Karnataka High Court
Karnataka State Industrial vs Madhu Paper Mills (P) Ltd on 27 February, 2025
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MFA No. 8628 of 2012
IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 27TH DAY OF FEBRUARY, 2025 R
PRESENT
THE HON'BLE MR JUSTICE SREENIVAS HARISH KUMAR
AND
THE HON'BLE MR JUSTICE K. V. ARAVIND
MISCELLANEOUS FIRST APPEAL NO. 8628 OF 2012 (SFC)
Between:
Karnataka State Industrial
Investment and Development Corporation,
Now known as Karnataka State Industrial and
Infrastructure Development Corporation Ltd.,
Khanija Bhavan, No.49, Race Course Road,
Bengaluru-560 001
By its Deputy Manager
...Appellant
(By Sri V.S.Arbatti, Advocate)
And:
Digitally signed
by VEERENDRA
KUMAR K M 1. Madhu Paper Mills (P) Ltd.,
Location: HIGH
Having its Registered Office at
COURT OF Sanjaya Theatre Building,
KARNATAKA Mysore City, (under liquidation),
Represented by its Official Liquidator,
Kendriya Sadan Building,
F Wing, Koramangala
Bengaluru-560 034.
2. Sri Dayananda Sagar
S/o H.C.Chennaiah, Major,
R/o No.1114, M C Road, Mandya
3. Sri M.K.Gopalakrishna
S/o Kempegowda,
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MFA No. 8628 of 2012
R/o No.25/41, 7th Block
Jayanagar, Bengaluru-560 011.
...Respondents
(By Sri V.Jayaram, Advocate for R1;
Sri G.Krishna Murthy, Senior Counsel for
Smt. Bhavana G.K., Advocate for R2
Vide order dated 03.10.2023 appeal against
R3 abated)
This MFA is filed u/s 32(9) of the State Financial
Corporations Act, against the order dated 05.03.2012 passed in
Misc.No.38/2010 on the file of the Principal District and
Sessions Judge, Mysore, dismissing the petition as barred by
law filed u/s 31(1) (aa) of the State Financial Corporations Act.
Date on which the appeal was
21.01.2025
reserved for judgment
Date on which the judgment was
27.02.2025
pronounced
This MFA, having been heard & reserved, coming on for
pronouncement this day, judgment was delivered therein as
under:
CORAM: HON'BLE MR JUSTICE SREENIVAS HARISH KUMAR
and
HON'BLE MR JUSTICE K. V. ARAVIND
CAV JUDGMENT
(PER: HON’BLE MR JUSTICE SREENIVAS HARISH KUMAR)
This is an appeal preferred under Section 32
(9) of the State Financial Corporation Act (‘SFC
Act’ for short). The material facts that led to this
appeal being filed are as below:
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MFA No. 8628 of 2012
2. The appellant initiated action under
Section 31 (1) (aa) of SFC Act to recover a sum of
Rs.2,98,30,100.04 with interest from the
respondents 2 and 3 who were sureties to the loan
granted by the appellant to the first respondent.
Initially, a sum of Rs.30 Lakhs was sanctioned to
the first respondent in the year 1981, and at that
time itself respondents 2 and 3 stood as sureties
by executing an irrevocable deed of continuing
guarantee. The first respondent having become a
defaulter approached the BIFR in the year 1989.
The BIFR directed the appellant to sanction a
further sum of Rs.25 Lakhs, and it was sanctioned
also. Rs.66.26 Lakhs was the sum that had
accrued towards interest on the original loan
amount of Rs.30 Lakhs, and it was funded,
however penal interest of Rs.8,47,627.67 was
waived. Again the respondent became a defaulter.
The BIFR declared the first respondent a sick
company and ordered for its winding up. In the
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MFA No. 8628 of 2012
meantime the appellant initiated action under
Section 29 of the SFC Act against the first
respondent and thereafter by issuing a notice
dated 29.12.2000, invoked the deed of guarantee
executed by respondents 2 and 3. According to
the appellant, the respondents 2 and 3 did not
receive the notice and they did not discharge their
obligation also. This resulted in a petition being
filed under Section 31(1)(aa) of the SFC Act on
8.6.2001 before the City Civil Court, Bengaluru.
