SYNDICATE BANK Vs. CHANNAVEERAPPA BELERI
LAWS(SC)-2006-4-99
SUPREME COURT OF INDIA
Decided on April 01,2006

SYNDICATE BANK Appellant
VERSUS
CHANNAVEERAPPA BELERI Respondents


Referred Judgements :-

TRICOMDAS COOVERJI BHOJA V. GOPINATH JIN THAKUR [REFERRED TO]
MARGARET LALITA SAMUEL VS. INDO COMMERCIAL BANK LIMITED [REFERRED TO]
IRON and HARDWARE INDIA CO VS. FIRM SHAMLAL and BROS [REFERRED TO]
BISHUN CHAND VS. GIRDHARI LAL [REFERRED TO]



Cited Judgements :-

MILKFOOD LIMITED VS. UNION BANK OF INDIA [LAWS(DLH)-2007-7-45] [REFERRED TO]
SARDAR GURJINDER SINGH VS. CENTRAL BANK OF INDIA [LAWS(MPH)-2007-1-100] [REFERRED TO]


JUDGEMENT

RAVEENDRAN, J. - (1.)THIS appeal by special leave, is by the plaintiff Bank against the judgment dated 6.3.1997 of the High Court of Karnataka dismissing R.F.A. No. 107 of 1993 filed by it against the judgment and decree dated 29.10.1992 of the Civil Judge, Gadag in O.S. No. 29 of 1990, dismissing its suit on the ground of limitation.
(2.)THE appellant bank filed Original Suit No. 29 of 1990 against respondents 1 to 7 herein for recovery of Rs. 19,77,478/60 (the liability of respondents 2 and 3 being restricted to Rs. 15,75,960 and liability of respondents 6 and 7 being restricted to 17,56,070.60) together with interest @18.5% per annum compounded quarterly from the date of suit till the date of realization. THE plaint averments in brief are as under. 2.1) THE bank had extended credit facilities by way of overdraft, goods loan, and demand loan against supply Bills to a company known as Gadag Forge Fits (India) Pvt. Ltd., ('company' for short). Respondent 1 was its Managing Director and respondents 2 to 7 were its Directors. THE credit facilities were renewed and enhanced from time to time. Respondents 1 to 7 executed the following guarantee bonds in favour of the bank, personally agreeing and undertaking to pay and satisfy the bank on demand all sums which may be due on account of the credit facilities granted to the company subject to the limits mentioned therein :
i) Guarantee bond dated 17.9.1983/ 20.8.1983/29.8.1983 executed by respondents 1, 2 and 3, the limit of liability being Rs. 10.50 lakhs (a single deed executed by respondents 1, 2 and 3 on different dates).

ii) Guarantee bond dated 4.4.1984 executed by respondents 4 and 5, the limit of liability being Rs. 10.50 lakhs.

iii) Guarantee bond dated 10.9.1985 executed by respondents 1, 4, 5, 6 and 7, the limit of liability being Rs. 11.70 lakhs. Thus the limit of total liability undertaken exclusive of interest was Rs.22.20 lakhs in the case of respondents 1, 4 and 5, Rs. 10.50 lakhs in the case of respondents 2 and 3 and Rs. 11.70 lakhs in the case of respondents 6 and 7. THEir liability was joint and several with the company.

2.2) On account of the company allegedly incurring losses and stopping its activities, operations in the accounts of the company with the bank stopped in the middle of 1986. In view of the failure on the part of the company (principal debtor) in paying the amounts due, the bank sent a letter dated 12.10.1987 to the company and its 7 Directors (respondents 1 to 7) informing that the following amounts were outstanding in the accounts of the company as on 30.9.1987 and calling upon the company as principal debtor and respondents 1 to 7 as guarantors to pay the said amounts aggregating to Rs. 13,48,264.79 with interest @ 18.5% per annum from 1.10.87 within 15 days :- JUDGEMENT_579_JT4_2006Html1.htm

