(Prayer: Petition filed under Sections 31(1)(aa) and 32 of the State Financial Corporations Act, 1951, praying to determine the liability and direct the respondents 2 to 4 herein to pay, jointly and severally, a sum of Rs.8,48,35,454.45 (Rupees Eight Crores Forty Eight Lakhs Thirty Five Thousand Four Hundred and Fifty Four and Paise Forty Five only) to the petitioner corporation with interest at 15% per annum from the date of the petition till the date of realisation in full and awarding costs.)

1. This Original Petition is filed by the Tamilnadu Industrial Investment Corporation Limited (herein after mentioned as “the Corporation”), a public financial institution, under Sections 31(1)(aa) and 32 of the State Financial Corporations Act, 1951 (“the SFC Act”), seeking a determination of liability and a direction for Respondents 2 to 4 to pay, jointly and severally, a sum of Rs.8,48,35,454.45, with interest at 15% per annum from the date of the petition until realisation, and costs.

2. The petitioner’s case is that in 1986 the Corporation sanctioned a term loan of Rs. 27,00,000 to the 1st Respondent, M/S. Uni Organic Industries Limited, to set up a unit for manufacturing edible-grade rice bran oil at R.K.Nagar, Chennai. The loan carried interest at 16% per annum and was repayable in ten half-yearly instalments. On 9.4.1987, the 1st Respondent hypothecated the machinery to the Corporation, and the 2nd and 3rd Respondents — Thiru S.P.Narasimhan and Thiru S.Nageswara Gupta — executed a Deed of Guarantee on the same day, standing surety for the loan.

3. It is further submitted that the 1st Respondent commenced production and paid a few instalments, but thereafter defaulted. One Sathya Engineering filed C.P. No. 131 of 1994 before this Court seeking the winding up of the company. This Court appointed an Official Liquidator on 8.11.1996. The Official Liquidator took possession of the factory on 13.5.1998 and sold its assets by public auction on 25.8.2005 for Rs.26,35,464, which sum, according to the Corporation's own pleaded case, “was credited in the loan account” of the 1st Respondent.

4. The Corporation issued notices of demand to the guarantors only on 02.09.2011 and 05.09.2011, and, when that yielded nothing, filed the present Petition on 23.11.2011, claiming a principal balance of Rs.1,47,258, interest of Rs.8,46,73,956.45, and other dues of Rs.14,240 — a total of Rs.8,48,35,454.45 — from Respondents 2 to 4.

5. Respondents 2 and 3 filed separate but substantively identical counterstatements on 29.6.2016. Each raises only one defence on the merits: that the claim is barred under Article 137 of the Limitation Act, 1963, because, as pleaded, “the claim against the respondents had crystallised on 18.9.1991 itself when the loan was foreclosed,” and a Petition filed only in 2011 is hopelessly out of time. Reliance is placed on this Court's decision in State Industries Promotion Corporation of Tamil Nadu Ltd. v. Conveyor Systems (P) Ltd., C.M.A.No.2894 of 2011, judgment dated 18.9.2013. Respondents 1 and 4 filed no counter-statement and have not appeared at any stage, despite service being attempted on more than one occasion, including by paper publication as against the 1st Respondent.

6. The 2nd Respondent died on 9.12.2022. His death was reported to the Counsel on 10.04.2023. After the delay in furnishing particulars of the legal heirs was condoned, his wife, N. Visalakshmi, was brought on record as the 5th Respondent by order dated 21.11.2023 in A.No.4024 of 2023, and the petition was amended accordingly.

7. The petitioner Corporation initially examined P. Arangasamy, Junior Officer, as P.W.1 on 27.02.2017, through whom Exs.P1 to P7 were marked. As his cross-examination could not be completed and he subsequently ceased to be in the service of the Corporation, his evidence was closed on 02.03.2020. The petitioner thereafter filed A.Nos.1857 and 1858 of 2020 to reopen the evidence and eschew his testimony, which applications were allowed on 04.09.2020. Consequently, N. Ramakrishnan was examined on behalf of the petitioner Corporation and, on 07.03.2022, Exs.P1 to P8 were marked afresh through him, Ex.P1 is the authorization letter issued in favour of N. Ramakrishnan; Ex.P2 is the office copy of the Terms and Conditions of the loan dated 12.08.1986; Ex.P3 is the Deed of Hypothecation dated 09.04.1987; Ex.P4 is the Deed of Guarantee dated 09.04.1987; Ex.P5 series are the Postal Acknowledgment Cards; Ex.P6 series are the returned postal covers along with Postal Acknowledgment Cards; Ex.P7 is the certified copy of the Statement of Account relating to the first respondent; and Ex.P8 is the order dated 26.03.2009 passed in Comp.A.No.353 of 2009 in Comp.P.No.131 of 1994.

