*THE HON'BLE MR JUSTICE V.V.S.RAO +WRIT PETITION No.3425 of 2001 %Dated 16-10-2008 # N.Chandrasekhar … Petitioner VERSUS $ Special Deputy Tahsildar, A.P.State Financial Corporation, Lingampally Circle, Ramachandrapuram, Hyderabad and another. … Respondents. ! Counsel for Petitioners: Sri Venkata Raghu Ramulu ^Counsel for Respondents: M/s.Y.N.Lohita & Sarva Srinivasa Rao <GIST: >HEAD NOTE: ? Cases referred 1. AIR 1960 AP 210 2. 2000 (2) ALD 560 3. AIR 1999 SC 1305 4. AIR 2002 KERALA 396 = 2003 (2) Bankers Journal 89 5. AIR 2006 S 1874 IN THE HIGH COURT OF JUDICATURE, ANDHRA PRADESH AT HYDERABAD (Special Original Jurisdiction) THURSDAY, THE SIXTEENTH DAY OF OCTOBER TWO THOUSAND AND EIGHT PRESENT THE HON'BLE MR JUSTICE V.V.S.RAO WRIT PETITION NO : 3425 of 2001 Between: N.Chandrasekhar, S/o Late Sri N.Vishwanath Raju, Arun Appartments, Red Hills, Hyderabad. ..... PETITIONER AND 1. Special Deputy Tahsildar, A.P. State Financial Corp., 22-95, Reddy Complex, Beside LIC Office, Near Lingampally Circle, Ramachandrapuram, Hyd-500 032. 2. Senior Branch Manger, A.P. State Financial Corp., 24-36, Ashoknagar, Ramachandrampuram, Hyderabad-500 032. ..RESPONDENT(S) Petition under Article 226 of the constitution of India praying that in the circumstances stated in the Aﬃdavit ﬁled herein the High Court will be pleased to issue WRIT OF CERTIORARI or any other appropriate writ or order or direction, quashing the impugned notice dt 3-2-2001 vide Ref.No.AFC/RCP/RRACT/SDT/ 2000-01/8469, issued by the R1 by declaring the same is illegal, arbitrary, unconstitutional and violative of well established principles of natural justice. Counsel for the Petitioner: MR.VENKATA RAGHURAMULU Counsel for the Respondents: M/s.Y.N.Lohita & Sarva Srinivasa Rao The Court made the following: THE HON’BLE SRI JUSTICE V.V.S.RAO WRIT PETITION No.3425 OF 2001 ORDER: The petitioner was the Director of M/s.Power Packs Private Limited (PPL, for brevity), which was established for manufacturing electronic items like sealed rechargeable nickle cadmium cells in the small scale sector so as to supply the products to defence, railways, paramilitary forces and other Government bodies. The said company availed term loans from Andhra Pradesh Industrial Development Corporation (APIDC). It also availed term loan in a sum of Rs.39.99 lakhs from Andhra Pradesh State Financial Corporation (APSFC). The loan was sanctioned by second respondent on diﬀerent occasions – an amount of Rs.30.00 lakhs on 29.03.1985, Rs.6.20 lakhs on 31.03.1987, Rs.2.13 lakhs on 21.10.1987 and Rs.1.68 lakhs on 22.04.1989. The petitioner, one Udaya Sankar who was Managing Director of the company and another gave personal guarantee to secure the loan besides mortgaging company’s assets as security for the loan sanctioned by APSFC. PPL could not make much headway. Due to various reasons like paucity of funds, the company incurred losses. Therefore, petitioner and two others approached P.K.Rajgarhia and Associates, New Delhi (Rajgarhia, for brevity) for additional funds. Upon agreement between them, PPL and its Directors allegedly with the consent of ﬁnancial institutions, APSFC transferred the company to Rajgarhia on 13.01.1992 along with assets and liabilities of PPL. Such transfer was accepted in a multiparty meeting of the parties and ﬁnancial institutions on 07.05.1991. Payment of balance loan was rescheduled. It was also agreed that Rajgarhia would substitute personal guarantees with new guarantors. It appears Rajgarhia executed indemnity bond insulating petitioner and other Directors of PPL against losses or damages they might suﬀer in connection with personal guarantees. The further case of petitioner is that with eﬀect from 13.01.1992, Rajgarhia was managing PPL and he had no knowledge of further development except that Form No. 32 was sent to Registrar of Companies (RoC) of Andhra Pradesh. Rajgarhia addressed letter, dated 13.01.1992 to State Bank of India, Balkampet (SBI) requesting to discharge personal guarantees of petitioner and two others. Petitioner alleges that in view of circumstances surrounding the takeover and multiparty meeting on 07.05.1991, personal guarantees given by petitioner and two others were treated as cancelled. In spite of the same, second respondent issued notice, dated 14.08.1997 to petitioner and two others calling upon them to pay a sum of Rs.71,70,478/- being dues payable by PPL. The petitioner got issued reply through an advocate inter alia stating that petitioner and two others resigned from the Board of Directors on 13.01.1992 and that they ceased to be the guarantors. A year, thereafter, second respondent issued yet another communication informing petitioner that consequent on several defaults committed by PPL, APSFC seized the unit and sold it under Section 29 of the State