“SPECIAL CONTRACTS”

Internal Assignment-1

“IRAC CASE ANALYSIS”

Karnataka State Financial Corporation Vs. Madhu Paper Mills

Private Ltd. and Ors.
[2016(3) AKR 744]
(Appellant) (Respondent no. 1)
(Respondent no. 2&3 – Directors)

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Table of Contents
SUMMARY OF RELEVANT FACTS: .................................................................................... 3

LEGAL ISSUES INVOLVED: ................................................................................................. 3

APPLICABLE RULES OF LAW: ............................................................................................ 3

ANALYSIS: ............................................................................................................................... 5

CONCLUSION .......................................................................................................................... 7

BIBLIOGRAPHY: ..................................................................................................................... 8

STATUTES: .......................................................................................................................... 8

BOOKS: ................................................................................................................................. 8

CASES: .................................................................................................................................. 8

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 SUMMARY OF RELEVANT FACTS:

• Appellant sanctioned loan of Rs. 30 lakhs in favour of first respondent (28.7.1976) +

additional term loan of Rs. 22.55 (23.3.1987).
• First respondent created equitable mortgage in favour of appellant vide mortgage deed
dated (3.10.1977) and modification deed of mortgage (26.3.1988).
• First respondent hypothecated its movables under hypothecation deed (26.3.1988).
• Respondent 2 & 3 became guarantor.
• First respondent defaulted in repayment of the loan.
• The BIFR under section 20(1) of Sick Industrial Companies (Special Provisions) Act
ordered that the Company should wound up and assets of company was taken over by
M/s. Karnataka State Industrial Investment and Development Corporation.
• Appellant invoked the personal guarantee of the respondent no. 2&3and calling upon
them to jointly and severally pay the appellant sum of Rs. 4,00,19,992.70

LEGAL ISSUES INVOLVED:

1. When does the period of limitation starts running for invoking a continuous guarantee?
2. Whether the omission and commission of the appellant/Corporation has impaired the
rights of the guarantors, consequently discharging them from their liability?

APPLICABLE RULES OF LAW:

Section 134 of Indian contract act1:

1
Indian Contract Act, 1872.

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Discharge of surety by release or discharge of principal debtor

The surety is discharged by any contract between the creditor and the principal debtor, by which
the principal debtor is released, or by any act or omission of the creditor, the legal consequence
of which is the discharge of the principal debtor.

Section 135 of Indian Contract act:

Discharge of surety when creditor compounds with, gives time to, or agrees not to sue,
principal debtor:

A contract between the creditor and the principal debtor, by which the creditor makes a
composition with, or promises to give time to, or not to sue, the principal debtor, discharges
the surety, unless the surety assents to such contract.

Section 139 of Indian Contract act:

Discharge of surety by creditor's act or omission impairing surety's eventual remedy:

If the creditor does any act which is inconsistent with the right of the surety, or omits to do any
act which his duty to the surety requires him to do, and the eventual remedy of the surety
himself against the principal debtor is thereby impaired, the surety is discharged.

Illustrations:

C lends money to B on the security of a joint and several promissory note made in C's favor by
B, and by A as surety for B, together with a bill. of sale of B's furniture, which gives power to
C to sell the furniture, and apply the proceeds in discharge of the note. Subsequently, C sells
the furniture, but, owning to has misconduct and willful negligence, only a small price is
realized. A is discharged from liability on the note.

Article 137 of Limitation Act2:

Any other application for which no period of limitation is provided elsewhere in this Division,
in such cases limitation period will be of 3 yrs. Starting from the time when the right to apply
accrues.

2
The Limitation Act, 1963.

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Section 31 of State Financial Corporations Ac3t:

Special provisions for enforcement of claims by Financial Corporation.—(1) Where an

industrial concern, in breach of any agreement, makes any default in repayment of any loan or
advance or any instalment thereof [or in meeting its obligations in relation to any guarantee
given by the Corporation] or otherwise fails to comply with the terms of its agreement with the
Financial Corporation, any officer of the Financial Corporation, generally or specially
authorized by the Board in this behalf, may apply to the district judge within the limits of whose
jurisdiction the industrial concern carries on the whole or a substantial part of its business for
one or more of the following reliefs, namely:—

[(aa) for enforcing the liability of any surety; or]

Section 32 of State Financial Corporations Act:

Procedure of district judge in respect of applications under section 31:

[(1A) When the application is for the relief mentioned in clause (aa) of sub-section (1) of
section 31, the district judge shall issue a notice calling upon the surety to show cause on a date
to be specified in the notice why his liability should not be enforced.]