8. Learned counsel appearing for the petitioner submitted that the first respondent had availed a term loan of Rs.27,00,000/- from the petitioner Corporation for the purpose of manufacture of edible oil and, in proof of the loan transaction, security, guarantee and subsequent recovery proceedings, the petitioner had marked Exs.P1 to P8, which were referred to and explained during the course of submissions. According to the petitioner, the borrower initially made certain payments towards the loan account, but subsequently committed default in repayment.

9. On the question of limitation, learned counsel submitted that the relevant starting point is not the date of the original default or recall of the loan, but the date on which the secured assets were sold and the sale proceeds were realised and adjusted, since it is only thereafter that the actual balance recoverable from the guarantors could be ascertained. It was contended that Ex.P8, which relates to the proceedings concerning disbursement of the sale proceeds by the Official Liquidator, establishes the relevant point of time for computing limitation and that the present petition was instituted within three years therefrom. The petitioner’s stand is that the assets of the first respondent were sold through the Official Liquidator and the proceedings relating to distribution of the sale proceeds culminated in an order of this Court in the year 2009.

10. In support of the above contention, learned counsel placed strong reliance upon Deepak Bhandari v. Himachal Pradesh State Industrial Development Corporation Ltd., (2015) 5 SCC 518, and submitted that the Supreme Court has held that, where the secured assets are proceeded against, the right to recover the balance from the guarantor arises only after the assets are sold and the balance due is ascertained. According to the petitioner, therefore, the period of limitation has to be reckoned from the stage at which the sale proceeds are realised and the balance liability becomes ascertainable and not from the earlier date of recall or default.

11. Learned counsel further submitted that the principle laid down in Deepak Bhandari’ case (cited supra) would equally apply to the present case notwithstanding the fact that the petitioner Corporation itself had not invoked Section 29 of the State Financial Corporations Act, 1951. It was submitted that, in the present case, the assets were brought to sale by the Official Liquidator in proceedings initiated otherwise than by the petitioner; consequently, the petitioner had necessarily to await sale of the assets and distribution of the realised amount amongst the secured creditors before it could ascertain the balance remaining due and invoke the guarantee.

12. Learned counsel further referred to the additional proof affidavit filed on behalf of the petitioner and submitted that the petitioner had entered the witness box again for the specific purpose of explaining the subsequent developments and the receipt/disbursement of the amounts through the Official Liquidator. It was contended that Ex.P8 was marked through the said additional proof affidavit and that the respondents had not chosen to cross-examine the petitioner’s witness on the averments contained therein.

13. It was thus submitted that the petitioner could ascertain the precise shortfall recoverable from the guarantors only after the sale of the assets of the principal borrower and the consequent realisation and distribution of the proceeds. On that basis, it was contended that Article 137 of the Limitation Act, 1963, though prescribing a period of three years, would commence only from such ascertainment of the balance amount and that, reckoned from the relevant event evidenced by Ex.P8, the present petition is well within limitation. Accordingly, learned counsel submitted that the plea of limitation raised by respondents 2, 3 and 5 is liable to be rejected.

14. The learned counsel appearing for respondents 2, 3 and 5 submitted that the claim made by the petitioner is hopelessly barred by limitation. It was pointed out that the petitioner Corporation had sanctioned a term loan of Rs.27,00,000/- to the first respondent for purchase and erection of plant and machinery; the machinery was hypothecated in favour of the petitioner and respondents 2 and 3 had executed a Deed of Guarantee. According to the respondents, the loan was foreclosed on 18.09.1991; the Official Liquidator was appointed on 08.11.1996 and took possession of the factory premises on 13.05.1998; and the assets were ultimately auctioned on 25.08.2005 for Rs.26,35,464/-, which amount was credited to the loan account. The final demand notice and invocation of the personal guarantee were made only on 02.09.2011 and 05.09.2011 It was further submitted that, though under Section 128 of the Indian Contract Act, 1872, the liability of a surety is co-extensive with that of the principal debtor and the creditor may proceed against the guarantor without first proceeding against the principal borrower, the petitioner cannot, after permitting several years to elapse, seek to fasten an enlarged liability together with accumulated interest upon the guarantors. On this premise, it was contended that, if the foreclosure of the loan on 18.09.1991 is taken as the starting point, the proceedings instituted only in 2011 are clearly barred by limitation even it is 3 years or 12 years.