Financial Corporations Act, 1951 and that the sale proceeds have been adjusted to the credit of loan account. It was further informed that even after such adjustment, there is still an outstanding amount of Rs.51,86,552/- towards principal and interest and petitioner was called upon to pay the said amount within ﬁfteen days. The petitioner and two others then ﬁled writ petition being W.P.No.28958 of 1998 seeking a writ of certiorari to quash communication of second respondent, dated 03.10.1998. This Court disposed of the writ petition on 25.01.1999 giving liberty to petitioners to ﬁle explanation to the said notice and APSFC was directed to consider the same and pass appropriate orders after issuing notice to petitioners and Rajgarhia. In furtherance thereof, the petitioner and two others submitted an explanation, dated 08.02.1999 through their advocate. Second respondent or head oﬃce of APSFC, it is alleged – did not pass any orders. At that stage, Special Deputy Tahsildar, APSFC (ﬁrst respondent herein) issued impugned notice calling upon the petitioner to pay a sum of Rs.49,86,751/- towards principal and interest within a period of ﬁfteen days, in default of which, APSFC would take action under Section 52-A of A.P.Revenue Recovery Act, 1864 (RR Act, for brevity). Petitioner sent a reply, dated 06.02.2001 through his advocate requesting to withdraw the impugned letter, in vain, necessitating ﬁling of present writ petition. The petitioner contends that in view of the consent given by Andhra Pradesh Industrial Infrastructure Corporation Limited (APIIC), APIDC and Government of Andhra Pradesh for takeover of PPL by Rajgarhia, APSFC cannot proceed against petitioner. He also contends that Rajgarhia eﬀectively substituted guarantees by addressing letters to all concerned, and therefore, petitioner stood discharged from guarantee. Petitioner also contends that any action under RR Act is barred by limitation. Second respondent ﬁled counter aﬃdavit as well as additional counter affidavit. The allegations of petitioner are denied. The brief summary of various counter averments is as follows. The petitioner is Managing Director of PPL. APSFC and other ﬁnancial institutions permitted the original promoter to transfer shareholding in PPL in favour of Rajgarhia. He and other directors of company were required to complete legal formalities by executing personal guarantee in favour of ﬁnancial institutions. However, Rajgarhia failed to review personal guarantees and petitioner failed to ensure executing personal guarantees by Rajgarhia. Even before such substitution of guarantees, petitioner handed over possession of the unit to Rajgarhia, and therefore, APSFC treated permission granted for transfer as cancelled. APSFC is not a party to indemnity bond executed by Rajgarhia and it is nothing to do with the liability and the same does not have the eﬀect of extinguishing the liability of petitioner as long as personal guarantee executed by him is in force. His liability is co-extensive with the principal debtor. The petitioner also failed to comply with the conditions stipulated by APSFC for transfer of PPL to Rajgarhia. The allegation that the recovery is barred by limitation is denied. It is also stated that pursuant to the order of High Court in W.P.No.28958 of 1998, petitioner submitted explanation. Second respondent issued notice, dated 05.07.2001 requesting petitioner and Rajgarhia to meet second respondent for review and settlement of the case. There was no response from Rajgarhia. Petitioner visited the branch oﬃce on 30.01.2001 but no proposal or commitment to pay the dues was given in respect of the proceedings under RR Act. Even before the case could be considered by second respondent, petitioner ﬁled instant writ petition. If the petitioner and the transferee i.e., Rajgarhia appear before the APSFC, the matters could be sorted out. The matter was initially heard on 16.09.2008. In view of the admitted fact that APSFC did not pass any orders after receiving explanation submitted by petitioner on 08.02.1999, this Court directed APSFC or concerned branch to give necessary response/pass orders on the explanation submitted by petitioner pursuant to the orders of this Court in the earlier writ petition. In obedience thereto, second respondent by communication, dated 18.09.2008, informed petitioner that the incoming directors have not taken up any documentation with APSFC with regard to take over of the liability of the company and therefore, the liability of the petitioner is subsisting. A reference was also made to a letter, dated 27.02.1992 of Principal Secretary to Government of Andhra Pradesh in Industries and Commerce Department pointing out that substitution of guarantees to institutions was not attended by Rajgarhia. Even