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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 ..... s 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 dat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trial court. Consequently, the suit is decreed, as prayed for, with costs. - Arun Kumar And R V Raveendran, JJ. JUDGMENT: Raveendran, 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 ₹ 19,77,478/60 (the liability of Respondents 2 3 being restricted to ₹ 15,75,960 and liability of Respondents 6 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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18,424.20 14/86 11-3-86 8,800/- 11,685.45 15/86 20-3-86 10,230/- 13,518.25 16/86 21-3-86 36,000/- 47,534.00 18/86 25-3-86 20,300/- 26,750.10 20/86 26-4-86 6,400/- 8,412.60 TOTAL 13,48,264.79 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 5. 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... THSTANDING 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 ₹ 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontract 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. (1939 AC 439), and the Court of Appeal in Bradford Old Bank Ltd. v. Sutcliffe [1918 (2) KB 833] 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 dir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l debtor, but still enforceable against the guarantor. The parties may agree that the liability of a guarantor shall arise at a later point of time than that of the principal debtor. We have referred to these aspects only to underline the fact that the extent of liability under a guarantee as also the question as to when the liability of a guarantor will arise, would depend purely on the terms of the contract. 10. Samuel (supra), no doubt, dealt with a continuing guarantee. But the continuing guarantee considered by it, did not provide that the guarantor shall make payment on demand by the Bank. The continuing guarantee considered by it merely recited that the surety guaranteed to the Bank, the repayment of all money which shall at any time be due to the Bank from 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 ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve, 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. 17. 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 (supra). 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 . 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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