15. The learned counsel placed reliance upon Deepak Bhandari’ case (cited supra), particularly paragraphs 26 to 29, and H.P. Financial Corporation v. Pawna, (2015) 5 SCC 617, to contend that, where the secured assets are sold, limitation for recovery of the balance from the guarantor commences from the date of sale of the assets, when the balance liability becomes ascertainable, and not from the earlier recall notice. Applying the said principle, it was submitted that, even taking 25.08.2005, the date of auction of the assets, as the starting point, the claim ought to have been instituted on or before 24.08.2008, whereas the present proceedings were initiated only in 2011 and are therefore barred.

16. Learned counsel further submitted that, although the petitioner's witness had stated that the period of limitation was twelve years, the petitioner’s counsel had conceded that the applicable period was three years. Reliance was also placed upon Maharashtra State Financial Corporation v. Ashok K. Agarwal, (2006) 9 SCC 617, wherein proceedings under Sections 31 and 32 of the State Financial Corporations Act were held to attract Article 137 of the Limitation Act and a period of three years. As regards the petitioner's reliance upon Ex.A8, stated to have been introduced through an additional affidavit to contend that the sale proceeds were received by TIIC only in 2009 and that the proceedings instituted after issuance of notice in 2011 were therefore within limitation, the respondents contended that there was no corresponding amendment to the pleadings. Neither the petition nor the cause-of-action paragraph in the amended petition referred to the said High Court order as furnishing a fresh starting point of limitation. It was therefore submitted that evidence unsupported by pleadings could not be relied upon to create a fresh cause of action.

17. It was further contended that the said exhibit merely permitted the Official Liquidator to make payment and did not, by itself, establish that the amount was received for the first time only in 2009. On the contrary, the respondents relied upon Ex.P7, the petitioner's own statement of accounts, to contend that a sum of Rs.25,52,742/- had been transferred from the office of the Official Liquidator to the High Court on 15.09.2007, leaving a balance of Rs.1,47,758/-. Thus, even assuming that 15.09.2007 constituted the relevant date, it was argued that the proceedings ought to have been initiated by 15.09.2010 and were still barred by limitation.

18. On quantum, learned counsel submitted that the claim for Rs.8,48,35,454.45 includes excessive compounded and post-sale interest. Placing reliance upon Section 34 CPC and Central Bank of India v. Ravindra, (2002) 1 SCC 367, it was submitted that the Court retains discretion in the matter of pendente lite and future interest and that penal interest cannot be capitalised. It was therefore contended that the petitioner cannot take advantage of its own prolonged delay in enforcement to burden the guarantors with an enormous accumulation of interest.

19. Learned counsel further submitted that there had been an unexplained delay from the default in 1989, through the winding-up proceedings in 1996 and the auction in 2005, until institution of the proceedings in 2011, and that such delay and laches ought to weigh against the grant of heavy pendente lite and future interest, particularly against the estate of a deceased guarantor. It was further pointed out that, after the death of the second respondent, S.P. Narasimhan, the fifth respondent was impleaded only in her capacity as his legal representative and, by virtue of Sections 50 and 52 CPC, her liability, if any, can extend only to the extent of the assets of the deceased which have come into her hands and no personal decree can be passed against her. It was also contended that, in the absence of pleadings or proof of any acknowledgment or consent by the second respondent or his estate to the alleged revised balances, rescheduling or capitalisation of interest, unilateral statements of account cannot be relied upon to enlarge the liability of the surety. On these grounds, the respondents prayed for dismissal of the petition.

20. The following arises for the points for determination :

                     (i) Whether the claim made in the petition is barred by limitation?

                     (ii) Whether the fourth respondent has been improperly joined as a party to the petition?

                     (iii) To what relief, if any, is the petitioner entitled to?

POINT (i): LIMITATION

21. The threshold question is which provision of the Limitation Act, 1963, governs an application of this kind, brought by a State Financial Corporation under Section 31(1) (aa) of the State Financial Corporations Act, 1951 against a guarantor. Two articles have been canvassed at different points in this case: Article 136, which prescribes twelve years for execution of a decree or order of any civil court, on the footing that Section 32(8) of the State Financial Corporations Act, 1951 deems such an order executable as a decree; and Article 137, the residuary article, which prescribes three years for any other application for which no period of limitation is provided elsewhere, running from the date the right to apply accrues.