ANALYSIS:

The petition filed by the corporation u/s 31(1) (aa) and 32 in district court, Mysore was
dismissed as their claim according to district court was time barred (Article 137 of Limitations
Act). The question before high court is to determine whether the findings of district court is up
to the mark and serves justice?

In high court contention from appellant side is that the guarantee deed executed by respondents
2&3 is a continuing guarantee, which binds them for the unpaid loan amount. And claims of
respondent that cause of action aroused on 15.11.1989 is totally wrong and their petition in
district court on 2.3.2001 is well within time. Petitioner’s claim is supported by law laid down
by the apex court in the matter of Deepak Bhandari -vs- H.P.State Industrial Development

3
State Financial Corporations Act, 1951.

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Corporation Limited4, right to sue on a contract of indemnity/guarantee would arise when the
contract is broken so time begins to run from 21.8.2000 only.

And As per the judgment of the Apex Court in the matter of Syndicate Bank -vs-
Channaveerappa Beleri and Others5, the continuing guarantee is different from the ordinary
guarantee. Even if the claim is barred against the principal debtor, but still is enforceable
against a guarantor. In that view of the matter, the Court was not justified in dismissing the
claim as time barred.

On the other hand, respondent’s contention is that in respect of a petition under Section 31(1)
(aa) of the Act6 to enforce the surety, the petition ought to have been filed within three years
from the date of first demand (PW-1 having admitted during his cross- examination that
demand notices were issued after release of the second term loan in the year 1986) and the
relevant provision applicable is Article 137 of the Limitation Act. Having allowed the taking
over of the Company and its assets being sold out, right against the guarantors is allowed to be
lost. Hence, the surety stands discharged under Section 139 of the Contract Act.

Findings on major issues:

(1) The Corporation had issued notice to the respondents in the year 1988 for proceeding
against the assets of the Company since the loan amount was not repaid, that amounts to breach
of contract between the Corporation and the guarantors. Hence, the petition filed in the year
2001 is hit by Article 137 of the Limitation Act, which contemplates three years of limitation
period from when the right to apply accrues; (2) The properties mortgaged to the Corporation
having already been sold, the particulars of the sale proceeds not being made available and not
shown in the Ledger extract of the Corporation, the guarantors have lost their rights over the
said property. Consequently, the guarantors lost their right over the property due to the above
omission of the Corporation and they are entitled to be discharged of their liability in
accordance with Section 139 of the Contract Act, 1872.

With respect to limitation, strong reliance is placed on the judgement of the Apex court in:
Maharashtra State Financial Corporation -vs- Ashok K.Agarwal and Others7 In a petition
under Section 31(1) and 32 of the Act in respect of the liability of the surety, Article 137 of

4
AIR 2014 SC 961.
5
AIR 2006 SC 1874.
6
State Financial Corporations Act, 1951.
7
AIR 2006 SC 1584.

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the Limitation Act would apply and the application filed beyond three years from the date of
the demand is barred.

CONCLUSION

If the debt had 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 is
not barred) against the principal debtor, limitation in respect of guarantor will run from the date
of such demand and refusal/non-compliance. And public money is involved in the loan
transaction. The petition could not have been disposed of on a superficial assessment of the
evidence.

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 BIBLIOGRAPHY:
STATUTES:
• Indian Contract Act, 1872.
• The Limitation Act, 1963.
• State Financial Corporations Act, 1951.

BOOKS:
• AVTAR SINGH, CONTRACT & SPECIFIC RELIEF (12th edi.)

CASES:
Deepak Bhandari -vs- H.P.State Industrial AIR 2014 SC 961
Development Corporation Limited
Syndicate Bank -vs- Channaveerappa Beleri AIR 2006 SC 1874
and Others
Maharashtra State Financial Corporation - AIR 2006 SC 1584
vs- Ashok K.Agarwal and Others

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