The petition was later on transferred to District
Court, Mysuru, as it was the Court which had
territorial jurisdiction.
3. The second respondent filed statement of
objections prominently contending that the petition
under Section 31(1)(aa) was time barred. The
District Judge, Mysuru, held an enquiry, and by his
order dated 5.3.2012 in Mis.No.38/2010, dismissed
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MFA No. 8628 of 2012
the petition holding it as barred by limitation.
Hence this appeal.
4. We heard the argument of Sri Venkatesh
S Arbatti, learned advocate for the appellant and
Sri G.Krishna Murthy, learned Senior Advocate,
who argued on behalf of learned advocate
Smt.Bhavana G K, for respondent No.2.
5. The main points urged by Sri Venkatesh S
Arbatti are these: The respondents do not dispute
their suretyship for the loan transaction and the
execution of a deed of continuing guarantee. The
first respondent became a defaulter, not even a
single pie was repaid. There was restructuring of
loan due to intervention of BIFR, and even
thereafter the first respondent failed to repay the
sum borrowed by it. On 29.6.1998, the appellant
took over the assets of the first respondent by
exercising power under Section 29 of the SFC Act.
On 21.7.2000, the BIFR passed an order declaring
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MFA No. 8628 of 2012
the first respondent a sick company and it should
be wound up. On 29.12.2000, a notice was issued
under Section 30 of the SFC Act recalling the loan
amount. Petition under Section 31(1)(aa) of the
Act was filed on 08.06.2001 at City Civil Court,
Bengaluru which was later on transferred to
District Court, Mysuru. The petition was filed
within three years according to Article 137 of the
Limitation Act from the date of recalling of the
loan amount under Section 30 of SFC Act.
5.1. Before proceeding under Section
31(1)(aa) of the Act, the appellant had taken
recourse to action under Section 29 of the SFC Act.
And since the action under Section 31(1)(aa) of
the Act against the sureties was for the balance
that remained after adjustment of dues under
Section 29 of the Act, period of limitation has to
be reckoned from the date of closure of proceeding
under Section 29, and thus seen, the petition was
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MFA No. 8628 of 2012
filed within three years from 29.06.1998, which
was the date on which the assets of the first
respondent were taken over under Section 29 of
the Act. The order impugned therefore suffers
from legal infirmity and requires to be set-aside
and the matter, remanded to the District Court for
adjudication on merits.
6. But Sri G.Krishna Murthy argued in this
way: Ex.P3 is the Deed of Guarantee executed by
respondents No.2 and 3. Clauses 2 and 4 of Ex.P3
stipulate that guarantors are treated as principal
debtors and any notice issued to respondent No.1
should be treated as intimation to the guarantors.
13.02.1988 was the first date of accrual of accrual
of cause of action. As per Exs.R3 to R8, the
appellant issued many demand notices to
respondent No.1. The subsequent events such as
the first respondent approaching the BIFR,
sanction of Rs.25 lakhs for rehabilitation of the
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MFA No. 8628 of 2012
first respondent etc., did not extend the period of
limitation. And in Ex.R10 there is a reference to
notice dated 15.05.1998, issued by the appellant
demanding repayment of Rs.1,65,60,463/- which
was the sum due as on 20.03.1998. Even if
limitation is calculated from 15.05.1998, the
petition having been filed on 08.06.2001, was time
barred.
6.1. Sri G.Krishna Murthy also highlighted
certain other points that there was no prohibition
under the SICA to initiate recovery proceedings
against the guarantors. It was very much known
to the appellant that the first respondent was
unable to pay the amount as long back as 1989
when it took a decision to approach the BIFR. On
29.03.1993, additional amount was sanctioned;
but it was not released as security was not
furnished. 10.10.1996 was the date when the
BIFR recommended for winding up. On
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26.02.1998, the AIFR confirmed the order of BIFR
to wind up the first respondent company. Then on
15.05.1998, the appellant issued notice to the
company to pay the overdue amount as on
20.03.1998. Therefore there was a delay of 12
years from the date when the right to sue first
accrued; 8 years from the failure of rehabilitation;
5 years from the date when the first respondent
was recommended to be wound up and 3 years 24
days from the date of notice to the first
respondent.
