2006 Supreme(SC) 336

2006(5) Supreme 115
SUPREME COURT OF INDIA
(From Karnataka High Court)
Arun Kumar and R.V. Raveendran, JJ.
Syndicate Bank — Appellant
versus
Channaveerappa Beleri & Ors. — Respondents
Civil Appeal No. 6894 of 1997
Decided on 10-4-2006
Counsel for the Parties :
For the Appellant : Adarsh B. Dial, Sr. Advocate, Rajiv Nanda, Ms. Sumati Anand, Navneet Mishra, Advocates.
For the Respondents : Bhimrao Naik, Sr. Advocate, S.V. Deshpande, Mrs. Anuradha Rustogi, C.G. Solshe, Advocates.

IMPORTANT POINT
When the demand is made against the guarantor, if the claim is a live claim against the principal debtor, limitation in respect of the guarantor will run from the date of such demand and refusal/non-compliance.

Headnote:(i) Limitation Act, 1963 — Articles 55 and 113 — Contract Act, 1872 — Sections 126, 128, 129 and 130 — Bank suit against Guarantors — Limitation period — Meaning of words ‘on demand’ in guarantee bonds — Where guarantor becomes liable in pursuance of a demand validly made in time — Creditor can sue the guarantor within three years, even if the claim against the principal debtor gets subsequently time- barred — Ceasing of operation of accounts by the borrower — Whether it 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 — (No).

       Held : A guarantor’s liability depends upon the terms of his contract. A ‘continuing guarantee’ is different from an ordinary guarantee. There is also a difference between a guarantee which stipulates that the guarantor is liable to pay only on a demand by the creditor, and a guarantee which does not contain such a condition. Further, depending on the terms of guarantee, the liability of a guarantor may be limited to a particular sum, instead of the liability being to the same extent as that of the principal debtor. The liability to pay may arise, on the principal debtor and guarantor, at the same time or at different points of time. A claim may be even time-barred against the principal 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.(Para 9)

       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 forthwith and a demand is not a condition precedent for the amount to become payable. The meaning attached to the expression ‘on demand’ as ‘always payable’ or ‘payable forthwith without demand’ is not one of universal application. The said meaning applies only in certain circumstances. The said meaning is normally applied to promissory notes or bills of exchange payable on demand.(Para 12)

       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.(Para 14)

       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.(Para 15)

       (ii) Limitation Act, 1963 — Articles 55 and 113 — Contract Act, 1872 — Sections 126, 128, 129 and 130 — Bank suit against Guarantors — Limitation period for filing of — Bank had extended credit facilities by way of overdraft, goods loan etc. against supply Bills to a company — Credit facilities were renewed and enhanced from time to time — Respondents 1 to 7 executed guarantee bonds in favour of the Bank, personally agreeing and undertaking to pay — Company allegedly incurring losses and stopping its activities — Operations in accounts of the Company and the Bank stopped in the middle of 1986 — High Court ordered winding up of the Company on 17.3.1989 — Suit filed by the Bank on 16.3.1990 only against Guarantors for recovery of amount — It was alleged that cause of action for the suit against the guarantors arose on 17.12.1987 when the demand was made and on 30.12.1987 when they denied the liability by notice — Trial Court dismissed the suit as barred by limitation — Whether decision of Courts below that the suit was barred by limitation is correct in law — (No).

       Held : 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.(Para 13)

       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.(Para 16)

       Under the old Limitation Act (Act of 1908), the periods prescribed were different under Article 115 and 116. The periods prescribed were also different under Article 115 and 120. But under the 1963 Act, the period of limitation is the same (three years) both under Article 55 and 113. 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, AIR 1979 SC 102, 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.(Para 18)

       (iii) Words and Phrases — Words ‘on demand’ — Meaning attached to the expression ‘on demand’ as ‘always payable’ or ‘payable forthwith without demand’ is not one of universal application.(Para 12)