2.3) THE company and its Directors (respondents 1 to 7) sent a reply dated 31.10.1987 through counsel stating that the company was passing though a financial crisis and the bank had failed to assist the company by making further advances by way of working capital. THEy further alleged that in view of the failure to advance further funds, the company sustained heavy loss and the company was reserving liberty to file a suit for damages for an amount which would be more than the amount claimed by the bank. THEy also alleged that the bank ought to have given a moratorium on interest to rehabilitate the company. THEy also stated that without prejudice to their rights and contentions, they were willing to discuss the matter with the bank, to arrive at an amicable solution. A formal notice through counsel was sent by the bank on 17.12.1987 demanding payment which elicited a reply dated 30.12.1987 denying the demand.

2.4) THE bank initiated proceedings for winding up against the company on account of its inability to pay its dues, on 11.10.1988 and the High Court ordered winding up of the company on 17.3.1989. THErefore, the suit was filed by the bank on 16.3.1990 only against the guarantors (respondents 1 to 7) for recovery of Rs. 19,77,478.60 (that is, the amount demanded in the notice dated 12.10.1987 with interest up to date of suit). THE bank restricted the claim to Rs.10.50 lakhs with interest at 18.5% P.A. from 17.12.87 to the date of suit against respondents 2 and 3 and to Rs.11.70 lakhs with interest at 18.5% P.A. from 17.12.1987 to date of suit against respondents 6 and 7. THE bank contended that the respondents were jointly and severally liable to pay the amounts due by the company, as aforesaid. It was alleged that the cause of action for the suit against the guarantors (respondents 1 to 7) arose on 17.12.1987 when the demand was made and on 30.12.1987 when they denied the liability by notice. THE statements of account showing the particulars of amount due as on 31.12.1989 were annexed to the plaint.

Respondents 4 and 7 remained ex parte. Respondents 1, 5 and 6 filed a common written statement which was adopted by 2nd respondent. Respondent No. 3 filed a separate written statement. They resisted the suit inter alia on the following grounds:

a) The suit was not maintainable only against the Guarantors and was liable to be rejected for non-joinder of the principal debtor.

b) The bank cannot proceed against the guarantors without first exhausting of remedies against the principal debtor.

c) The guarantee bonds were executed in the years 1983,1984 and 1985. As the suit was not filed within three years from the respective dates of the guarantee bonds, in the absence of renewals or acknowledgment by them, the suit was barred by limitation.

The trial court framed as many as 16 issues. We are concerned with the issue no.4, that is,: 'Is the suit not in time?'. The bank examined its manager and respondents 1, 2 and 3 gave evidence on behalf of the defence. Exhibits P-1 to P-35 and exhibits D-1 to D5 were marked. The trial court by an exhaustive judgment answered all the issues, except the issue regarding limitation in favour of the bank. It held that the bank had established the correctness of the amounts claimed and the rate of interest. It, however, held that the suit was barred by time and consequently, dismissed the suit. The appeal filed by the bank was also dismissed by the High Court. The said dismissal is challenged in this appeal by special leave. The only question that was argued and that arises for consideration in this appeal is whether the decision of the courts below that the suit was barred by limitation is correct in law

(3.)TO appreciate the rival contentions, it is necessary to refer to the relevant statutory provisions, the terms of the guarantee and the decision of this Court relied on by both parties 5 1) Section 126, 128, 129 and 130 of Contract Act, 1872 are extracted below
"Section 126. 'Contract of guarantee,' 'surety,' 'principal-debtor'and 'creditor' A'contract of guarantee' is a contract to perform the promise, or discharge the liability, of a third person in case of his default The person who gives the guarantee is called the 'surety', the person in respect of whose default the guarantee is given is called the 'principal-debtor,' and the person to whom the guarantee is given is called the 'creditor' A guarantee may be either oral or written "

"Section 128. Surety's liability The liability of the surety is co-extensive with that of the principal-debtor, unless it is otherwise provided by the contract"

"Section 129. 'Continuing guarantee' A guarantee which extends to a series of transactions is called a 'continuing guarantee "