7. Now the question to be answered is,
Whether the District Judge is
justified in dismissing the
petition under Section
31(1)(aa) of SFC Act as time
barred?
8. Before answering this question, reference
may be made to Sections 29(1) and 31 of SFC Act
to gather their ambit of applicability. Section 29
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MFA No. 8628 of 2012
authorizes a financial corporation to take over the
management or possession or both of an industrial
concern when the latter makes any default in
repayment of loan or advance or any installment or
fails to comply with terms of its agreement with
the financial corporation. This Section also
empowers financial corporation to transfer either
by way of lease or sale to realise the property
pledged, mortgaged, hypothecated or assigned to
it. Section 31 is another remedy made available to
the financial corporation and it can be exercised in
the following circumstances, namely an industrial
concern
(1) In breach of any agreement makes
any default
(i) In repayment of any loan or
advance or any installment
thereof
(ii) In meeting its obligations in
relation to any guarantee given
by the corporation, or
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MFA No. 8628 of 2012
(2) Otherwise fails to comply with the
terms of its agreement with the
financial corporation, or
(3) Where the financial corporation
requires immediate repayment of any
loan or advance under Section 30 and
industrial concern fails to make such
repayment.
9. As it is clear that two remedies are
available to a financial corporation, it can choose
the remedy and there is no bar to invoke the two
provisions simultaneously as both remedies are
distinct. However, if a financial corporation
initiates action for the remedy under Section 31
(1)(a) or (b), or both, it cannot take recourse to
Section 29, as both are same, but difference lies in
mode of action in the sense if Section 29 is without
judicial intervention, Section 31 is a proceeding
that takes place before a District Judge. Section
31(1)(aa) provides for action against sureties, and
pendency of action under Section 29 is not a bar to
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MFA No. 8628 of 2012
proceed against sureties. Once an action under
Section 29 is initiated and a certain sum is
realized, for the balance action against sureties
under Section 31(1)(aa) is permitted. It is to be
noted here that Section 29 does not empower the
financial corporation to go against sureties, that
empowerment is given to financial corporation only
under Section 31(1)(aa).
10. The begging question in this appeal is
with regard to limitation. It is now settled by a
catena of decisions that limitation for initiation
under Section 31 is 3 years in accordance with
Article 137 of the Limitation Act, and the starting
point of time is when the right to apply under
Section 31 arises. Discussing the issue as to
which of the two Articles, Article 136 or Article 137
is applicable in relation to proceeding under
Section 31, the Supreme Court in the case of
Maharashtra State Corporation vs Ashok K
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MFA No. 8628 of 2012
Agarwal and Others [(2006) 9 SCC 617] has
held :
“5. Section 31 of the Act contains special
provisions for enforcement of claims by
State Financial Corporations. It is by way of
a legal fiction that the procedure akin to
execution of decrees under the Code of Civil
Procedure has been permitted to be invoked.
But one cannot lose sight of the fact that
there is no decree or order of a civil court
when we are dealing with applications under
Section 31 of the Act. The legal fiction at
best refers to a procedure to be followed. It
does not mean that a decree or order of a
civil court is being executed, which is a sine
qua non for invoking Article 136. 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
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MFA No. 8628 of 2012to 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 und er 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 word s
“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.
6. Article 137 of the Limitation Act applies
in the facts of the present case. When
Article 137 is applied, the application moved
by the appellant- Corporation on 2nd
January, 1992 for proceeding against the
sureties i.e. the respondents herein, was
clearly barred by time and the courts below
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MFA No. 8628 of 2012were correct in holding so. To recall the
facts of the present case, the notice
demanding repay ment of the amount of loan
was issued against the borrower, that is,
M/s. Crystal Marketing Private Limited on
8th March, 1983 and the application under
Sections 31 and 32 of the State Financial
Corporation was filed against the said
borrower on 25th October, 1983. The
liability of sureties had crystalised then.”