though a copy of the said letter was handed over to learned counsel for petitioner in the Court, the petitioner has not taken any steps for amending the writ petition nor petitioner has ﬁled any reply aﬃdavit to counter and additional counter ﬁled by second respondent. Learned Counsel for the petitioner submits that in view of the respondents’ acceptance to transfer PPL to Rajgarhia, the respondents cannot proceed against the petitioner who has transferred entire shareholding to Rajgarhia. He points out that pursuant to such acceptance by APSFC, the Unit was handed over to the new management, who were running the Unit. He nextly contends that after taking over, Rajgarhia addressed letters to bankers and Government of Andhra Pradesh accepting the liability to repay the loan, and therefore, the personal guarantee given by the petitioner stood discharged, as a result of which, APSFC cannot initiate any action against the petitioner either under Section 29 of SFC Act or RR Act. Lastly, he contends that the impugned notice seeks to recover the amount allegedly due from the petitioner as a personal guarantor, and therefore, it is barred by limitation. He placed reliance on Mohd.Sultanuddin v Mohd.Dastagir[1], N.A.Radha v State of Andhra Pradesh[2], State of Kerala v V.R.Kalliyanikutty [3] (hereafter referred to as Kalliyanikutty) and Annama Jose v Kerala Financial Corporation[4]. Learned Standing Counsel submits that as agreed in the consortium meeting, Rajgarhia did not complete legal documentation including documentation for substitution of personal guarantees, though he gave such letter to the bankers. Therefore, the petitioner continued to be guarantor for all the loans sanctioned to PPL. The decision taken in the consortium meeting was not complied with, and therefore, petitioner’s liability continued. He submits that the guarantee executed by the petitioner is of continuing bank guarantee, and therefore, the question of limitation would not arise, as the last disbursement of the loan was made on 22.04.1989. Alternatively, he submits that the liability of the guarantor is coextensive with the principal debtor, namely, PPL. When admittedly, PPL paid certain amounts, the limitation cannot be said to have commenced from the date of disbursement of first loan in 1985. Two points emerge for consideration. 1) Whether the petitioner stood discharged as personal guarantor of the loan sanctioned by APSFC to M/s.Power Packs Private Limited; and 2) Whether recovery of the due amount by APSFC under Section 52A of the Andhra Pradesh Revenue Recovery Act, 1864, is barred by limitation? The admitted facts relevant for examination of point No.1 as above are as follows. PPL availed Rs.39.99 lakhs term loan during the period from 29.03.1985 to 22.04.1989. The petitioner as Managing Director of PPL executed personal guarantee, which is statedly a continuing guarantee extending to series of transactions under which loans were sanctioned/disbursed. The unit could not make much headway. Rajgarhia came forward to take over the unit. On a request made by PPL and its Directors, consortium of ﬁnancial institutions, namely, APIDC, APSFC, SBI and Andhra Pradesh Electronics Development Corporation agreed in principle to permit transfer of the shares of PPL’s promoters in favour of Rajgarhia. The issue of substituting personal guarantees given by PPL’s promoters including the petitioner was one of the subjects discussed in the meeting of consortium in which PPL and Rajgarhia participated. Rajgarhia agreed to execute personal guarantees by two directors including himself. This was one of the decisions taken in the consortium meeting on 07.05.1991. The relevant decision was that Rajgarhia and one other director among his associates would complete the legal documentation and extend personal guarantees in favour of ﬁnancial institutions and banks. After eight months of consortium meeting, Rajgarhia executed an indemnity bond, dated 13.01.1992 in favour of petitioner and two other promotee directors of PPL, wherein the decision to replace personal guarantees was also reiterated while indemnifying the petitioner and others against all losses and damages they might suﬀer in connection with personal guarantees given by petitioner and two others to ﬁnancial institutions. This was followed up by ﬁling Form No.32 as required under Section 303(2) of Companies Act, 1956 informing RoC that the petitioner and two other promotee directors of PPL resigned on 13.01.1992. Rajgarhia representing PPL addressed letter, dated 13.01.1992 to State Bank of India, Balkampet Branch, Hyderabad, requesting the latter to release personal guarantees of the petitioner and two others after completing legal formalities. He also requested SBI to arrange to get the legal formalities completed