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TMI Blog2006 (4) TMI 540X X X X Extracts X X X X X X X X Extracts X X X X ..... upply 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 & 5, the limit of liability being Rs. 10.50 lakhs. iii) Guarantee bond dated 10.9.1985 executed by Respondents 1, 4, 5, 6 & 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 & 5, Rs. 10.50 lakhs in the case of Respondents 2 & 3 and Rs. 11.70 lakhs in the case of Resondents 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Limitation Time from which period begmsto run 55 For compensation for The breach of any contract,express or 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty 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 vs. INDO COMMERCIAL BANK LTD (AIR 1979 SC 102) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 action 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 (1863) 1 H&C 667, 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 beco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y time. 7. The High Court affirmed the said finding. It held that the words 'on demand' had a specific connotation in legal parlance; and that when an amount is payable on demand, it means 'always payable' and a 'demand' is not a condition precedent for the amount to be paid. The High Court held that when the guarantee stated that the guarantors were liable to pay on demand by the Bank, it meant that the amount was payable from the moment of execution of the guarantee and, consequently, no actual demand is necessary to make the amount due under the guarantees. It was held that the money became payable under the guarantee bond as soon as the guarantee was executed. The High Court also held that when the accounts became dormant in the middle of 1986 by non-operation and non- payment, it should be deemed that there was a refusal to pay the amount under the guarantees and, therefore, the suit filed on 16.3.1990 was barred by limitation, being beyond 3 years. The High Court held that the decision in Samuel (supra) will not apply to the Bank's suit, as this Court had stated that the limitation will not run only if the account was a 'live account' and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the borrower on the general balance of their accounts with the Bank, and that the guarantee shall be a continuing guarantee to an extent of Rs. 10 lakhs. Interpreting the said continuing guarantee, this Court held that 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, the period of limitation could not be said to have commenced running. 11. But in the case on hand, the guarantee deeds specifically state that the guarantors agree to pay and satisfy the bank on demand and interest will be payable by the guarantors only from the date of demand. In a case where the guarantee is payable on demand, as held in the case of Bradford (supra) and Hartland (supra), the limitation begins to run when the demand is made and the guarantor commits breach by not complying with the demand. 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 forthw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 tim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d' 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 & Anr. (AIR 1934 PC 147) : "The essence of an account stated is not the character of the items on one side or the other but the fact that 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 deali ..... X X X X Extracts X X X X X X X X Extracts X X X X
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