrieved by the same, the Appellant filed an appeal before the division bench of the High Court which was dismissed. The Appellant then filed an appeal before the Supreme Court of India (“Supreme Court”) on the ground that the said recovery suit was time barred under the Limitation Act, 1963 (“Limitation Act”).
ISSUE
The main issue before the Supreme Court was whether the period of limitation in a contract for guarantee would commence from the date (a) of Recall Notice; or (b) the Respondent called the Guarantor to re-pay the balance amounts due to the Respondent after setting off the proceeds from sale of the properties furnished to the Respondent as security, as aforesaid.
ARGUMENTS ADVANCED
The Appellant contended that since the suit was filed after 4 (Four) years from the date of the Recall Notice, it was time barred under the Limitation Act. The Respondent, on the other hand, argued that the period of limitation would commence not from the date of the Recall Notice but from the date the Respondent determined the balance liability of the Borrower to be repaid by the Appellant as the guarantor.
JUDGMENT
The Supreme Court held that when the Respondent takes steps for recovery of the amount, the limitation period for recovery of the balance amount would start only after adjusting the proceeds from the sale of assets of the Borrower as only then would the Respondent be in a position to determine the Appellant’s final liability as the guarantor. It was further stated that, the right to sue under a contract of indemnity or guarantee would principally arise when the indemnifier or the guarantor fails to pay the money claimed from it and not from the time when the Recall Notice is served.
Accordingly, the suit filed by the Respondents for recovery of money from the Appellant being the guarantor was held to be within the period of limitation.
[REPORTABLE]
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO.1019/ 2014
[Arising out of Special Leave Petition (Civil) No. 30825 of 2010]
Deepak Bhandari …..........Appellant(s)
Versus
Himachal Pradesh State Industrial
Development Corporation Limited ….........Respondent(s)
Citation:(2015)5SCC518
2.Present appeal raises an interesting question of law pertaining to the starting point
of limitation for filing the suit for recovery by the State Financial Corporations
constituted under the State Financial Corporation Act. We make it clear at the
outset itself that we are not treading a virgin path. There are two judgments of this
Court touching upon this very issue. At the same time it is also necessary to point
out that it has become imperative to clarify the legal position contained in two
judgments and to reconcile the ratio thereof as well because of the reason that they
are contradictory in nature. It necessitates wider discussion in order to avoid any
confusion in the manner such cases are to be dealt with.
3. With the aforesaid preliminary introduction to the subject matter of the
present appeal, we now proceed to take note of the facts which have led to the
question of limitation that confronts us.
4. Respondent No. 1 viz. Himachal Pradesh State Industrial Development
Corporation Limited (hereinafter to be referred as 'the Corporation') is a financial
corporation under the State Development Corporation Act (hereinafter to be
referred as the Act). It is a statutory body constituted for the purpose of carrying out
the objectives of the Act. It is a company incorporated under the Companies Act,
1956, engaged in the business of providing financial aid to companies for setting up
and commencing operations. Respondent No. 2 (hereinafter to be referred as the
'Company') is the industrial concern which defaulted in repayment of the loan
disbursed by the Respondent No. 1. It is now under liquidation. Respondent No. 3
is the official liquidator, who was appointed by the High Court of Delhi for the
purposes of winding up the Company. Respondent Nos. 4 & 5 were the Directors of
the Company at the time of entering into the loan agreements with the Corporation.
5. The appellant who was also a director of the Company, was a Guarantor
for the payment of loans taken by the Company vide loan agreements executed
between Corporation and the Company. The following loan agreements were
executed along with the corresponding amounts and guarantees:
Loan Agreement Date Amount Deed of Guarantee Date
5.6.1985 20.67 lacs 5.6.1985
7.4.1986 8.73 lacs 7.4.1986
24.11.1986 15.38 lacs 24.11.1986
28.7.1987 7.76 lacs
Total 52.54 lacs
6.The Company defaulted on the repayments of the loan amount disbursed to it by
the Corporation. The Corporation issued a Recall Notice bearing No. PAC 84/ 90/
6705 dated 21.5.1990 recalling an amount of Rs. 77,35,607/-(Rupees seventy seven
lakhs thirty five thousand six hundred and seven only) plus further interest to be
accrued from 10.9.1990.