22. In Tamil Nadu Industrial Investment Corporation Ltd. v. M/s Kalathi & Co., dated 13.02.2013 this Court referred to the principle that an application under Section 31(1) of the State Financial Corporations Act cannot be treated as a plaint and that the substantive relief sought is akin to execution proceedings, and further applied Article 62 of the Limitation Act, 1963, which prescribes a limitation period of twelve years from the date when the money secured becomes due, and accordingly held that the claim was not barred by limitation. This question is no longer open in this Court. In State Industries Promotion Corporation of Tamil Nadu Ltd. v. Conveyor Systems (P) Ltd., C.M.A.No.2894 of 2011, dated 18.09.2013 this Court considered the earlier authorities which had treated proceedings under Section 31 of the State Financial Corporations Act as being in the nature of execution proceedings and had applied Article 136 of the Limitation Act. The Court referred, inter alia, Rajasthan Financial Corporation v. Banwari Lal, AIR 1997 Raj 273, Gujarat State Financial Corporation v. Natson Manufacturing Co. (P) Ltd., (1979) 1 SCC 193, and Maganlal v. Jaiswal Industries, (1989) 4 SCC 344 and thereafter followed the authoritative pronouncement of the Supreme Court in Maharashtra State Financial Corporation v. Ashok K. Agarwal, (2006) 9 SCC 617, wherein it was held,

                     “The proposition set out in the case of Gujarat State Financial Corporation (supra) found support in M/s. Everest Industrial Corporation and Others v. Gujarat State Financial Corporation 1987 (3) SCC 597. Again in Maganlal etc. vs. Jaiswal Industries Neemach & Ors. 1989 (3) SCR 696 this court noticed that an order under Section 32 is not a decree stricto sensu as defined in Section 2(2) of the Code of Civil Procedure, the financial Corporation could not be said to be a decree holder. This makes it clear that while dealing with an application under Sections 31 and 32 of the Act there is no decree or order of a civil court being executed. It was only on the basis of a legal fiction that the proceedings under Section 31 are treated as akin to execution proceedings. In fact this Court has observed that there is no decree to be executed nor there is any decree holder or judgment debtor and therefore in a strict sense it cannot be said to be a case of execution of a decree. Article 136 of the Limitation Act has no application in the facts of the present case. Article 136 specifically uses the words "decree or order of any civil court". The application under Sections 31 and 32 of the State Financial Corporation Act is not by way of execution of a decree or order of any civil court.

                     Article 137 of the Limitation Act applies in the facts of the present case.”

The Supreme Court thus held that Article 136 of the Limitation Act is inapplicable to proceedings under Section 31 of the State financial corporation Act and that such proceedings are governed by Article 137 of the Limitation Act. Following the said pronouncement, this Court in re Conveyor Systems (P) Ltd., held that Article 137 applies to proceedings against the sureties and that the period of limitation is three years, which is the settled position of law.

23. In view of the judgment in re Conveyor Systems (P) Ltd., which followed the decision of the Hon’ble Supreme Court in Maharashtra State Financial Corporation (cited supra), the earlier judgments of the Madras High Court, including Tamil Nadu Industrial Investment Corporation Ltd. v. M/s Kalathi & Co., dated 13.02.2013, can no longer be regarded as laying down good law.

24. The next question is: when does the right to proceed against the guarantor accrue where the principal debtor’s secured assets have been sold and the sale proceeds applied to the outstanding liability? This question was answered by the Hon’ble Supreme Court in Deepak Bhandari v. Himachal Pradesh State Industrial Development Corporation Ltd., (2015) 5 SCC 518, which also arose under the State Financial Corporations Act, 1951. It was held that the period of limitation for recovering the balance amount from the guarantor, after the sale of the mortgaged or hypothecated assets, begins to run on the date the sale proceeds are adjusted and the balance amount due is ascertained.

25. In the present case, the hypothecated properties and other assets of the first respondent company were sold by the Official Liquidator appointed by this Court. Although the properties were auctioned on 25.08.2005, the balance amount due to the petitioner Corporation could not have been ascertained on that date, as the determination of the amounts payable to the secured creditors and the ratio of distribution fell within the Official Liquidator’s purview. As evidenced by Ex.P7, the Official Liquidator remitted Rs.25,52,742/- to the petitioner Corporation on 15.09.2007. Accordingly, the petitioner Corporation could have ascertained the balance amount remaining due from the principal debtor only on 15.09.2007. Therefore, the right to proceed against the guarantors accrued, and the period of limitation commenced, on 15.09.2007. The aforesaid principle, read with the three-year limitation prescribed under Article 137 of the Limitation Act, 1963, applies to the facts of the present case.

