1 IN THE HIGH COURT OF JUDICATURE AT BOMBAY O. O. C. J. Misc. Petition No.10 of 2006 SICOM Ltd. .. .. Petitioner V/s. Jagdish Jagjivandas Doshi & ors. .. Respondents Mr.K. Setalvad with Ms.Rashmi M. Vaity i/by M/s.M.P. Rege & Co. for Petitioner. Mr.F.I. De'Vitre, Senior Advocate with Mr.Jaydeep Mitra, Mr.T.M.Tripathi and Ms.S. Rachaure i/by M/s.T.N. Tripathi & Co. for Respondent Nos.1 to 4. ----- CORAM : SMT.ROSHAN DALVI, J. Dated : 2nd July, 2008 P.C. : 1.This Petition is filed essentially under Section 31(1)(a)(a) of the State Financial Corporations Act, 1951 (SFC Act) against Respondent Nos.1 to 3 for enforcing their liability as surety and for an order directing Respondent Nos.1 to 3 to pay the Petitioner Rs.15,44,63,629.80 as on 14.6.2006 under the Term Loan granted to Respondent No.4 to the principal debtors and for further interest thereon as specified in the particulars of claim, Exhibit-G to the Petition, and for other incidental reliefs. 2.The Term Loan of Rs.664 Lacs was granted to Respondent 2 No.4 on 27.1.1997 for meeting the costs of their project for manufacture of Super Alloys of stainless steel Nickel and Iron at Plot No.L-4, Phase-II, MIDC, District Thane. An indenture of mortgage came to be executed by Respondent No.4 mortgaging all the rights, title and interest of Respondent No.4 in the said property on 3.8.1998. The Term Loan was to be paid in 21 quarterly installments from 15.3.1999 till 15.3.2004. The Petitioner also executed a common Deed of Guarantee for guaranteeing the repayment of the said amount with Respondent Nos.1 to 3, the Directors of Respondent No.4 as guarantors on 27.10.1998. It is essentially on this Deed of Guarantee that this Petition is filed. 3.The Petitioner issued a Demand Notice on 6.12.2000 requiring Respondent No.4 to pay off the balance then due and payable to the Petitioner. Respondent No.4 defaulted. The balance amount payable was revoked by the Petitioner. The Petitioner issued a Recall-cum-Takeover Notice on 16.8.2001 and took over possession of the mortgaged assets of Respondent No.4 on 7.9.2001 under the provisions of the SFC Act. Thereafter the Petitioner issued notice to Respondent No.3 as the guarantors on 25.9.2001 to pay the balance to the Petitioner as per the Deed of Guarantee, upon 3 the default of the principal debtor. Respondent Nos.1 to 3 did not reply or show cause to the notice, did not refute the contentions of the Petitioner and did not comply with the notice either. On the very next day, Respondent No.4 informed the Petitioner that the Company was registered with BIFR with effect from 20.9.2001 under Case No.372/2001. The Petitioner, therefore, could not initiate legal proceedings against any of the Respondents consequent upon the provisions of Section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA). 4.BIFR dismissed the Reference on 8.10.2002 and Appeal therefrom to AAIFR came to be dismissed on 17.11.2004. The Writ Petition filed by Respondent No.4 challenging the order of AAIFIR came to be dismissed on 23.12.2005. 5.The Petitioner sold the mortgaged hypothecated property in June 2005. A shortfall of Rs.15,09,40,074/- as on 30.4.2006 occurred. The Petitioner has filed this Petition to claim that shortfall from the guarantees under the Deed of Guarantee, Exhibit-A to the Petition. 6.Clause-1 of the Deed of Guarantee shows the guarantee given by Respondents 1 to 3 to jointly and severally pay the 4 Petitioner on demand the loan together with interest thereon and all other monies which shall then become due to the Petitioner together with all the costs, charges and expenses incurred by the Petitioner, if at any time Respondent No.4, as the principal debtor, defaulted in the repayment of the Term Loan lent and advanced to it by the Petitioner. Under the said guarantee, Respondents 1 to 3 also indemnified the Petitioner at all times against any loss and damage, which the Petitioner may suffer by reason of the default of Respondent No.4. 7.Clauses 5 and 6 of the guarantee show that it is irrevocable, joint and several. 8.Clause 10 of the guarantee shows that it is a continuing guarantee for all amounts lent and advanced by the Petitioner which becomes due and payable and remains unpaid to the Petitioner under the mortgage executed by Respondent No.4 until the loan is paid off in full with interest and costs, charges and expenses and all other monies incurred by the Petitioner. 