"Section 130. Revocation of continuing guarantee A continuing guarantee may at any time be revoked by the surety, as to future transactions by notice to the creditor"

5.2) The relevant Articles in the Schedule to the Limitation Act, 1963 are extracted below Article No. Description of Suit Period of begins Time from which period begins to run 55 For compensation for the begins of any contract, express of implied not herein specially provided for Three years When the contract is broken or (where there are successive breaches) when the breach in respect of which the suit is instituted occurs or (where the breach is continuing) when it ceases 113 Any suit for which no period of limitation is provided elsewhere in this Schedule Three years When the right to sue accrues 19 For money payable for money lent Three years When the loan is made 21 For money lent under an agreement that it shall be payable on demand Three years When the loan is made

5.3) The guarantee bonds have been executed in the standard Form of the bank. The relevant portions from the guarantee bond dated 10.8.1985 (the bonds are similarly worded) are extracted below :

"In consideration of SYNDICATE BANK, hereinafter called the "Syndicate", making, or continuing to make advances or otherwise giving credit or financial accommodation or affording banking facilities for as long as the Syndicate may think fit to M/s. Godrej Forge Fits (I) Pvt. Ltd. Hirakoppa village, Gadag taluk hereafter called the "Borrower".., the undersigned (1) C. M. Beleri, (2) I. M. Beleri, (3) K. M. Chhadda, (4) Mrs. Shailaja Beleri and (5) T. Parthasarathy (hereinafter referred to as the "Guarantor") hereby agrees to pay and satisfy to the Syndicate on demand all and every sum and sums of money which are now or shall at any time be owing to the Syndicate in any of its offices on any account whatsoever,."

"PROVIDED ALWAYS that the total liability ultimately enforceable against the Guarantor under this guarantee shall not exceed the sum of Rs.11,70,0007- together with interest thereon at the rate stipulated by the bank from date of demand by the Syndicate upon the Guarantor for payment."

"NOTWITHSTANDING the borrower's Account or Accounts with the Syndicate may be brought to credit or the credit given to the borrower fully exhausted or exceeded or howsoever the said financial accommodation varied or changed from time to time; notwithstanding any payments from time to time or any settlement of Account, this guarantee shall be a continuing guarantee for payment of the ultimate balance to become due to the Syndicate by the Borrower not exceeding Rs.11,70,000/- as aforesaid."

"NOTWITHSTANDING the discontinuance of this guarantee as to one or more of the guarantors or the death of any one of them, the guarantee is to remain a continuing guarantee, as to the other or others or the representatives and estates of the deceased and where there is more than one guarantor, their liability under these presents being construed as joint and several."

"ANY ACCOUNT SETTLED or stated by or between the Syndicate and the borrower or admitted by him or on his behalf may be adduced by the Syndicate and shall in that case be accepted by the guarantors and each of them and their respective representatives as conclusive evidence that the balance or amount thereby appearing is due from to the Syndicate."
[Emphasis supplied]
5.4) Margaret Lalita Samuel v. Indo Commercial Bank Ltd relied on both sides dealt with the question of limitation with reference to a continuing guarantee. In that case the guarantor sought to avoid liability by contending that every item of an overdraft account was an independent loan and the limitation would start from the date of each loan, and that with reference to such dates, the suit was barred by limitation. While negativing the said contention, this Court observed :

"In our view it is unnecessary for the purposes of the present case, to go into the question of the nature of an overdraft account. The present suit is in substance and truth one to enforce the guarantee bond executed by the defendant. In order to ascertain the nature of the liability of the defendant, it is necessary to refer to the precise terms of the guarantee bond rather than embark into an enquiry as to the nature of an overdraft account. After referring to the terms of the guarantee bond, this Court held :

