2014 (1) TMI 1753 - SC - Indian Laws

Recovery of the balance - Contract of indemnity - Period of limitation - Held 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. 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. 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.

Summary

Issues Involved:
1. Determination of the starting point of limitation for filing a suit for recovery by State Financial Corporations under the State Financial Corporation Act.
2. Interpretation of the legal position and reconciliation of contradictory judgments regarding the limitation period.

Issue-wise Detailed Analysis:

1. Determination of the Starting Point of Limitation for Filing a Suit for Recovery:
The core issue in the appeal is the determination of the starting point of limitation for filing a suit for recovery by the State Financial Corporations constituted under the State Financial Corporation Act. The appellant contended that the limitation period should start from the date of the recall notice (21.5.1990), which would make the suit time-barred as it was filed beyond three years from this date. The Corporation argued that the limitation period should start from the date when the mortgaged/hypothecated assets were sold (31.3.1994), as only then could the balance amount payable by the guarantors be ascertained.

2. Interpretation of Legal Position and Reconciliation of Contradictory Judgments:
The judgment discusses two prior Supreme Court cases with seemingly contradictory positions on the issue. The first case, Maharashtra State Financial Corporation v. Ashok K. Agarwal & Ors., dealt with whether the limitation period for an application under Sections 31 and 32 of the Act was three years as per Article 137 of the Limitation Act or twelve years as per Article 136. The Court held that Article 137 applied, meaning the period of limitation was three years. However, this case did not address the specific issue of when the limitation period starts.

The second case, HP Financial Corporation v. Pawana & Ors., directly addressed the issue of the starting point of limitation. It held that the limitation period starts after the sale of the mortgaged/hypothecated assets when the balance amount due is ascertained. The Court emphasized that the right to sue on the contract of indemnity arises only after the assets are sold and the proceeds are found insufficient to cover the debt.

The judgment reconciles these cases by clarifying that the starting point for the limitation period is the date when the assets are sold, not the date of the recall notice. This is because the Corporation can only ascertain the balance amount due after the sale of the assets.

Conclusion:
The Supreme Court upheld the judgment of the High Court, affirming that the limitation period for filing a suit for recovery by the Corporation starts from the date when the mortgaged/hypothecated assets are sold and the balance amount payable is ascertained. The appeal was dismissed with costs, confirming that the suit filed by the Corporation was within the limitation period.