7.The Company failed to make the repayment and accordingly the Corporation,
proceeded under Section 29 of the State Financial Corporations Act, 1951 to take
over the mortgaged/ hypothecated assets of the Company. The assets of the
Company were taken over by the Corporation on 10.7.1992. The mortgaged/
hypothecated assets of the Company were sold by the Corporation on 31.3.1994 for
a sum of Rs. 96,00,000/- (Rupees Ninety Six Lakhs only) by inviting offers by
means of publishing advertisements in the leading newspapers.
8.Since the company was also indebted to HP Financial Corporation, amount
realised from the sale of the company's assets was apportioned between these two
secured creditors. After adjusting the sale proceeds against the outstanding debts of
the Company, in proportion to the term loans advanced by the Corporation and
Himachal Pradesh Financial Corporation; a sum of Rs. 68,96,564/- (Rupees Sixty
Eight Lakhs Ninety Six Thousand Five Hundred and Sixty Four only) still
remained outstanding against the Company.
9.The Corporation preferred a Civil Suit No. 85 of 1995 on 26.12.1994 titled as
Himachal Pradesh State Industrial Development Corporation Limited v. M/s
RKB Herbals Pvt. Ltd and Ors., for recovery of sum of Rs. 30,60,732/- (Rupees
Thirty Lakhs Sixty Thousand Seven Hundred and Thirty Two only). The sum above
mentioned was calculated as follows by the Corporation:
4Page 5
C.A. No. 1019 of 2014 @ SLP(C)No. 30825 of 2010
Recoverable amount on 31.5.1994
Principal Amount (Rs./-) 5,16,582
Interest 63,79,982
Total 68,96,564
Less Penal Interest 38,35,832
Net Amount for which suit was filed 30,60,732
10. The Civil Suit No. 85 of 1995 was decreed in favour of the Corporation
vide judgment and decree dated 6.6.2008 passed by the Single Judge of the High
Court of Himachal Pradesh, granting a decree of Rs. 30,60,732/- (Rupees Thirty
Lakhs Sixty Thousand Seven Hundred and Thirty Two only) along with interest at
the rate of 12% from the date of filing of suit till the realization of the said amount.
11.Before the learned Single Judge of the High Court a plea was taken by the
defendants, including the appellant herein, that the suit was time barred as it was
filed beyond the period of 3 years from the date of commencement of limitation
period. To appreciate this plea we recapitulate some relevant dates:
Date Event
21.5.1990 Recall notice sent by the Corporation, recalling
the outstanding amount.
10.7.1992 Mortgage/ hypothecated assets of the Company
taken over by the Corporation.
31.3.1994 The Mortgage/ hypothecated assets of the
Company sold by the Corporation.
21.5.1994 Notice issued to all the three Directors of the
Company for payment of outstanding amount.
26.12.1994 Suit for recovery of the balance outstanding
filed by the Corporation.
12. As per the defendants cause of action for filing the recovery suit arose on
21.5.1990 when recall notice was issued by the Corporation to the Company and
the Guarantors. Therefore, the suit was to be filed within a period of 3 years from
the said date and calculated in this manner, last date for filing the suit was
20.5.1993. It was, thus, pleaded that the suit filed on 26.12.1994 was beyond the
period of 3 years from 21.5.1990 and, therefore, the same was time barred. The
Corporation, on the other hand, contended that action for selling the mortgage/
hypothecated properties of the Company was taken under the provisions of Section
29 of the Act and the sale of these assets were fructified on 21.3.1994. It is on the
realization of sale proceeds only, the balance amount payable by the guarantors
could be ascertained. Therefore, the starting point for counting the limitation period
is 31.3.1994 and the suit filed by the Corporation on 26.12.1996 was well within
the period of limitation.
13. The learned Single Judge deciding in favour of the Corporation, held the
suit to be well within limitation. The suit was decreed against all the defendants
including the appellant herein, holding them to be jointly and severely liable to pay
the decretal amount. The appellant herein preferred an intra court appeal against the
judgment and decree dated 6.6.2008. The Division Bench has also negatived the
contention of the appellant affirming the finding of the single Judge and holding the
suit to be within limitation.
