2006 (4) TMI 540 - SC - Indian Laws

Suit barred by limitation - demand made by the creditor against the guarantor for payment - continuing guarantees - Date of default - - breach of guarantee - HELD THAT - 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 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. 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 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. 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 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. Thus, 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. 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 1978 (9) TMI 180 - SUPREME COURT . 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 . Having regard to the fact that the period of limitation is 3 years both under Article 55 and Article 113, and having regard to the binding decision in Samuel (supra), we do not propose to examine the controversy as to whether the appropriate Article is 55 or 113. Suffice it to note that even if the Article applicable is Article 113, the Bank's suit is in time. In view of our finding that the suit is not barred by time, we allow this appeal and, consequently set aside the judgment and decree of the High Court and that of the trial court. Consequently, the suit is decreed, as prayed for, with costs.

Summary

Issues Involved:
1. Whether the suit was barred by limitation.
2. Whether the suit was maintainable against the guarantors without joining the principal debtor.
3. Whether the Bank could proceed against the guarantors without exhausting remedies against the principal debtor.

Detailed Analysis:

Issue 1: Whether the suit was barred by limitation
The primary issue was whether the suit filed by the Bank was barred by limitation. The Bank argued that the limitation period began when the demand was made on the guarantors and they refused to pay, not when the company ceased operations. The trial court and the High Court held that the suit was barred by limitation, interpreting that the limitation period began when the accounts became dormant in mid-1986. However, the Supreme Court clarified that the limitation period for a continuing guarantee which requires a demand starts when the demand is made and refused. The Supreme Court referred to Section 126, 128, 129, and 130 of the Contract Act, 1872, and Articles 55 and 113 of the Limitation Act, 1963. It emphasized that the liability of the guarantors under the guarantee bonds arose only when a demand was made by the Bank and refused by the guarantors. The Court concluded that the suit filed within three years from the demand was in time.

Issue 2: Whether the suit was maintainable against the guarantors without joining the principal debtor
The respondents argued that the suit was not maintainable against the guarantors alone and should be rejected for non-joinder of the principal debtor. The Supreme Court did not specifically address this issue in detail, as it primarily focused on the limitation aspect. However, it implicitly upheld the maintainability of the suit against the guarantors by decreeing the suit in favor of the Bank.

Issue 3: Whether the Bank could proceed against the guarantors without exhausting remedies against the principal debtor
The respondents contended that the Bank could not proceed against the guarantors without first exhausting remedies against the principal debtor. The Supreme Court, by decreeing the suit in favor of the Bank, implicitly rejected this contention. The liability of the guarantors was established as co-extensive with that of the principal debtor, allowing the Bank to proceed against the guarantors directly.

Conclusion:
The Supreme Court allowed the appeal, setting aside the judgments of the High Court and the trial court. It held that the suit was not barred by limitation, as the time began to run from the date of demand and refusal, not from when the accounts became dormant. Consequently, the suit was decreed in favor of the Bank, with costs.