9.The amounts mentioned in the Petition, which constituted the shortfall together with interest thereon and costs, 5 charges and expenses of the Petitioner, remained unpaid. Consequently, the guarantee remains in force. 10.It is the case of the Respondents that the Petition is barred by limitation as it has not been filed within 3 years of the invocation of the guarantee on 25.9.2001. It is contended by the Respondents that even when the Reference of Respondent No.4 was filed before the BIFR under SICA, the BIFR had granted permission to the Petitioner to file any Suit or proceeding to recover their claim pending reconstruction and hence, the time during which the Petitions were pending before the BIFR or AAIFR cannot be deducted or allowed to compute the period of limitation. 11.It is the case of the Petitioner that since the guarantee is continuing and the claim of Respondent No.4 remains outstanding and Respondent Nos.1, 2 and 3 have not refuted the Petitioner's claim or refused to make payment or caused breach of the guarantee, the guarantee remains in force and the period of limitation has not even begun to run. 12.This legal position has been settled in a number of judgments of the Apex Court as well as this Court. 6 13.In the earliest judgment on this aspect in the case of Mrs.Margaret Lalita Samuel vs. The Indo Commercial Bank Ltd., (1979) 2 Supreme Court Cases 396 = AIR 1979 SC 102, the computation of the period of limitation in a continuing guarantee under Article 55 of the Limitation Act, 1963 (Article 115 of the Limitation Act, 1908) came to be considered. It was held that the period of limitation started running only on the breach of the contract of continuing guarantee and is not related to the date of advances made against the guarantee. In Para-10 of that judgment on page 403, the liability of the Defendant upon enforcement of the guarantee bond was considered. The precise term of the guarantee given by the Defendant in the form of a letter to the Plaintiff in that Suit was set out. In that case, the Defendant guaranteed the repayment of all the monies which, at any time, became due to the Bank on the general balance of the accounts of the Defendant with the Bank and declared that the guarantee was a continuing guarantee to the extent of some of the overdrafts specified in that case which, at any one time or at different times, became due on the general balance of account. 14.It was observed that the guarantee was a continuing guarantee and the undertaking of the Defendant was to pay 7 that amount thereunder. It was held that so long as the account was “live” account in the sense that it was not settled and there was no refusal on the part of the guarantor to carry out the obligations, the period of limitation could not be said to have commenced running. It was observed that the limitation would only run from the date of the breach under Article 115 of the Limitation Act, 1908 (Article 55 of the Limitation Act, 1963). 15.The judgment of Justice J.C. Shah (as he then was in this Court) was reproduced, considered and upheld. In the observation of Justice J.C. Shah, which has been reproduced in that judgment, only the period of limitation for enforcing the liability of the Defendant under the surety bond was to be considered. The cause of action was held to have arisen when the contract of continuing guarantee was “broken” and it was observed that so long as the amount remained lying without refusal by the Defendant to carry out his obligations the period of limitation did not commence to run. 16.The Supreme Court considered the observations of the Judicial Committee of the Privy Council in the case of Wright vs. New Zealand Farmers Co-operative Association of 8 Canterbury Ltd. under which also the continuing guarantee applied to the balance at any time payable and which remained unpaid. The construction of such a continuing guarantee by the Privy Council was accepted by the Supreme Court. The observations of the Privy Council read thus:- “It is difficult to see how effect can be given to this provision except by holding that the repayment of every debit balance is guaranteed as it is constituted from time to time, during the continuance of the guarantee, by the excess of the total debits over the total credits. If that be the true construction of this document, as their Lordships think it is, the number of years which have expired since any individual debt was incurred is immaterial.” 17.It is clear to see that in this case the letter of the Petitioner addressed to the Respondents dated 25.9.2001 has remained unreplied, uncomplied and unrefuted. The guarantee, therefore, continued to run because the amount was not fully paid off by the principal debtor. 