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. 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 realised 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, 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 under Section 138 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 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.
16. We would like to refer to the law laid down by this Court in Oriental
Insurance Co. Ltd. vs. Smt. Raj Kumari and Ors.; 2007 (13) SCALE 113. In the
said case, well known proposition, namely, it is ratio of a case which is applicable
and not what logically flows therefrom is enunciated in a lucid manner. We would
like to quote the following observations therefrom:-
10. Reliance on the decision without looking into the factual
background of the case before it is clearly impermissible. A decision
is a precedent on its own facts. Each case presents its own features.
It is not everything said by a Judge while giving a judgment that
constitutes a precedent. The only thing in a Judge's decision binding
a party is the principle upon which the case is decided and for this
reason it is important to analyse a decision and isolate from it the
ratio decidendi. According to the well-settled theory of precedents,
every decision contains three basic postulates - (i) findings of
material facts, direct and inferential. An inferential finding of facts
is the inference which the Judge draws from the direct," or
perceptible facts; (ii) statements of the principles of law applicable
to the legal problems disclosed by the facts; and (iii) judgment
based on the combined effect of the above. A decision is an,
authority for what it actually decides. What is of the essence in a
decision is its ratio and not every observation found therein nor
what logically flows from the various observations made in the
judgment. The enunciation of the reason or principle on which a
question before a Court has been decided is alone binding as a
precedent.(See: State of Orissa v. Sudhansu Sekhar Misra and
Ors . (1970) ILLJ 662 SC and Union of India and Ors.v.
Dhanwanti Devi and Ors. (1996) 6 SCC 44. A case is a precedent
and binding for what it explicitly decides and no more. The words
used by Judges in their judgments are not to be read as if they are
words in Act of Parliament. In Quinn v. Leathern (1901) AC 495
(H.L.), Earl of Halsbury LC observed that every judgment must be
read as applicable to the particular facts proved or assumed to be
proved, since the generality of the expressions which are found
there are not intended to be exposition of the whole law but
governed and qualified by the particular facts of the case in which
such expressions are found and a case is only an authority for what
it actually decides.
11.Courts should not place reliance on decisions without discussing
as to how the factual situation fits in with the fact situation of the
decision on which reliance is placed. Observations of Courts are
neither to be read as Euclid's theorems nor as provisions of the
statute and that too taken out of their context. These observations
must be read in the context in which they appear to have been
stated. Judgments of Courts are not to be construed as statutes. To
interpret words, phrases and provisions of a statute, it may become
necessary for judges to embark into lengthy discussions but the
discussion is meant to explain and not to define. Judges interpret
statutes, they do not interpret judgments. They interpret words of
statutes; their words are not to be interpreted as statutes. In London
Graving Dock Co. Ltd.v. Horton 1951 AC 737 Lord Mac Dermot
observed:
The matter cannot, of course, be settled merely by treating the
ipsissima vertra of Willes, J as though they were part of an Act of
Parliament and applying the rules of interpretation appropriate
thereto. This is not to detract from the great weight to be given to
the language actually used by that most distinguished judge.
The aforesaid principle was reiterated in Government of Karnataka and
Ors. vs. Smt. Gowramma and Ors. 2007 (14) SCALE 613, wherein, the
Court observed as under:-
“10. Courts should not place reliance on decisions without
discussing as to how the factual situation fits in with the fact
situation of the decision on which reliance is placed. Observations
of Courts are neither to be read as Euclid's theorems nor as
provisions of the statute and that too taken out of their context.
These observations must be read in the context in which they appear
to have been stated. Judgments of Courts are not to be construed as
statutes. To interpret words, phrases and provisions of a statute, it
may become necessary for judges to embark into lengthy
discussions but the discussion is meant to explain and not to define.
Judges interpret statutes, they do not interpret judgments. They
interpret words of statutes; their words are not to be interpreted as
statutes. In London Graving Dock Co. Ltd. vs. Horton 1951 AC
737, Lord Mac Dermot observed:
The matter cannot, of course, be settled merely by treating the
ipsissima vertra of Willes, J as though they were part of an Act of
Parliament and applying the rules of interpretation appropriate
thereto. This is not to detract from the great weight to be given to
the language actually used by that most distinguished judge.”
