Corporate Guarantee Limitation Period

Corporate Guarantee: Limitation Period

Limitation Period in a Corporate Guarantee is given in the Article 113 of 10th Schedule of the Limitation Act, 1963.

PART X – Suits for which there is no prescribed period

SL. NO. DESCRIPTION OF SUIT PERIOD OF LIMITATION TIME FROM WHICH PERIOD BEGINS TO RUN
113. Any suit for which no period of limitation is provided elsewhere in this Schedule. Three years When the right to sue accrues.

Judicial Precedents on Corporate Guarantee:

  1. Limitation period in a continuing guarantee begins from the date of breach: In MARGARET LALITA SAMUEL v. INDO COMMERCIAL BANK LTD the guarantee was a continuing guarantee at any one time. A contention was raised that each of the debit items in the account constituted a distinct loan and gave raise to separate limitation. The Supreme Court rejected the contention and held thus: “The guarantee is seen to be a continuing guarantee and the undertaking by the defendant is to pay any amount that may be due by the company at the foot of the general balance of its account or any other account whatever. In the case of such a continuing guarantee, so long as the account is alive 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, we do not see how the period of limitation could be said to have commenced running. Limitation would only run from the date of breach under Article 115 of the schedule to the Limitation Act, 1908.”
  2. Limitation period on a surety by directors of a company begins when the sureties are crystallised: In MAHARASHTRA STATE FINANCIAL CORPORATION v. ASHOK K. AGARWAL AND OTHERS the question that arose for consideration is whether it is Article 136 or Article 137 of the Schedule to the Limitation Act which has application to the proceedings initiated under sections 31, 32 and 31(1)(aa) of the State Financial Corporation Act, 1951. In this case, the Maharashtra State Financial Corporation had sanctioned a loan Rs.5.00 lakhs in favour of a company to which the respondents therein who were directors of the borrower company stood sureties for the loan. When the company failed to repay the loan notice dated 8.3.1983 was issued calling upon the borrower to repay its due. On 25.10.1983 an application under sections 31 and 32 of the State Financial Corporations Act, 1951 was filed by the Corporation for sale of the hypothecated property of the borrower company so that the sale proceeds could be appropriated towards meeting the outstanding liability of the borrower towards the appellant. On 11.6.1990 the attached properties of the borrower company were put to sale. There was shortfall in the amount realized and hence notice dated 27.12.1991 was issued to the respondent sureties claiming Rs.16,79,033/- together with interest. On 2.1.1992 the Corporation filed an application under section 31(1)(aa) for steps for recovery of the amount due. An objection was raised that the application was barred by limitation, which was upheld by the Additional District Judge in view of Article 137 of the Schedule to the Limitation Act which provides that in cases where no period of limitation is specifically prescribed period of limitation would be three years. Learned counsel for the appellant however placing reliance on Article 136 contended that since the said Article prescribes a limitation period of twelve years in cases of execution of decrees and orders passed by Civil Courts, the same should be made applicable to the application filed under section 31 (1)(aa) also which is in the nature of execution proceedings. The Supreme Court following the proposition set out in GUJARAT STATE FINANCIAL CORPN v. NATSON MFG. CO. (P) LTD.9held that while dealing with an application under Sections 31 and 32 of the SFC Act there is no decree or order of a Civil Court being executed and it is only on the basis of a legal fiction that the proceedings under Section 31 are treated as akin to execution proceedings, therefore, application under sections 31 and 32 of the State Financial Corporation Act is not by way of execution of a decree or order of Civil Court and as such Article 136 has no application. It was held that since the liability of sureties had crystallized on 25.10.1983 when the Corporation had filed the application under sections 31 and 32, the application filed on 2.1.1992 under section 31(1)(aa) for recovery of the amounts due from the sureties is barred by limitation.
  3. Extent of liability of a guarantee depends upon the contract but limitation begins when actual demand for payment is made: In SYNDICATE BANK v. CHANNAVEERAPPA BELERI AND OTHERS the Supreme Courtheld that the limitation as to guarantor’s liability depends on the terms and conditions of contract and limitation starts running only when actually a demand for payment is made and it was refused by guarantors, however, such a demand should not be time-barred against the principal debtor i.e. it should be a live claim and cessation of operation of accounts cannot be treated as refusal to pay by the principal debtor. The appeal by the appellant-bank was directed against the order of the High Court of Karnataka dismissing the suit filed by the bank on the ground of limitation. 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.
  4. In case of a guarantee, time period of limitation stems from the point when demand is made: Supreme Court also agreed with the view expressed by the Privy Council in WRIT V. NEW ZEALAND FARMERS COOPERATIVE ASSOCIATION OF CANTERBURY LTD.11 and the Court of Appeal in BRADFORD OLD BANK LTD. V. SUTCLIFFE12 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.
  5. In Raja Rao vs A.P. Industrial Development(AP High Court), the court stated thata continuing guarantee is different from ordinary guarantee. There is 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. 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. A claim may be time-barred against the principal debtor, but still enforceable again the guarantor.Limitation against a guarantor under a continuing guarantee (which specified that the liability of the guarantor is pay on demand) would not run from the date of each advance, but only run from the timed when the balance was constituted and a demand was made for payment thereof.In a case where the guarantor liable to pay on demand the limitation begins to run when the demand is made and the guarantor commits breach by not complying with the demand.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.

    Ceasing of operation of accounts by the borrower for some reason or the other 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.

Author – Sushant Chaturvedi (Associate, K&T Law Offices)

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