18.The Respondents have relied upon a case of Maharashtra State Financial Corporation vs. Ashok K. Agarwal, (2006) 9 9 Supreme Court Cases 617, in which case the failure of the Company to repay the loan of MSFC resulted in Notice dated 8.3.1983 being issued to the principal debtor. The application under Sections 31 and 32 of the SFC Act came to be filed on 25.10.1983. The attached properties of the borrower came to be sold on 11.6.1990 and the shortfall was sought to be realized from the sureties under Notices dated 27.1.1991, sent after the sale of the assets of the borrower and to recover only the shortfall of the amount then remaining due and payable. The Petition came to be filed on 2.1.1992 under Section 31(1)(aa) of the SFC Act. The aspect to be considered was whether the period of limitation had to be computed under Article 137 or 136 of the Limitation Act. It was held that the Petition was not in the nature of an execution of a decree and hence, 12-year period of limitation would not apply. 19.The judgment in the case of Ashok Agarwal (supra) came to be considered by the Calcutta High Court in the case of West Bengal Industrial Development Corporation & anr. vs. Nicon Electronics Devices Pvt. Ltd. & ors., AIR 2008 Calcutta 71. It is held that the limitation period would be 3 years and not 12 years from the time the guarantee became due and payable. In that case, the guarantee was 10 continuing guarantee. The guarantor agreed to pay the guaranteed amount after notice in writing requiring payment of the same was delivered or sent to the guarantor through Registered Post. It may be mentioned that there is no such contract between the parties in this case. In this case, the continuing guarantee remains due and payable at all times until the amount remains due and payable by the principal debtors. There is no specific contract between the parties for issuing a notice in writing requiring payment of the amount invoked under the guarantee. In the case of Nicon Electronics (supra), the Notice of Demand dated 29th September 1995 was sent to the guarantors as well as the principal debtors. The liability of the guarantor was co- extensive with that of the liability of the principal debtor. The case of Margaret (supra) was also considered. In that case, it was observed and accepted that in the continuing guarantee, the liability ran until the account was settled and there was refusal on the part of the guarantor to carry out his obligations under the live account. The guarantee would then commence to run from the date of the breach or the refusal under Article 115 of the Limitation Act, 1909. Since in that case the notice in writing, as required, was issued the guarantee came to be invoked on the date of the notice. Hence, it was observed that if the Corporation had not 11 issued the notice to the guarantors along with the demand made upon the principal borrower as per the judgment in the case of Margaret (supra) the live account with the borrower and the refusal to pay on the part of the guarantor would have remained and the guarantee, being continuing, the period of limitation would not have run. But since the Demand Notice was issued upon the guarantors also along with the Demand Notice on the principal borrower and the guarantors had refused to pay, the liability became crystallized and consequently, it was held that that Petition was barred by limitation. 20.In this case, neither is there any clause mandatorily requiring the Petitioner to issue the notice nor is there a refusal on the part of the guarantors to make payment of the amount invoked under the guarantee. Consequently, there is no breach of the guarantee which continues to run. 21.As held in the judgment in the case of Maharashtra State Financial Corporation vs. Jaycee Drugs and Pharmaceuticals Pvt. Ltd. & ors., (1991) 2 Supreme Court Cases 637 relied upon by Mr.Setalvad, the application under Section 31(1)(a)(a) of the SFC Act would apply to a personal guarantee as also the property secured. 12 Consequently, the Petition is granted under the aforesaid provisions, the amount having remained unpaid and the shortfall having arisen, the Respondents, as the guarantors under the continuing guarantee, are required to make good that payment under the guarantee. 22. Consequently, the Petition is made absolute in terms of prayer (a). No order as to costs. [SMT.ROSHAN DALVI, J.]