earlier. It appears Rajgarhia also addressed a letter to Government of Andhra Pradesh seeking permission for commencing repayment of funded interest one month after formal transfer of shares and reschedulement of payment of loan. In response thereto Secretary to Government in Industries Department addressed a letter to Rajgarhia on 27.03.1992 pointing out that substitution of guarantees to the institution is still to be attended to. A perusal of these documents would show that though Rajgarhia agreed for substituting personal guarantees of the petitioner and two others with the personal guarantees of Rajgarhia and Vivek Rajgarhia, the same was not done legally. Indeed, the letter of Rajgarhia addressed to SBI itself makes this clear. For ready reference, the same is extracted as under. Ref: PP/F-SBI/1139 Date: 13-1-92 POWERPACKS PRIVATE LIMITED To The Manager, State Bank of India, Balkampet Branch, HYDERABAD. Dear Sir, We have taken over the management of M/s.Power Packs Private Limited, Hyderabad, from the existing promoters viz., Mr.N.Udaya Sankar & Associates as per the approval of IDBI and APIDC’s Approval Letter No.M (M&R) TAC/E-12/4315/91 dt.22- 11-1991. As per the terms of the APIDC Approval Letter, we are giving the Personal Guarantees of the following to cover your Working Capital limits. 1.SHRI P.K.RAJGARHIA 2.SHRI VIVEK RAJGARHIA We request you to please arrange to get the Legal Formalities completed at the earliest. We also request you to please release the Personal Guarantees of the following after the completion of our Legal Formalities. 1. SHRI N.UDAYA SANKAR 2. SHRI N.CHANDRA SEKHAR 3. SHRI N.S.V.PRASADA RAJU Thanking you and requesting you to do the needful. Yours sincerely, For POWER PACKS PRIVATE LIMITED (P.K.RAJGARHIA) (emphasis supplied) That by the above letter, there was no proper substitution of personal guarantees executed by petitioner and others is clear from the reading of letter of Secretary to Government, dated 27.03.1992 wherein it was pointed out that there was no proper substitution of personal guarantees. Thus up to 27.03.1992 there was no substitution of personal guarantees even though such a decision was taken in the consortium meeting held on 07.05.1991. Subsequent to 27.03.1992, nothing happened and the petitioner has not placed before this Court any material to show that the petitioner stood discharged as the personal guarantor for the loans advanced by APSFC. Sections 134, 135 and 139 read with other incidental provisions of Indian Contract Act, 1872 deal with the situations when the guarantor/surety is discharged. So as to fall under these categories, the petitioner is required to show that there is a contract between APSFC and PPL whereunder the borrower was released/discharged or APSFC compounded or promised principle debtor not to sue or APSFC has committed acts of negligence inconsistent with the rights of the surety. The petitioner cannot assume that he stood discharge the moment Rajgarhia agreed to substitute personal guarantees and addressed letters to SBI and Government of Andhra Pradesh. Indeed it is quite glaring that Rajgarhia did not address any letter to APSFC or other ﬁnancial institutions nor approached them with proper legal documentation for substitution of personal guarantees as was decided in the consortium meeting held on 07.05.1991. Therefore, on point No.1, it must be held that the personal guarantee/continuing guarantee executed by petitioner in favour of APSFC continued to be in force and the petitioner cannot escape liability. The question of limitation raised by petitioner does not require any elaborate debate. Admittedly disbursement of Rs.30.00 lakhs was made on 29.03.1985 and for the last time an amount of Rs.1.68 lakhs was disbursed on 22.04.1989. Sanction of loan and disbursement of the same are part of the same transaction, though on diﬀerent dates. They cannot be treated as individual transactions. All of them form one series of transactions. There is no dispute or denial that as a policy, APSFC obtains personal guarantees of all the directors to cover series of transactions. When such continuing guarantee is executed by petitioner, he cannot be heard to contend that recovery of dues is barred by limitation. The impugned notice informing petitioner that action would be initiated under RR Act was issued on 23.02.2001, which is within a period of limitation of twelve years because APSFC is trying to recover the amount due under mortgage which is also secured by personal guarantee of petitioner and other directors. The decision in Kalliyanikutty, and the decisions in N.A.Radha (supra) and Annama Jose (supra), which followed Kalliyanikutty, laid down that, “a debt which is barred by law of limitation cannot be recovered by resorting to recovery proceedings