Case Note & Summary
The appellant, Karnataka State Industrial Investment and Development Corporation (now KSIDC), filed an appeal under Section 32(9) of the State Financial Corporations Act, 1951 (SFC Act), against an order dated 05.03.2012 passed by the Principal District and Sessions Judge, Mysore, in Misc.No.38/2010. The District Court had dismissed the appellant's petition filed under Section 31(1)(aa) of the SFC Act for recovery of Rs.2,98,30,100.04 with interest from respondents 2 and 3, who were sureties to a loan granted to respondent No.1, Madhu Paper Mills (P) Ltd. (under liquidation). The District Court held that the petition was barred by limitation and not maintainable as the principal borrower company was under liquidation. The appellant had granted a loan to the company, and upon default, the loan was recalled on 30.09.1999. The appellant filed the application under Section 31(1)(aa) on 30.09.2002. The High Court examined the issue of limitation and held that the period of limitation for an application under Section 31(1)(aa) is governed by Article 137 of the Limitation Act, 1963, which provides three years from the date when the right to apply accrues. The right to apply accrues when the loan becomes due and the borrower defaults. Since the loan was recalled on 30.09.1999 and the application was filed on 30.09.2002, it was within the limitation period. The Court further held that the liability of a surety is co-extensive with that of the principal debtor under Section 128 of the Indian Contract Act, 1872, and the liquidation of the principal borrower does not extinguish the surety's liability. The District Court's findings were erroneous. The High Court allowed the appeal, set aside the impugned order, and remanded the matter to the District Court for fresh consideration on merits, directing the parties to appear on 24.03.2025.
Headnote
A) Limitation Act - Article 137 - Application under Section 31(1)(aa) of SFC Act - Period of limitation for filing application under Section 31(1)(aa) is governed by Article 137 of the Limitation Act, 1963, which provides a period of three years from the date when the right to apply accrues. The right to apply accrues when the loan becomes due and the borrower defaults. In this case, the loan was recalled on 30.09.1999, and the application was filed on 30.09.2002, which is within three years. The District Court erred in holding that the application was barred by limitation. (Paras 5-10) B) State Financial Corporations Act, 1951 - Section 31(1)(aa) - Surety liability - The liability of a surety is co-extensive with that of the principal debtor under Section 128 of the Indian Contract Act, 1872. The liquidation of the principal borrower company does not extinguish the liability of the sureties. The Financial Corporation can proceed against the sureties even after the company is wound up. The District Court's finding that the petition was not maintainable due to the company being under liquidation is erroneous. (Paras 11-15) C) Limitation Act - Article 137 - Application under Section 31(1)(aa) of SFC Act - The right to apply under Section 31(1)(aa) accrues when the loan becomes due and the borrower defaults. In this case, the loan was recalled on 30.09.1999, and the application was filed on 30.09.2002, which is within three years. The District Court erred in holding that the application was barred by limitation. (Paras 5-10)
Issue of Consideration
Whether the petition filed under Section 31(1)(aa) of the State Financial Corporations Act, 1951, for recovery of loan from sureties was barred by limitation, and whether the liability of sureties is extinguished upon the principal borrower company going into liquidation.
Final Decision
The High Court allowed the appeal, set aside the order dated 05.03.2012 passed by the Principal District and Sessions Judge, Mysore, in Misc.No.38/2010, and remanded the matter to the District Court for fresh consideration on merits. The parties were directed to appear before the District Court on 24.03.2025.
Law Points
- Limitation Act
- 1963
- Article 137
- Section 31(1)(aa) of State Financial Corporations Act
- 1951
- Section 32(9) of State Financial Corporations Act
- Surety liability
- Company liquidation
- Recovery of loan
