TaxTMI 
TaxTMI 
2006 (4) TMI 540
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....ft, goods loan, and demand loan against supply Bills to a company known as Gadag Forge Fits (India) Pvt. Ltd., ('company' for short). Respondent 1 was its Managing Director and Respondents 2 to 7 were its Directors. The credit facilities were renewed and enhanced from time to time. Respondents 1 to 7 executed the following guarantee bonds in favour of the Bank, personally agreeing and undertaking to pay and satisfy the Bank on demand all sums which may be due on account of the credit facilities granted to the company subject to the limits mentioned therein : i) Guarantee Bond dated 17.9.1983/20.8.1983/29.8.1983 executed by Respondents 1, 2 and 3, the limit of liability being Rs. 10.50 lakhs (a single deed executed by Respondents 1, 2 and 3 on different dates). ii) Guarantee bond dated 4.4.1984 executed by respondents 4 & 5, the limit of liability being Rs. 10.50 lakhs. iii) Guarantee bond dated 10.9.1985 executed by Respondents 1, 4, 5, 6 & 7, the limit of liability being Rs. 11.70 lakhs. Thus the limit of total liability undertaken exclusive of interest was Rs. 22.20 lakhs in the case of Respondents 1, 4 & 5, Rs. 10.50 lakhs in the case ....
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....it for damages for an amount which would be more than the amount claimed by the Bank. They also alleged that the bank ought to have given a moratorium on interest to rehabilitate the company. They also stated that without prejudice to their rights and contentions, they were willing to discuss the matter with the Bank, to arrive at an amicable solution. A formal notice through counsel was sent by the Bank on 17.12.1987 demanding payment which elicited a reply dated 30.12.1987 denying the demand. 2.4) The Bank initiated proceedings for winding up against the company on account of its inability to pay its dues, on 11.10.1988 and the High Court ordered winding up of the company on 17.3.1989. Therefore, the suit was filed by the Bank on 16.3.1990 only against the Guarantors (Respondents 1 to 7) for recovery of Rs. 19,77,478.60 (that is, the amount demanded in the notice dated 12.10.1987 with interest up to date of suit). The Bank restricted the claim to Rs. 10.50 lakhs with interest at 18.5% P.A. from 17.12.87 to the date of suit against Respondents 2 and 3 and to Rs. 11.70 lakhs with interest at 18.5% P.A. from 17.12.1987 to date of suit against respondents 6 and 7. The Bank contend....
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.... "Section 126. 'Contract of guarantee,' 'surety,' 'principal-debtor' and 'creditor' A 'contract of guarantee' is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the 'surety'; the person in respect of whose default the guarantee is given is called the 'principal-debtor,' and the person to whom the guarantee is given is called the 'creditor.' A guarantee may be either oral or written." "Section 128. Surety's liability The liability of the surety is co-extensive with that of the principal-debtor, unless it is otherwise provided by the contract." "Section 129. 'Continuing guarantee' A guarantee which extends to a series of transactions is called a 'continuing guarantee." "Section 130. Revocation of continuing guarantee A continuing guarantee may at any time be revoked by the surety, as to future transactions, by notice to the creditor." 5.2) The relevant Articles in the Schedule to the Limitation Act, 1963 are extracted below : Article No. De....
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....me due to the Syndicate by the Borrower not exceeding Rs. 11,70,000/- as aforesaid." "NOTWITHSTANDING the discontinuance of this Guarantee as to one or more of the Guarantors or the death of any one of them, the Guarantee is to remain a continuing Guarantee, as to the other or others or the representatives and estates of the deceased and where there is more than one Guarantor, their liability under these presents being construed as joint and several." "ANY ACCOUNT SETTLED or stated by or between the Syndicate and the Borrower or admitted by him or on his behalf may be adduced by the Syndicate and shall in that case be accepted by the guarantors and each of them and their respective representatives as conclusive evidence that the balance or amount thereby appearing is due from to the Syndicate." [Emphasis supplied] 5.4) MARGARET LALITA SAMUEL vs. INDO COMMERCIAL BANK LTD (AIR 1979 SC 102) relied on both sides dealt with the question of limitation with reference to a continuing guarantee. In that case the guarantor sought to avoid liability by contending that every item of an overdraft account was an independent loan and the limitation would start from the date o....
