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2003 Supreme(SC) 1333
SUPREME COURT OF INDIA
S.N. VARIAVA, H.K. SEMA, JJ.
HIMACHAL PRADESH FINANCIAL CORPORATION - Appellant
Versus
PAWNA AND OTHERS - Respondents
Civil Appeal No. 1971 of 1998
Decided On : 18-12-2003
The limitation period for recovering a balance due under an indemnity clause in a mortgage deed begins only after the mortgaged assets are sold and the deficiency is ascertained, as the indemnity contract is independent of the main loan agreement.
Headnote:(A) State Financial Corporations Act, 1951 - Section 29 - Mortgage and Indemnity - Limitation period for recovery of balance due after sale of mortgaged property - Where a mortgage deed contains a clause providing for recovery of balance from partners and other properties if sale proceeds are insufficient, such clause constitutes an independent contract of indemnity - The obligation under the indemnity arises only after the sale is completed and a balance remains due - The right to sue on the contract of indemnity accrues at the stage the balance becomes ascertained and the sale proceeds are found to be insufficient - Action taken under Section 29 to take possession and sell assets does not terminate the independent contract of indemnity.
(B) Limitation - Suit for personal decree - The period of limitation for a suit based on a contract of indemnity starts from the date the right to sue arises (i.e., after the sale of assets), not from the date of the initial breach of covenant or default in payment under the main loan agreement.
(C) Mortgage Suit - Period of limitation for a mortgage suit is 12 years; a prayer for a personal decree for the balance can be included within such a suit, maintaining the 12-year limitation period.
Facts of the case:
A financial corporation provided a loan to a partnership firm, secured by a mortgage deed. The deed included a clause stating that if sale proceeds of mortgaged properties were insufficient to satisfy dues, the corporation could recover the balance from the partners and their other properties. Following a default in repayment, the corporation took possession of the assets under Section 29 of the State Financial Corporations Act and sold them. A suit for the recovery of the balance was filed after the sales were completed. The respondents contended that the suit was barred by limitation, arguing that the period began from the date of the initial breach of the loan covenant.
Findings of Court:
It was held that the contract of indemnity is an independent and separate contract from the main loan transaction. The right to recover the balance under the indemnity clause arose only after the assets were sold and the deficiency was ascertained. Therefore, the suit filed after the sale was within the period of limitation.
Issues: Whether the period of limitation for recovering the balance due after the sale of mortgaged property starts from the date of the breach of the loan covenant or from the date the sale proceeds are found insufficient to cover the claim.
Ratio Decidendi: A contract of indemnity is distinct from the principal contract. Where the recovery of a balance is contingent upon the sale of mortgaged assets, the cause of action for the indemnity claim arises only when the sale is conducted and the balance due is determined. The statutory power to sell assets under Section 29 of the State Financial Corporations Act does not extinguish such an independent indemnity contract.
Result: Judgment of the Division Bench set aside and appeal restored to the High Court.
Legal Category Hierarchy
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contract law
- indemnity
- guarantee
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limitation and prescription
- period of limitation
- accrual of cause of action
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property law
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mortgage
- recovery of balance after sale of mortgaged property
-
mortgage
-
financial institutions
-
state financial corporations act, 1951
- section 29
-
state financial corporations act, 1951
-
practice and procedure
-
limitation
- suit for recovery
-
limitation
ORDER
The question for decision in this appeal is: When the period of limitation for recovery of the balance due after sale of mortgaged property starts. Briefly stated, the facts are as follows: the appellants had given a loan to a partnership firm of M/s Engineering Works. As security for that loan, a mortgage deed was executed. Certain other documents were also executed with which we are not concerned in this appeal.
Clause 7 of the mortgage deed is important. It reads as follows:
“Without prejudice to the above rights and powers conferred on the Corporation by these presents and by Sections 29 and 30 of the State Financial Corporations Act, 1951 and as amended in 1956 and 1972 and the special remedies available to the Corporation under the said Act, it is hereby further agreed and declared that if the partners of the industrial concern fail to pay the said principal sum with interest and other monies due from them under these presents to the Corporation in the manner agreed, the Corporation shall be entitled to realise its dues by sale of the mortgaged properties, the said fixtures and fittings and other assets, and if the sale proceeds thereof are insufficient to satisfy the dues of the Corporation, to recover the balance from the partners of the industrial concern and the other properties owned by them though not included in this security.”
(emphasis supplied)
It is thus to be seen that by virtue of the italicised portion of Clause 7, apart from the mortgage, an indemnity to pay if the sale proceeds were insufficient to satisfy the dues of the Corporation was also given. The obligation under the indemnity arose after sale and only if any balance remained, still due and payable. It is at that stage the Corporation would have a right to recover the balance from the partners and other properties owned by them even though those properties did not form part of the mortgage deed. The principal debtor committed defaults in repayment. Therefore, on 4 January, 1977, a notice was issued to them. Thereafter a publication declaring intention to take over the assets was made on 25-7-1981. On 25-10-1982 in exercise of powers under Section 29 of the Financial Corporations Act, possession was taken over.
The Corporation sold the assets on 28 March, 1984 and 14 March, 1985. From such sale, they recovered a sum of Rs. 2, 90, 000/-. The Corporation then issued a notice dated 27 May, 1985 to the respondents who had executed the indemnity referred to hereinabove. As the balance was not paid up, a civil suit for recovery of the balance amount was filed on 15 September, 1985. In the suit the respondents took up a preliminary contention that the suit was barred by limitation. It appears that a Single Judge of the Himachal Pradesh High Court had, in some other matter held, that the period of limitation for such a suit started after sale and when a balance was found due. When this suit reached hearing before another Judge of the same Court, the learned Judge disagreed with the earlier view. By an order dated 13 May, 1993 the following question was referred to a larger Bench for decision:
“When the personal remedy on a mortgaged debt is lost but the remedy against the mortgaged property survives and the plaintiff Corporation realises the mortgage debt by the sale of the mortgaged property under Section 29 of the State Financial Corporations Act, and the mortgage ceases to exist, but the sale proceeds are not sufficient to cover the whole of the claim, can such a plaintiff be allowed to obtain a personal decree for the recovery of balance outstanding dues after the expiry of three years from the date of the breach of covenant contained in the mortgage deed.”
The Division Bench has, by the impugned judgment1, answered the question by holding that suit for balance arose as a result of the non-payment of debt by the principal debtor. It was held that suit for obtaining a personal decree gets barred after a period of three years from the date of breach of cove