under Revenue Recovery Act”. The binding principle laid down by Supreme Court applies only when factually and actually a debt is time barred. Otherwise not. In Kalliyanikutty, Kerala State Financial Corporation (KSFC, for brevity) initiated proceedings under Kerala Revenue Recovery Act, 1968 for recovering certain loans which were allegedly time barred. A Division Bench of Kerala High Court held that, “in the absence of any provision in the Kerala Revenue Recovery Act creating a substantive right to recover time barred debts, the said Act cannot be availed of once the period prescribed for recovery under the Limitation Act has expired”. This was subject matter of appeal before Supreme Court. A Full Bench of Kerala High Court, however, did not agree with the view of Division Bench against which other appeals were also ﬁled before apex Court. All these matters were heard together. Agreeing with the Division Bench’s view, Supreme Court laid down as under. The provisions in the present case are statutory provisions for coercive recovery of "amounts due". Although the necessity of ﬁling a suit by a creditor is avoided, the extent of the claim which is legally recoverable is not thereby enlarged. Under Section 70(2) of the Kerala Revenue Recovery Act the right of a debtor to ﬁle a suit for refund is expressly preserved. Instead of the bank or the ﬁnancial institution ﬁling a suit which is defended by the debtor, the creditor ﬁrst recovers and then defends his recovery in a suit ﬁled by the debtor. The rights of the parties are not thereby enlarged. The process of recovery is diﬀerent. An Act must expressly provide for such enlargement of claims which are legally recoverable, before it can be interpreted as extending to the recovery of those amounts which have ceased to be legally recoverable on the date when recovery proceedings are undertaken. Under the Kerala Revenue Recovery Act such process of recovery would start with a written requisition issued in the prescribed form by the creditor to the collector of the District as prescribed under Section 69(2) of the said Act. Therefore, all claims which are legally recoverable and are not time-barred on that date can be recovered under the Kerala Revenue Recovery Act. In Annama Jose (supra), KSFC sanctioned loan in 1986. Petitioner therein executed guarantee deed on 20.02.1986. When there was default in repayment of loan, notice dated 06.02.1992 was issued. Subsequently, revenue recovery notice was issued only on 10.02.1999 after lapse of thirteen (13) years from the date of execution of guarantee deed. Therefore, learned single Judge of Kerala High Court relying on Article 55 of Limitation Act, 1963 came to the conclusion that limitation to enforce guarantee is three years and therefore, revenue recovery notices are time barred. In N.A.Radha (supra), learned single Judge of this Court was dealing with the case where APSFC sought to recover loans sanctioned in 1971 by initiating revenue recovery proceedings in November, 1998 after lapse of about seventeen (17) years. Therefore, these two cases would not be useful in the present case. As noticed supra, petitioner executed a continuing guarantee, and therefore, cause of action against the guarantors arises only from the date of making payment by the creditor. In this context, a reference may be made to Syndicate Bank v Channaveerappa Beleri[5]. Referring to Sections 126, 128, 129 and 130 of the Contract Act and Article 55 of Limitation Act, Supreme Court laid down as under. 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. In this case, demand is made on the principle debtor i.e., PPL within a period of limitation in 1998. After issuing recall notice, unit was sold and part of the amount was realised. As the debt is secured by mortgage, within a period of twelve years APSFC issued another notice to petitioner as guarantor and therefore, the debt prima facie is not barred by limitation. When the question of limitation is raised, the burden lies on the petitioner to produce necessary evidence and prove the same. The petitioner has not placed any material in support of his plea and indeed no reference is made to the provisions of Contract Act to which a reference is made by this Court as above. Therefore, on point No.2 this Court holds that the impugned order cannot be invalidated on any grounds much less on the ground that the recovery of dues is barred by limitation. In the result, for the above reasons, the writ petition fails and is liable to be dismissed. Accordingly, the writ petition is dismissed with costs. ______________ (V.V.S.RAO,J) .10.2008. pln Note: LR copy be marked. (By order) pln [1] AIR 1960 AP 210 [2] 2000 (2) ALD 560 [3] AIR 1999 SC 1305 [4] AIR 2002 KERALA 396 = 2003 (2) Bankers Journal 89 [5] AIR 2006 SC 1874