17. Other case of this Court, which is relied upon by the High Court as well, is
the decision dated 18.12.2003 in C.A. No. 1971 of 1998 titled as HP Financial
Corporation v. Pawana & Ors. In that case recall notice was given to the
defaulting Company on 4.1.1977; possession of mortgage/ hypothecated assets of
the Company was taken over on 25.10.1982 in exercise of powers under Section 29
of the Act; these assets were sold on 29.3.1984 and 14.3.1985; notice for payment
of balance amount was issued to the guarantors on 22.5.1985 and suit for recovery
of the balance amount was filed on 15.9.1985.
18. A single Judge of the Himachal Pradesh High Court held that the period of
limitation for such a suit started after the sale and when balance was found due and,
therefore, suit was within the period of limitation. However, when the suit reached
hearing before another Judge of the High Court he disagreed with the earlier view
and referred the matter to a larger Bench. The Division Bench of the High Court
answered the question by holding that the suit for balance amount was filed as a
result of the non- payment of debt by the principle debtor which was the date when
cause of action arose. Therefore, the suit should have been filed within 3 years
from the date of recall notice. The suit was, thus, dismissed as time barred. This
Court reversed the judgment of the High Court. While doing so, it referred to
clause 7 of the mortgage deed which was to the following effect:
“Without prejudice to the above rights and powers conferred on the
Corporation by these presents and by Section 29 and 30 of the State
Financial Corporations Act, 1951, and as amended in 1956 and 1972
and the special remedies available to the Corporation under the said
Act, it is hereby further agreed and declared that if the partners of
the industrial concern fail to pay the said principal sum with interest
and other moneys due from him under these rpesents, to the
Corporation in the manner agreed, the Corporation shall be entitled
to realise tis dues by sale of the mortgaged properties, the said
fixtures and fittings and other assets, and if the sale proceeds thereof
are insufficient to satisfy the dues of the Corporation, to recover the
balance from the partners of the industrial concern and the other
properties owned by them though not included in this security.”
(emphasis supplied).
19. On the basis of the aforesaid clause the Court found fault with the approach
of the High Court in as much as clause 7 specifically provided that the Corporation
could filed recovery proceedings against the partners of the Industrial concern if the
sale proceeds of the assets of the industrial concern were insufficient to satisfy the
dues of the Corporation.
20. Mr. Dhruv Mehta, learned Senior Counsel appearing for the appellant tried
to distinguish this judgment by vehemently arguing that the aforesaid case was
based on interpretation of clause 7 of the mortgage deed which was executed
between the parties and in the present case such a clause is conspicuously absent.
Had the judgment of this Court rested solely on clause 7 of the mortgage deed, the
aforesaid argument of Mr. Dhruv Mehta would have been of some credence.
However, we find that the Court also specifically discussed the issue as to when
right to sue on the indemnity would arise and specific answer given to this question
was that it would be only after the assets were sold of. The judgment was also
rested on another pertinent aspect viz. since the mortgage deed was executed, the
period of limitation would be 12 years if a mortgage suit was to be filed. Following
discussion in the said judgment on this aspect squarely answers the contention of
the learned Senior Counsel for the appellant:
“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 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 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 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.
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.
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. 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 mortgage suit. Therefore, the period of limitation in such cases
will remain 12 years”. [Emphasis Supplied]
21. We thus, hold that when the Corporation takes steps for recovery of the
amount by resorting to the provisions of Section 29 of the Act, the limitation period
for recovery of the balance amount would start only after adjusting the proceeds
from the sale of assets of the industrial concern. As the Corporation would be in a
position to know as to whether there is a shortfall or there is excess amount
realised, only after the sale of the mortgage/ hypothecated assets. This is clear from
the language of sub-Section (1) of Section 29 which makes the position abundantly
clear and is quoted below:
“Where nay 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 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.
24. The up-shot of the aforesaid discussion is to hold that the present appeal is
bereft of any merits. Upholding the judgment of the High Court, we dismiss the
instant appeal, with costs.
…...........................................J.
[K.S. RADHAKRISHNAN]
…..........................................J.
[A.K. SIKRI]
New Delhi.
29th January , 2014
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