"The guarantee is seen to be a continuing guarantee and the undertaking by the defendant is to pay any amount that may be due by the company at the foot of the general balance of its account or any other account whatever. In the case of such a continuing guarantee, so long as the account is a live account in the sense that it is not settled and there is no refusal on the part of the guarantor to carry out the obligation, we do not see how the period of limitation could be said to have commenced running. Limitation would only run from the date of breach under Article 115 of the schedule to the Limitation Act, 1908. When the Bombay High Court considered the matter in the first instance and held that the suit was not barred by limitation. J.C. Shah, J, speaking for the Court said : On the plain words of the letters of guarantee it is clear that the defendant undertook to pay any amount which may be due by the company at the foot of the general balance of its account or any other account whatever We are not concerned in this case with the period of limitation for the amount repayable by the company to the bank. We are concerned with the period of limitation for enforcing the liability of the defendant under the surety bond We hold that the suit to enforce the liability is governed by Article 115 and the cause of action arises when the contract of continuing guarantee is broken, and in the present case we are of the view that so long as the account remained live account, and there was no refusal on the part of defendant to carry out her obligation, the period of limitation did not commence to run.
(Emphasis supplied) After expressing agreement with the above view expressed by Shah, J., this Court also agreed with the view expressed by the Privy Council in Wright v. New Zealand Farmers Co-operative Association of Canterbury Ltd., and the Court of Appeal in Bradford Old Bank Ltd. v. Sutcliffe that limitation against a guarantor under a continuing guarantee (which specified that the liability of the guarantor is to pay on demand) would not run from the date of each advance, but only run from the time when the balance (payment of which is guaranteed) was constituted and a demand was made for payment thereof. This Court also referred to a passage from Paget's Law of Banking, with approval, though not extracted. The said passage from Paget reads thus:
"In Bradford Old Bank Ltd. v. Sutcliffe - (1918) 2 KB 833, it was pointed out that the contract of the surety was a collateral, not a direct, one and that in such case demand was necessary to complete a cause of ac- tion and set the statute running Moreover, bank guarantees invariably specify that the liability of the surety is to pay on demand, and in this connection the words are not devoid of meaning or effect, even with reference to this statute, as is the case with a promissory note payable on demand, but make the demand a condition precedent to suing the surety, so that the statute does not begin to run till such demand has been made and not complied with."
(Emphasis supplied)
5.5) Bradford (supra), in turn, relied on Hartland v. Jukes, wherein in the context of a continuing guarantee, it was contended that the period of limitation would begin to run as soon as the principal debtor becomes indebted to the Bank The contention was negatived by stating It was contended before us that the statute began to run from the 31st of December, 1855, by reason of the debt of Pound 179 1 11 then due to the bank, but no balance was then struck, and certainly no claim was made by the bank upon the defendant's testator (the Guarantor) in respect of that debt and we think the mere existence of the debt unaccompanied by any claim from the bank would not have the effect of making the statute run from that date "

The trial court held that the accounts of the company with the bank became dormant and inoperative from 1986 and, therefore, they ceased to be live accounts' It held that a 'live account' was one which was currently being operated at the relevant time by the borrower/customer The trial court further held that in view of such cessation of operation of the accounts, it should be deemed that the company and consequently the guarantors had refused to discharge their obligations, that once there was such refusal by stopping operation of the accounts, the limitation would start to run immediately, that time which begins to run, cannot be stopped, and that the mere fact that the demand was made by the bank much later, that is in the year 1987 will not postpone the commencement of running of the period of limitation The trial court refused to accept the contention that the limitation will start to run only when a notice was issued by the creditor bank, demanding payment of the amount from the guarantors and a refusal thereof by the guarantors The trial court was of the view that if bank's contention was to be accepted then it would mean that the bank, by postponing issue of a notice making a demand, can postpone the commencement of the running of limitation The trial court purported to test the validity of the bank's contention, by reference to a hypothetical situation, where the bank, by not making a demand for, say 20 or 30 years, or postponing the demand indefinitely, could postpone the commencement of limitation indefinitely, and held that such a situation was impermissible It, therefore, held that the period of limitation commenced to run from the middle of 1986 when the operation of the accounts was stopped, and the suit filed in 1990 beyond 3 years from the stoppage of operation of accounts was barred by time



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