11. Sri Venkatesh Arbatti did not dispute
applicability of Article 137 of the Limitation Act,
but he based his argument with reference to
another judgment of the Supreme Court in Deepak
Bhandari vs Himachal Pradesh State Industrial
Development Corporation [(2015) 5 SCC 518],
where it was held that the contract of indemnity
executed by guarantors was independent, and right
to claim for the balance arose under the contract
of indemnity when the sale proceeds were found
insufficient. Sri G.Krishna Murthy submitted that
Deepak Bhandari was not applicable in as much
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MFA No. 8628 of 2012
as petition under Section 31 against the
guarantors was filed for the balance that remained
after exhausting remedy under Section 29, but in
the present case, guarantee was invoked under
Section 30 of SFC Act, and therefore starting point
of limitation was from the day when notice under
Section 30 was issued.
12. In Deepak Bhandari, there is a
reference to Maharashtra State Financial
Corporation vs Ashok Agarwal and it has been
observed that the question that arose there was
which of the two Articles namely 136 or 137 of the
Limitation Act was applicable, but did not discuss
the issue in regard to starting date for counting
the period of limitation. And the facts in that case
show that financial corporation, i.e., Himachal
Pradesh State Industrial Development Corporation
instituted a suit invoking deed of indemnity
executed by the guarantor, it did not take action
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MFA No. 8628 of 2012
under Section 31 of SFC Act. In those set of
circumstance it was held that the case would fall
under Article 55 of the Limitation Act and the right
to sue on a contract of indemnity guarantee would
arise when the contract was broken. Thus it is
clear that the appellant cannot seek assistance
from Deepak Bhandari. Given a careful reading
to Section 31 it figures out that invocation of
Section 30 of SFC Act is, as has been already
referred, one of the circumstances for initiating
proceeding under Section 31 before the District
Judge. That means if notice under Section 30 is
issued to the industrial concern, it is a notice
issued to guarantors too. This meaning can be
ascribed, for Section 31 provides for action not
only against industrial concern, but also against
guarantors for one or more of the reliefs envisaged
in that Section. In this view if notice was issued
under Section 30, starting point would be date of
notice.
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MFA No. 8628 of 2012
13. In this case, the undisputed facts are
that,
(i) As per clause 2 of Ex.P3, the ‘Deed of
Guarantee’ the corporation i.e.,
appellant shall b e entitled to treat the
guarantors as principal borrowers for all
the due repayment and covenants ……….
(ii) Clause 4 stipulates that any action taken
by the appellant against the company
and an intimation in writing sent to the
company by the appellant that a default
or breach has occurred shall be treated
as final and conclusive proof as to the
facts stated therein and be binding on
the guarantors.
(iii) Exs.R3 to R8 are the demand notices to
respondent No.1-company for the
amount due. Issuance of notices is not
disputed. Exs.R3 to R5 bear the date
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MFA No. 8628 of 2012
15.6.1988 and Exs. R6 to R8 bear the
date 15.9.1988.
(iv) In Ex.R10 there is a reference to notice
dated 15.05.1998, issued by the
appellant demanding repayment of
Rs.1,65,60,463/- which was the sum
due as on 20.03.1998.
(v) 29.6.1998 was the date of passing a
resolution by the appellant to invoke
Section 29 of SFC Act.
(vi) On 29.12.2000 appellant issued legal
notice to respondents 2 and 3 invoking
guarantee deed.
Though guarantee deed was invoked on
29.12.2000, neither that date nor the date of
passing of a resolution to invoke Section 29 i.e.,
29.06.1998 can be considered as starting point of
limitation. 15.06.1988 was the date to be
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MFA No. 8628 of 2012
reckoned for counting, and thus seen, petition,
having been filed on 8.6.2001 was time barred.
14. Therefore the conclusion is that the
impugned order does not suffer from legal
infirmity. The appeal deserves to be dismissed
and ordered accordingly.
Sd/-
(SREENIVAS HARISH KUMAR)
JUDGE
Sd/-
(K. V. ARAVIND)
JUDGE
CKL
List No.: 1 Sl No.: 1
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