LIMITATION PERIOD FOR GUARANTEE TO COMMENCE AFTER DETERMINATION OF FINAL LIABILITY OF THE GUARANTOR

Deepak Bhandari v. Himachal Pradesh State Industrial Development Corporation Limited

The Supreme Court has in this case dealt with the issue of how the ‘limitation period’ in a contract of indemnity and guarantee is to be computed.

FACTS

In this case, a company (“Borrower”) had defaulted in repayment of a loan availed from the Himachal Pradesh State Industrial Development Corporation Limited (“Respondent”) and accordingly the Respondent issued a recall notice (“Recall Notice”) to the Borrower directing it to repay the outstanding amounts due to the Respondent. Upon failure of the Borrower to repay such amounts, the Respondent sold the properties furnished by the Borrower to secure such loan and set-off a part of its outstandings against the sale proceeds thereof.

The Respondent then called upon the promoter of the Borrower (“Appellant”) being a guarantor to the said loan to repay the balance amounts due to the Respondent. Since the Appellant failed to repay such amount, the Respondent filed a suit for recovery against the appellant which was decreed in favour of the Respondent by a single judge of the High Court of Himachal Pradesh (“High Court”). Being aggrieved by the same, the Appellant filed an appeal before the division bench of the High Court which was dismissed. The Appellant then filed an appeal before the Supreme Court of India (“Supreme Court”) on the ground that the said recovery suit was time barred under the Limitation Act, 1963 (“Limitation Act”).

ISSUE

The main issue before the Supreme Court was whether the period of limitation in a contract for guarantee would commence from the date (a) of Recall Notice; or (b) the Respondent called the Guarantor to re-pay the balance amounts due to the Respondent after setting off the proceeds from sale of the properties furnished to the Respondent as security, as aforesaid.

ARGUMENTS ADVANCED

The Appellant contended that since the suit was filed after 4 (Four) years from the date of the Recall Notice, it was time barred under the Limitation Act. The Respondent, on the other hand, argued that the period of limitation would commence not from the date of the Recall Notice but from the date the Respondent determined the balance liability of the Borrower to be repaid by the Appellant as the guarantor.

JUDGMENT

The Supreme Court held that when the Respondent takes steps for recovery of the amount, the limitation period for recovery of the balance amount would start only after adjusting the proceeds from the sale of assets of the Borrower as only then would the Respondent be in a position to determine the Appellant’s final liability as the guarantor. It was further stated that, the right to sue under a contract of indemnity or guarantee would principally arise when the indemnifier or the guarantor fails to pay the money claimed from it and not from the time when the Recall Notice is served.

Accordingly, the suit filed by the Respondents for recovery of money from the Appellant being the guarantor was held to be within the period of limitation.