Case Note & Summary
The appellant, Smt. C. Sarasamma, was a guarantor for a loan availed by respondent No.2, M/s. Ethnic Informatics Private Ltd., from respondent No.1, Karnataka State Financial Corporation (KSFC). The loan was sanctioned on 30.09.1996 and disbursed on 30.10.1996. The borrower defaulted, and the account was classified as a Non-Performing Asset (NPA) on 31.03.1999. KSFC issued a demand notice on 22.06.1999. On 30.07.2004, KSFC filed a petition under Sections 31(1)(aa) and 32 of the State Financial Corporation Act, 1951 (SFC Act) before the XXXVII Additional City Civil and Sessions Judge, Bangalore, seeking enforcement of the mortgage and sale of the property. The learned Sessions Judge allowed the petition on 25.11.2015. Aggrieved, the appellant filed this Miscellaneous First Appeal under Section 32(9) of the SFC Act. The primary legal issue was whether the petition was barred by limitation. The appellant argued that the application was filed beyond three years from the date of cause of action, which arose when the loan was declared NPA on 31.03.1999 or upon demand on 22.06.1999. KSFC contended that the limitation period was 12 years under Article 62 of the Limitation Act, 1963, as it was a mortgage suit. The High Court held that an application under Section 31(1)(aa) of the SFC Act is not a suit for enforcement of mortgage but a special proceeding for enforcement of security interest, and the limitation period is three years under Article 137 of the Limitation Act, 1963. The cause of action arose on 31.03.1999 (NPA date) or 22.06.1999 (demand date), and the petition filed on 30.07.2004 was clearly barred by limitation. The court also held that a guarantor can raise the defence of limitation. Consequently, the appeal was allowed, the order of the learned Sessions Judge was set aside, and the petition was dismissed as barred by limitation.
Headnote
A) Limitation Act, 1963 - Article 137 - Application under Section 31(1)(aa) of SFC Act - Period of Limitation - The period of limitation for filing an application under Section 31(1)(aa) of the State Financial Corporation Act, 1951 is three years from the date when the right to apply accrues, as per Article 137 of the Limitation Act, 1963. The cause of action arises when the loan is declared as Non-Performing Asset (NPA) or upon demand and default by the borrower. (Paras 10-12) B) State Financial Corporation Act, 1951 - Section 31(1)(aa) - Limitation - Guarantor's Defence - A guarantor is entitled to raise the defence of limitation in proceedings under Section 31(1)(aa) of the SFC Act. The liability of the guarantor is co-extensive with that of the borrower, but if the claim against the borrower is barred by limitation, the guarantor cannot be held liable. (Paras 13-15) C) State Financial Corporation Act, 1951 - Section 32(9) - Appeal - Maintainability - An appeal under Section 32(9) of the SFC Act lies against an order passed under Section 31 or 32 of the Act. The High Court, in such appeal, can examine the correctness of the order including the question of limitation. (Para 1) D) Limitation Act, 1963 - Article 137 - Application under Section 31(1)(aa) of SFC Act - Commencement of Limitation - The limitation period of three years under Article 137 of the Limitation Act, 1963 for an application under Section 31(1)(aa) of the SFC Act commences from the date when the loan account is classified as NPA or from the date of demand and default, whichever is later. (Paras 10-12)
Issue of Consideration
Whether the petition filed by the Karnataka State Financial Corporation under Section 31(1)(aa) of the State Financial Corporation Act, 1951 was barred by limitation, and whether the appellant, as a guarantor, could raise the defence of limitation.
Final Decision
The appeal is allowed. The order dated 25.11.2015 passed in Misc.No.521/2004 by the XXXVII Addl. City Civil and Sessions Judge, Bangalore, is set aside. The petition filed by KSFC under Sections 31(1)(aa) and 32 of SFC Act is dismissed as barred by limitation.
Law Points
- Limitation for application under Section 31(1)(aa) of SFC Act is three years under Article 137 of Limitation Act
- 1963
- Cause of action arises when loan becomes NPA or on demand and default
- Guarantor's liability is co-extensive but subject to limitation
- Section 32(9) of SFC Act provides appeal remedy against orders under Section 31/32.