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....his Court also agreed with the view expressed by the Privy Council in Wright v. New Zealand Farmers Co-operative Association of Canterbury Ltd. (1939 AC 439), and the Court of Appeal in Bradford Old Bank Ltd. v. Sutcliffe [1918 (2) KB 833] 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. This Court also referred to a passage from Paget's Law of Banking, with approval, though not extracted. The said passage from Paget reads thus : "In Bradford Old Bank Ltd v Sutcliffe - (1918) 2 KB 833, it was pointed out that the contract of the surety was a collateral, not a direct, one and that in such case demand was necessary to complete a cause of action and set the statute running. Moreover, bank guarantees invariably specify that the liability of the surety is to pay on demand, and in this connection the words are not devoid of meaning or effect, even with reference to this statute, as is the case with a promisso....
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....where the Bank, by not making a demand for, say 20 or 30 years, or postponing the demand indefinitely, could postpone the commencement of limitation indefinitely, and held that such a situation was impermissible. It, therefore, held that the period of limitation commenced to run from the middle of 1986 when the operation of the accounts was stopped, and the suit filed in 1990 beyond 3 years from the stoppage of operation of accounts was barred by time. 7. The High Court affirmed the said finding. It held that the words 'on demand' had a specific connotation in legal parlance; and that when an amount is payable on demand, it means 'always payable' and a 'demand' is not a condition precedent for the amount to be paid. The High Court held that when the guarantee stated that the guarantors were liable to pay on demand by the Bank, it meant that the amount was payable from the moment of execution of the guarantee and, consequently, no actual demand is necessary to make the amount due under the guarantees. It was held that the money became payable under the guarantee bond as soon as the guarantee was executed. The High Court also held that when the accounts bec....
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....en the liability of a guarantor will arise, would depend purely on the terms of the contract. 10. Samuel (supra), no doubt, dealt with a continuing guarantee. But the continuing guarantee considered by it, did not provide that the guarantor shall make payment on demand by the Bank. The continuing guarantee considered by it merely recited that the surety guaranteed to the Bank, the repayment of all money which shall at any time be due to the Bank from the borrower on the general balance of their accounts with the Bank, and that the guarantee shall be a continuing guarantee to an extent of Rs. 10 lakhs. Interpreting the said continuing guarantee, this Court held that so long as the account is a live 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, the period of limitation could not be said to have commenced running. 11. But in the case on hand, the guarantee deeds specifically state that the guarantors agree to pay and satisfy the bank on demand and interest will be payable by the guarantors only from the date of demand. In a case where the guarantee is payable on demand, as held in the case of Bradfor....
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....le 55 provides that the time will begin to run when the contract is 'broken'. Even if Article 113 is to be applied, the time begins to run only when the right to sue accrues. In this case, the contract was broken and the right to sue accrued only when a demand for payment was made by the Bank and it was refused by the guarantors. When a demand is made requiring payment within a stipulated period, say 15 days, the breach occurs or right to sue accrues, if payment is not made or is refused within 15 days. If while making the demand for payment, no period is stipulated within which the payment should be made, the breach occurs or right to sue accrues, when the demand is served on the guarantor. 14. We have to, however, enter a caveat here. 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 wou....
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.... 17. In the view we have taken, it is not necessary to consider the meaning of the words 'live account' used and referred to in Samuel (supra). Suffice it to say that the interpretation by the courts below placed on the words 'live account', that they refer to an account which is operational and not dormant, may not be sound. This Court itself had indicated that 'live account' means an account that is not settled. The use of the term 'settled' gives an indication that a 'live account' refers to an account where the balance has not been struck by an "account stated" or "account settled". We may in this behalf, refer to the following observations in Bishun Chand v. Girdhari Lal & Anr. (AIR 1934 PC 147) : "The essence of an account stated is not the character of the items on one side or the other but the fact that there are cross items of account and that the parties mutually agree the several amounts of each and, by treating the items so agreed on the one side as discharging the items on the other side pro tanto, go on to agree that the balance only is payable. Such a transaction is in truth bilateral, and creates a new debt and a ne....