26. Applying the above principle to the pleaded facts, the petitioner Corporation’s consistent case, is that the Official Liquidator auctioned the first respondent company’s assets on 25.08.2005 for Rs.26,35,464/- and thereafter remitted Rs.25,52,742/-, which was credited to the loan account on 15.09.2007. Thus, even according to the petitioner Corporation’s own pleadings, the balance due from the guarantors became ascertainable, at the latest, on 15.09.2007. The three-year period computed from that date expired on 15.09.2010. However, the present petition was filed only on 23.11.2011, well beyond the prescribed limitation period. Consequently, the claim against respondents 2 and 3, who are the guarantors, and against the fifth respondent, who has been impleaded as the legal representative of the deceased second respondent, is barred by limitation, even on the basis of the petitioner Corporation’s own pleaded case.

27. The petitioner relies on Ex.P8, the order dated 26.03.2009 permitting the Official Liquidator to pay the secured creditors at the rate of “29 paise in a rupee”. However, Ex.P8 does not state that any amount was actually received by or credited to the petitioner Corporation on or after 26.03.2009. Further, there is no pleading, either in the original petition or in the amended petition, that the sale proceeds were received by the Corporation in the year 2009.

28. The petitioner cannot rely upon a document produced at a later stage of the proceedings to introduce a new case which was not pleaded. In the absence of any amendment to the pleadings, Ex.P8 cannot be relied upon to change the date on which the cause of action arose. The petitioner is bound by its own pleadings, which show 15.09.2007 as the relevant date from which the period of limitation began to run.

29. Apart from the above, an amount calculated at the rate of 29 paise per rupee was sanctioned by the Official Liquidator, evidently after convening a meeting of the secured creditors, and the said amount was credited to the petitioner’s account. Ex.P7 establishes that the amount was duly credited to the petitioner’s account.

30. Thereafter, the Official Liquidator filed an application before the Company Court seeking approval of the distribution, and an order was passed on 26.3.2009 under Ex.P8. Ex.P8 merely ratified the action already taken by the Official Liquidator in distributing the sale proceeds of the company in liquidation among the secured creditors, including the petitioner.

31. Therefore, limitation commenced from the date on which the last payment was credited to the petitioner’s account and not from the date of the subsequent order of ratification passed by the Company Court under Ex.P8. In these circumstances, the petitioner’s contention that limitation should be computed from the date of Ex.P8 is without merit and is accordingly rejected.

32. On the evidence of PW-1, he deposed that the applicable period was twelve years, on the strength of what he had been told within the Corporation. That is not a matter for a witness to depose to; it is a question of law for this Court. For the reasons given above, this Court respectfully follows the view already taken by this Court in re Conveyor Systems (P) Ltd., and by the Supreme Court in Maharashtra State Financial Corporation (cited supra), that the period is three years. The Respondents' own pleaded date of 18.9.1991 is not relied upon by this Court in reaching this conclusion, since no document supporting that date has been produced by either side; the finding of limitation rests entirely on dates forming part of the Corporation's own pleaded case and its own proved exhibits.

33. Point (i) is accordingly answered in favour of the Petitioner, the claim against Respondents 2, 3 and 5 is barred by limitation.

34. Point No.2: The petitioner in his petition specifically pleaded that only respondents 2 and 3 executed the deed of guarantee. No averment in the pleadings attributes any personal liability, contractual, statutory or otherwise, to the fourth respondent, who is described merely as the Secretary of the first respondent company. Nevertheless, the prayer seeks a joint-and-several money decree against respondents 2 to 4. A monetary claim cannot be sustained against a person in the absence of any pleaded cause of action or legal basis for fastening personal liability upon him. Therefore, the fourth respondent has been improperly joined as a party to the petition.

35. Further, the records disclose that notices sent to the fourth respondent in 2012 and again in 2015 were returned on both occasions with the endorsement “no such person.” There is no material to establish that notice was thereafter validly served upon him in his individual capacity. The order dated 08.12.2015 permitting substituted service by publication in a newspaper was confined to the first respondent company and did not extend to the fourth respondent individually. Accordingly, insofar as the petition is directed against the fourth respondent, it is liable to dismissal for want of a pleaded cause of action and for want of valid service.

36. Point No. 3: In light of the answers to the previous points, the petitioner is not entitled to any relief. For the foregoing reasons, this petition is dismissed; there shall be no order as to cost.